The COVID-19 pandemic has caused upheaval in the world in most areas of living. Businesses have been disrupted worldwide resulting in economic hardship and devastation. In the light of such dire consequences, the COVID-19 (Temporary Measures) Act 2020 (hereinafter referred to as the “Act”) is timely and meant to provide relief for businesses. It acknowledges that resulting from the pandemic, there will be obligations that parties will not be able to fulfil.
The Act is divided into several parts:
(a) Temporary Relief for Inability to Perform Contacts – Part 2 of the Act
(b) Temporary Relief for Financially Distressed Individuals, Firms and Other Businesses – Part 3 of the Act
(c) Temporary Measures for Conduct of Meetings – Part 4 of the Act
(d) Temporary Measures for Court Proceedings and Syariah Court Proceedings – Part 5 of the Act
(e) Temporary Measures Concerning Remission of Property Tax – Part 6 of the Act
(f) COVID-19 – Control Orders – Part 7 of the Act.
It is inevitable that there will be parties unable to perform their obligations. The provisions in Part 2 are useful for parties to seek relief. It is important that we know the scope of the provisions – the contracts applicable or who can apply – and the process to obtain relief – what information should you provide and what to expect in a determination.
The Act recognises that certain business will be more adversely affected that others.
For these contracts, no action can be taken against the defaulting party. However, this does not apply to all contracts.
The operative provision is Section 5 of the Act.
There are 5 conditions to be met, namely:
1. It must be a scheduled contract as listed in the Act – Section 5(1)(a) of the Act.
2. A party is unable to perform its obligations on or after 1 February 2020 – Section 5(1)(a) of the Act.
3. It does not apply to contracts entered into or renewed on or after 25 March 2020 – Section 4(1) of the Act.
4. This inability to perform a contract is to a material extent caused by the COVID-19 event – Section 5(1)(b) of the Act.
5. Notification for Relief must be served on the other party – Section 5(1)(c) of the Act.
Relief is not automatic like the Job Support Scheme. All the conditions must be met.
The contracts listed in the Schedule to the Act are:
• Loan facilities granted to Bank licensed under the Banking Act (Cap. 19) or a finance company licensed under the Finance Companies Act (Cap. 108) secured against commercial or industrial property or secured against any plant, machinery or fixed asset used for business purpose.
• Construction or supply contract.
• Performance bond or equivalent granted pursuant to a construction or supply contract.
• Hire-purchase agreement or conditional sales agreement as defined under the Hire Purchase Act (Cap.125) relating to plant, machinery or fixed asset used for business purposes or a commercial vehicle.
• Event contract.
• Tourism-related contract.
• Lease or licence of non-residential immovable property.
• Sale and purchase of a unit of housing accommodation.
The contract in which relief is sought must fall within one of those listed in the Schedule. It is important to note that not all contracts fall within the Schedule.
This has been expanded to include the sale and purchase of residential properties from Housing Developers with effect from 13 May 2020 – either by an option given by the housing developer or an agreement between the housing developer and purchaser.
If your contract does not fall within the Schedule, there is no relief. You can see that the list covers contracts very much impacted by the pandemic.
Not all bank loans qualify for relief. The Schedule does not cover residential properties or properties outside Singapore. The property secured must be a commercial or industrial property. It would seem that properties with dual use – part commercial and part residential – would not be eligible.
If the loan is taken from a party that is not a licensed bank or finance company, then you are not able to seek relief under the Act. An example is a loan from a private individual or company.
The loan must be to an enterprise as defined – a body corporate or body un-incorporate that is incorporated or formed that carries on business in Singapore. Further, not less than 30% of its shares or ownership interest must be held by Singapore citizens or permanent residents. The turnover must not exceed S$100 million in the latest financial year. Foreign owned companies or large corporations are excluded. Therefore, individuals who own and mortgaged their commercial or industrial property are not eligible.
Indirect mortgages involving commercial or industrial properties will not qualify. These refer to loans extended to individuals and secured against commercial or industrial property owned by the enterprise. This happens when a director or partner borrows monies against such security.
The conditions are similar to loans for commercial or industrial property in that the loans are by a licensed bank or finance company to an enterprise.
The plant, machinery or fixed asset must be located in Singapore and used for manufacturing, production or other business purposes.
Both contracts are specific contracts defined in the Act with reference to Section 2 of the Building and Construction Industry Security of Payment Act (Cap. 30B) which reads as follows:
“Contract” means a construction contract or a supply contract, and includes a construction contract or a supply contract that has been terminated;
“Construction Contract” means an agreement under which –
(a) one party undertakes to carry out construction work, whether including the supply of goods or services or otherwise, for one or more other parties; or
(b) one party undertakes to supply services to one or more other parties;
“Supply contract” means an agreement under which –
(a) one party undertakes to supply goods to any other party who is engaged in the business of carrying out construction work or who causes to be carried out construction work;
(b) the supply is for the purpose of construction work carried out or caused to be carried out by the second-mentioned party; and
(c) the first-mentioned party is not required to assemble, construct or install the goods at or on the construction site, but does not include such agreements as may be prescribed.
Performance bond or equivalent
This is related to the construction or supply contract referred to above.
The hire purchase or conditional sales agreement relates to any plant, machinery or fixed asset located in Singapore and used for manufacturing, production or other business purpose. Hire purchase for plant, machinery or fixed asset located in other countries will not be eligible.
Hire purchase of commercial vehicles would fall within the scheduled contracts and there is a comprehensive definition of commercial vehicle in Paragraph 2 of the Schedule.
This is defined in Section 2 of the Act. It covers contracts for facilities or related goods or services for business meetings, incentive travel, conference, exhibition, sales event concert, show, wedding, party or other social gathering, or sporting event or participants thereof.
These are contracts affected by the social distancing measures and the circuit breaker measures.
This is defined in Section 2 of the Act and covers travel by sea or land and tourism in Singapore, domestic tourist or outbound tourists.
These contracts are also affected by the circuit breaker measures examples cruises, hotel room bookings.
Contracts related to air travel are excluded.
For Leases or Licences, it applies only to non-residential immovable property. In a technical sense, this could be wider as non-residential extends beyond commercial or industrial property – for example, property zoned for societies or a place of worship. A tenant of a mixed-use unit would not be able to apply for relief where there is an element of residential use.
This applies to contracts between buyers and housing developers only for residential units.
The seller need not be a licensed developer – so long he is a person that engages in a business of housing development and includes the Housing Development Board.
Private sales and purchases between 2 parties do not qualify – sale of a completed unit or sub-sale of a unit in a housing development.
It would seem also that a contract for a mixed-use unit – residential and commercial – in a development will not qualify example a shop unit with living quarters in a development.
The inability to perform a contract is to a material extent caused by COVID-19 event is the acid test.
COVID-19 event is defined as the epidemic or pandemic itself or by operation with any law of Singapore or other countries or order or direction of Government worldwide made as a result of or in connection with COVID-19, examples are the social distancing measures or a lockdown.
There must be a connection in the causation and the causation is material. The key operative requirement here is “material extent”.
The potential issue for contention is what do you mean by “material extent”? How material is material? What is the extent of materiality? Is it an objective or subjective test? Do we look at current or future?
By the way Section 5 is drafted, “a party is unable to perform”, suggests that the inability must exist and cannot be anticipated. But could that be too late?
What are the factors we look at? This could be a drop in earnings, absence of customers, cash flow stagnation etc.
Some will be obvious – for instance, employees not being able to go to work or premises cannot be open for business.
However, there will be situations which are not so clear.
Before the COVID-19 event, a business is not doing well and the obligations cannot be met comfortably – delayed or reduced payments to suppliers etc. The business owner is thinking of closing the business as he feels it is a hopeless case. COVID-19 event worsens the business. Would the COVID-19 event be to a material extent the cause of the inability to perform its obligations if it merely accelerates the process?
If a business has some cash reserves, must the business owner utilise the cash reserves before applying for relief especially if the cash burn rate is high?
It is a case to case basis.
Having met the conditions in Sections 4 and 5(1)(a)(b) of the Act, the affected party may seek relief. To obtain the relief, the affected party needs to take steps as prescribed by the Act.
A Notification for Relief (hereinafter referred to as the “Notification”) has to be served on the various relevant recipients as provided in Section 9 of the Act. This has to be done within the prescribed period which is 6 months commencing 20 April 2020.
The procedures and prescribed information can be found in the regulations and Ministry of Law website.
It is noted that the procedures for service prescribed is primarily electronic by emails and internet messaging system. The use of postal services is last resort.
The Notification is a prescribed Form with 2 versions – electronic or manual version.
These are important information the affected party has to provide:
1. State the obligation that the affected party is unable to perform.
2. Explain how the inability to perform the obligation was materially caused by COVID-19 event – with supporting documents if you can.
3. Proposals for the other party’s consideration.
The Notification sets the basis for your application. Treat the explanation as a court pleading. You state your case. If you do it well, it will show your situation is genuine and you gain credibility.
Then, come up with sensible and reasonable proposals. Do not make ridiculous offers that would cast doubt on your sincerity. If you are a tenant, you should not be asking for waiver of rental completely. You need to consider the landlord’s situation as well. Look into a reduction or perhaps a profit-sharing arrangement.
You want to move the other party to negotiate with you positively and come to a sensible settlement. Making a proposal that is not workable would be a bad start for negotiations.
Parties are encouraged to reach a compromise.
Once the Notification has been served, the other party is prohibited from taking any action under Section 5(3) of the Act which are:
1. Commence or continue with an action in court – stay of legal proceedings – 5(3)(a)
2. Commence or continue with arbitral proceedings – stay of arbitral proceedings – 5(3)(b)
3. Enforce any security over immovable and movable property – 5(3)(c) & (d)
4. Application for scheme of arrangement or judicial management or winding up or bankruptcy – enforcement actions or appointment of receiver or manager – 5(3)(e)- (i)
5. Commencement of execution, distress or other legal process against any property except with leave of court – 5(3)(j)
6. Repossession of any goods used for trade, business or profession under leasing agreement, hire-purchase agreement or retention of title agreement – 5(3)(k)
7. Termination of contract because rent or money not paid – 5(3)(l)
8. Right of re-entry or similar right – 5(3)(m)
9. Enforcement of judgement or arbitral award or determination as specified – 5(3)(n)
10. Such other actions as prescribed – 5(3)(o)
If there are pending court or arbitral proceedings against the party seeking relief, this affected party may wish to refer to the procedures and information on filing a Memorandum of Notification for Relief or other prescribed forms under the COVID-19 (Temporary Measures) (Temporary Relief for Inability to Perform Contracts) Regulations 2020 on the Ministry of Law website to obtain a stay or dismissal of those proceedings in the State Courts and Supreme Court respectively. This is applicable where –
(a) there are any pending court or arbitral proceedings in relation to the subject inability at the time where the Notification was served; or
(b) such proceedings are commenced after the Notification is served.
Rule 3A of the COVID-19 (Temporary Measures) (Temporary Relief for Inability to Perform Contracts) Regulations 2020 expands on such other actions in Section 5(3)(o) and covers:
1. Unilateral increase in charges or interest – non-contractual
2. New charges
3. New security
4. Withholding of booking fee for housing development purchase
5. Termination of the agreement with developer
These prohibited actions apply only if a Notification is submitted.
If the affected party does not serve the Notification, the party is not protected from the actions that can be taken against it for default.
For construction or supply contract, event contract and tourism-related contract, Sections 6 and 7 of the Act provide additional relief.
Construction and Supply Contracts – a breach of terms of the contract or a delay in the supply of goods or services if materially caused by COVID-19, will be a defence to a claim for a breach of contract. Additionally, calling on a performance bond or equivalent as regards such inability is a prohibited action under the Act.
Event and Tourism-related Contracts – once the Notification is served, the service provider may not forfeit a deposit it has taken. Parties can make an application for an assessor’s determination if they are unable to reach a compromise. The inability to perform an obligation in the contract if materially caused by COVID-19, will be a defence to a claim for the payment of a cancellation fee under the contract.
There have been further proposed amendments to the Act to provide more rental relief to small-and-medium sized enterprise (hereinafter referred to as “SME”) tenants. Among the proposed amendments, Landlords will have to step up to provide SME tenants with more rental relief. SME tenants will be allowed to repay rental arrears by way of instalments with a cap on late payment interest or charges for specific contracts. The proposed amendments to the COVID-19 regulations are set to be introduced in Parliament on 5 June 2020 and if passed, will commence sometime at the end of July 2020.
Either party can make an application to the Registrar (Section 9(2) of the Act) to appoint an assessor who will make a determination as regards any dispute on whether the “conditions” are met.
The assessors must be a lawyer, public or chartered accountant, with at least 3 years of working experience in or relating to law, accountancy, finance, business management, building and construction or architecture. From the qualifications, we can see that these people are relevant insofar as they concern the scheduled contracts.
The considerations by the assessor are:
1. Whether the conditions in Section 5 of the Act are met.
2. The ability and financial capacity of the party to perform the obligation.
3. Achieving a just and equitable outcome.
4. In a case relating to event contract or tourism-related contract, whether it is just and equitable in the circumstances of the case for the deposit or any part of the deposit to be forfeited.
To achieve an outcome that is just and equitable, the types of determination are stated in Section 13(3) of the Act which includes:
1. Requiring a party to the contract to do anything or pay any sum of money to discharge any obligation under the contract.
2. Where a right or repossession of goods under the contract or of re-entry or forfeiture under a lease or licence of immovable property had been exercised by a party in breach of Section 5(2) of the Act, requiring the party to return the goods or give possession of the immovable property to the other party.
3. In a case of event contract or tourism-related contract, to retain or restore the deposit forfeited.
The assessor would try to encourage parties to agree to a reasonable proposal fair to both parties and to a certain extent function as a mediator. The difference is that if there is no resolution, the assessor can make a determination whereas a mediator is not able to do so.
The hearing will generally be conducted by email exchanges. Therefore, what you write is crucial – clear, precise, logical and reasonable.
Once a determination is made by the assessor, it is final and binding. Parties cannot bring an appeal.
However, if one party is absent from the hearing, and a dismissal or determination made, the absent party may make an application to set aside the dismissal or determination of the assessor if the assessor is satisfied that the absent party had a good reason for being absent from the hearing, and it is just in the circumstances to set aside the dismissal or determination (Rule 20 of the COVID-19 (Temporary Measures) (Temporary Relief For Inability To Perform Contracts) Regulations 2020.
No advocate and solicitor can represent any party in the proceedings. However, by the definition in Section 14 of the Act, it would seem that a paralegal or a non-practicing lawyer may represent parties.
This provision does not mean parties cannot engage the services of a lawyer. A lawyer can help parties draft the reasons for relief or to challenge the notification. Half your battle is won if parties are able to state clearly your case.
Engaging a lawyer trained and inclined towards mediation would be useful in helping parties work out practical and reasonable proposals.
The affected party may withdraw the notification at any time – before the determination by the assessor.
If the affected party realises that insufficient evidence was presented or that the application is weak, the application may be withdrawn. This is to avoid a determination against the affected party. The affected party can take steps to strengthen the case and proceed to serve another Notification. Of course, there can be abuse in this area. Multiple Notifications theoretically are allowed.
Section 5(2) of the Act provides that another party to the contract is prevented from taking the prescribed actions during the pandemic until the earliest of the following:
(a) the expiry of the prescribed period (described by Order 2 of the COVID-19 (Temporary Measures) (Prescribed Period) Order 2020 as 6 months commencing on 20 April 2020 i.e. 19 October 2020);
(b) the date the Notification is withdrawn;
(c) the date on which an assessor of the case makes a determination that the case in question is not entitled to relief under the Act, because any of the “conditions” have not been met.
It is advisable to check your contract and see whether there are other avenues to seek relief. The Act preserves other actions that you may rely on for relief – in law or in contract.
The Act mentions 2 actions:
1. Whether the contract has a force majeure clause that allows a party to a contract to be excused from performance caused by circumstances beyond its reasonable control. This depends on how the clause has been drafted to allow either party to terminate the contract or prolong performance – whether the clause refers to an epidemic or pandemic. Such clauses will have to be scrutinised on their wordings with consideration to the difficulties of the affected parties and in a commercial light.
2. Whether a party can rely on the doctrine of frustration if contract does not provide for force majeure. Here, the threshold is higher as it refers to a contract impossible of performance owing to an unforeseen event. There must not be any default by either party. The event significantly changes the nature of the contract. It is not only the expense or onerous consequence. It is something the parties had not contemplated and it would be unjust to hold them to the contractual terms in the new circumstances. In such an instance, both parties are to be discharged from further performance.
These actions have a higher threshold simply because the effect is to discharge parties substantially or fully from further obligations. This is different from the Act as the relief is only temporary.
The Act provides temporary relief. All rights are preserved and all obligations remain. For example, if interest is payable, you will still pay interest at the end of the day. It merely suspends your obligations.
The causation factor is important. The parties need to look at their contractual obligations, their financial position and the ultimate objective for your business.
As the relief is temporary, it is wise to take the temporary relief offered as an opportunity to reach a resolution palatable to both parties to a contract with a view to sustain the business and maintain the relationship between the parties.
In that way, the relief becomes permanent.
For more information, please contact:
Commissioner for Oaths & Notary Public
Seah Ong & Partners LLP
Seah Ong & Partners LLP