COVID-19 (Temporary measures) Act 2020 – Kicking the can down the road?

COVID-19 (Temporary measures) Act 2020 – Kicking the can down the road?

In this month’s edition of Notes from the Bar, we will examine the implications of the freshly minted Covid-19 (Temporary Measures) Act 2020 (the “Covid-19 Act”) on businesses and individuals in Singapore in the context of the deferment of contractual obligations.

The intent of the Singapore Parliament in enacting the Covid-19 Act is provide temporary relief through the deferment of certain contractual obligations of businesses and individuals in Singapore adversely affected by the pandemic.


Prescribed Period and Retrospective effect of the Covid-19 Act

The Covid-19 Act provides for the deferment of specified contractual obligations for a prescribed period of six months and which may be further extended up to one year, if necessary (the “Prescribed Period”).

It must be noted that the Covid-19 Act enacted on 7 April 2020 is of unusual retrospective effect. It covers contractual obligations which are to be performed on or after 1 February 2020 in respect of contracts which were made/renewed on or before 25 March 2020.


Application of the Covid-19 Act – which contracts are included?

The following types of contracts fall within the application of the Covid-19 Act:

  • Loan facilities by banks or finance companies to businesses secured against commercial or industrial immovable property;
  • Loan facilities by banks or finance companies to businesses secured against any plant, machinery or fixed asset located in Singapore which is used for manufacturing production or other business purposes;
  • Hire Purchase agreements for the purchase of machinery or commercial vehicles;
  • Contracts in relation to events and tourism-related services;
  • Construction or supply contracts; and
  • Leases or licenses for non-residential property.

(collectively the “Scheduled Contracts”)


Application of the Covid-19 Act – which obligations are being deferred?

In general, contractual obligations due on or after 1 February 2020 which cannot be performed to a material extent due to a Covid-19 event will be deferred to after the Prescribed Period. Parties wishing to rely on the Covid-19 Act must send a notice stating the same to their contractual counterparts.


Relief under the Covid-19 Act

In essence, the non-defaulting party of Scheduled Contracts will not be able to resort to legal remedies usually available to them to enforce their rights against defaulting parties. Failure to comply with the Act will be an offence punishable by a fine not exceeding S$1,000.00.

In the context of tenancy agreements for non-residential properties, landlords will not be able to repossess or terminate the tenancy agreement if there is a default in payment of rentals that are materially caused by a Covid-19 event. Writs of distress and other remedies usually available to the landlord will also not be available during the Prescribed Period. It should noted that the Covid-19 Act is silent on the application of default interest provisions typically found in tenancy agreements and it is likely that these provisions will continue to apply.

In addition, for construction and supply contracts, liquidated damages cannot be sought in respect of non-performance during the prescribed period if the non-performance was caused by a Covid-19 event.  Performance bonds also cannot be called on if there is non-performance during the Prescribed Period.

Under the Covid-19 Act, for events or tourism related contracts, any non-refundable deposits must also be refunded unless determined otherwise by an assessor and no cancellation fees will be payable if the inability to perform the contract was materially caused by a Covid-19 event.

The threshold required for bankruptcy of individuals have been raised from S$10,000 to S$60,000 whereas the threshold required for the winding up of companies has also been raised from S$15,000 to S$100,000. The period for a debtor to satisfy a creditor’s statutory demand has also been extended from 21 days to 6 months.


Disputes arising from the Covid-19 Act and the role of Assessors

The exercise of determining whether a contractual party has been “materially” affected by a Covid-19 event such that he is unable to perform the contract will be based on the facts of each case. It has been anticipated by legislators that there will be disputes over the application of the Covid-19 Act.

To resolve such disputes between contracting parties, Assessors who are lawyers and accountants will be appointed by the Ministry of Law to determine whether the non-performance of a contract was because the defaulting party was materially affected by a Covid-19 event. Decisions made by Assessors are final and not subject to appeals. Parties will need to present their cases before the Assessors without legal representation and no costs orders will be allowed at these hearings.


Implications of the Covid-19 Act

At first glance, it does appear that the Covid-19 Act is extremely advantageous to businesses materially affected by Covid-19.

However, it must be remembered that the Covid-19 Act is not intended to waive contractual obligations of parties, or to bring the contract to an end (as in the case of the invocation of force majeure notices or doctrine of frustration) such that the defaulting party is completely absolved from his breach of contract.

Parties who defer the performance of their contractual obligations under the Covid-19 Act are merely kicking the can further down the road as they will be required to discharge their contractual obligations after the expiration of the Prescribed Period. If defaulting parties are unable to recover from any adverse effects of Covid-19 immediately after the expiration of the Prescribed Period, they may find themselves immediately embroiled in legal claims in the aftermath of the pandemic.

One potential area of uncertainty is whether the contractual obligations that were deferred immediately becomes due upon the expiration of the Prescribed Period, or whether the defaulting party will be given a reasonable period to perform after the expiry of the Prescribed Period.  The Covid-19 Act is silent on this issue.

In addition, it appears that default interest provisions would continue to apply notwithstanding the Covid-19 Act.

It is noteworthy that Covid-19 Act does not prohibit arbitration proceedings governed by the International Arbitration Act. As such, arbitration proceedings with an international element can still be commenced and/or continued.

Finally, it appears that the Covid-19 Act does not expressly prevent the application of force majeure clauses which provides for the termination of the contract upon the occurrence of a force majeure event, or the doctrine of frustration enshrined under the Frustrated Contracts Act.  The Covid-19 Act only provides that the termination of a Scheduled Contract (being a lease or licence of immovable property) where the subject inability is the non‑payment of rent or other moneys is prohibited.

Contracting parties who are facing serious issues with performance of their contracts which are not for the lease or licence of immovable property may wish to seek advice on whether they fall within these doctrines instead for a final resolution of these issues.

If you have any queries or questions arising from the above, please do not hesitate to speak with us.

Photo by Evgeni Tcherkasski on Unsplash

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