COVID-19: Temporary Relief for Inability to Perform Contracts - 12 Insights

23 April 2020

Daniel Loh

​The COVID-19 (Temporary Measures) Act 2020 (“the Temporary Measures Act") was passed in Parliament on 7 April 2020. The relevant provisions providing for temporary relief for inability to perform contracts (“the temporary relief provisions”) commenced on 20 April 2020. On 20 April 2020 itself, the COVID-19 (Temporary Measures) (Temporary Relief for Inability to Perform Contracts) Regulations 2020 (“the temporary relief regulations”) was also enacted.
 
Below are 12 insights on the temporary relief provisions and the temporary relief regulations which we hope will be helpful to readers.

In this article, we do not intend to reproduce the good work that the Ministry of Law has done in educating the public via their FAQs, press releases, guides and infographics, but to highlight insights and potential implications that the temporary relief provisions may bring.
 
 
#1 The purpose: Breathing Space
 
The central theme to the temporary relief provisions is to give breathing space to businesses badly affected by COVID-19, provided they meet criteria under the provisions. In legalese, the central theme is to provide an easily accessible moratorium for businesses to invoke if needed. It is not a “get out of jail free” card.
 
In parliament on 7 April 2020, Minister for Law Mr K Shanmugam gave a speech (“Mr Shanmugam’s speech”), of which the relevant extract is reproduced as follows:
 
“62. The three packages by DPM, you can compare them to an infusion of blood. This Bill seeks to stanch the flow of blood, like a reprieve for a certain period, a matter of months. It seeks to give much-needed liquidity to commercial parties. The immediate impact is a redistribution of monies between the parties to the affected contracts. Tenants who have to pay rentals, now they can keep the cash. Contractors who have to pay damages will be relieved from having to pay. Some other categories of contracts are also covered.
 
63. We seek to give breathing space for these businesses – allow them to take stock, see what they can do, assess their position; and offer cash-flow relief meanwhile. We seek to be targeted and temporary.
 
64. I would call this a legal circuit breaker. A time-out, until this virus dies out, and contracts, like life, can return to normal…”
 
It therefore means that contractual obligations do not go away. They are simply deferred. In this light, it is possible to envision an extreme scenario where (for example) the rent and late payment interest snowball and the landlord becomes legally entitled to demand the rent and late payment interest in full in one lump-sum from the tenant after the prescribed period is over (but see below #9 below), short of any compromise arrangement in the interim.

Mr Shanmugam further reiterated:
 
“78. The measures do not mean that all tenants do not have to pay rent. Those who have the ability to make rental payments must continue to do so. The Bill seeks to help those who are unable to pay. And the measures are only for a period. The landlord’s rights can be exercised after that…”
 
That said, the Ministry of Law has openly said that it encourages creditors and debtors / landlords and tenants to try to work out a compromise where possible, even while the temporary relief provisions are in-force.
 
The implication for businesses based on the government’s approach can be summed up by the following exchange in Parliament as reported in the Business Times on 8 April 2020:
 
“During the debate, some MPs questioned the ability of tenants to pay the accrued rent after the relief period if they are already struggling.
 
To this, Mr Shanmugam replied that government intervention should not be held back by the fear of businesses going bust. The situation is "economically dire" and therefore, it should be a matter of sharing the pain, not finding a complete solution.”
 
In other words, the temporary relief provisions are meant to give badly affected businesses the breathing space to take-stock of their predicament, and to see whether they can survive, evolve, be rescued or go bust.
 
 
#2 How long will the temporary relief provisions last?
 
The temporary relief provisions commenced on 20 April 2020 and will in the first instance last for 6 months until 19 October 2020 (as also explained in Mr Shanmugam’s speech and the explanatory statement to the bill for the Temporary Measures Act). However, the prescribed period can be extended for up to one year until 19 April 2021; it can also be shortened to end before 19 October 2020, before the 6 months’ period is over. It can also be extended or shortened multiple times so long as the maximum period does not cross 19 April 2021 (ie. maximum one year).
 
 
#3 What contractual obligations do the temporary relief provisions apply / not apply to?
 
The temporary relief provisions apply only to a “scheduled contract”. The categories of scheduled contracts are well-explained by the Ministry of Law, so we briefly list them without delving into their definitions, as follows:

• Non-residential property leases and licences;  
• Constructions and supply contracts, and their performance bonds or equivalent;  
• Event contracts;  
• Tourism-related contracts;  
• Hire-purchase and conditional sales agreement for assets and commercial vehicles used for commercial purposes; and
• Certain secured loan facilities.

Under “certain secured loan facilities”, only local SMEs may benefit, such SMEs being enterprises (i) with not less than 30% shares owned by Singapore citizens or Singapore PRs; and (ii) with the turnover of the group not exceeding $100 million in the latest financial year.
 
The Minister is empowered to omit classes of scheduled contracts from protection under the temporary relief provisions or to modify the ambit of protection afforded to such classes of schedule contracts.
 
The temporary relief provisions apply to contractual obligations under scheduled contracts that are to be performed on or after 1 February 2020. But, they do not apply to scheduled contracts entered into or renewed (other than automatically) on or after 25 March 2020.
 
In his speech, Mr Shanmugam explained it thus:
 
“69. The measures under Part 2 of the Bill apply to obligations to be performed on or after 1 February 2020. This is when the impact of COVID-19 started to be significantly felt in Singapore. Supply chains connected to events occurring outside Singapore were being disrupted.
 
70. At the same time, the measures do not apply to contracts that were entered into on or after 25 March 2020. On 24 March 2020, the Health Ministry enhanced the restrictions, promoted safe distancing. So parties with knowledge of those facts who entered into contracts in the last few days, they should not seek help from this Bill.”
 
Further, it is crucial to note that the temporary relief provisions commenced on 20 April 2020.
 
The dates above are significant. The following scenarios are possible:

• A bank / financing company / landlord negotiates and manages to enter into a variation or compromise agreement on or after 25 March 2020 with the debtor / hire-purchaser / tenant, including in relation to contractual obligations that accrued on or after 1 February 2020. The debtor / hire-purchaser / tenant will not get protection under the temporary relief provisions for this variation or compromise agreement entered into.
  
  
• A bank / financing company / landlord has validly exercised and completed its right of repossession prior to 20 April 2020. The exercise of its rights does not appear capable of being reversed under the temporary relief provisions.
  
  
• A debtor / hire-purchaser / tenant who resisted any repossession prior to 20 April 2020 but subsequently serves a notification for relief on or after 20 April 2020 may get protection under the temporary relief provisions.

In this limited sense, there does not appear to be retrospective relief for acts already carried out, except in the following specific cases:

• In event contracts where a deposit forfeited before 20 April 2020 (or before a notification for relief was served) may potentially be restored; and
  
  
• In construction contracts and supply contracts in using the inability to perform a contractual obligation on or after 1 February 2020 due to a COVID-19 event as a defence against any claim for breach of contract, and to exclude any such time period of inability to perform when calculating liquidated damages for delay.

 

#4 The notification for relief is pivotal
 
A party does not automatically get protection under the temporary relief provisions. The party must have first served the notification for relief to the party(ies) involved in the contract and in the manner as prescribed. The FAQs by the Ministry of Law have also made it clear that there is no automatic protection.

The following implications will result:

1. Because the notification for relief was not available prior to 20 April 2020 since the temporary relief provisions had not commenced then, any valid exercise and completion of a bank / financing company / landlord’s right of repossession does not appear capable of being reversed under the temporary relief provisions;
   
   
2. A bank / financing company / landlord may continue to enforce its rights under the contract, including any rights of termination and repossession, for so long as the notification for relief has not been served;
   
   (a) If such rights are already exercised and completed (ie. by repossession or payment), it appears that the debtor / hire-purchaser / tenant cannot then attempt to reverse the situation by resorting to the temporary relief provisions. That said, this view is subject to change pending any further clarification, guidance or directive concerning how the temporary relief provisions ad regulations are supposed to operate;
   
   (b) In the case of a termination, damages may result. If a notification for relief is served after termination but before damages is pursued or while pursued but not yet paid, it makes sense that protection should be given if the debtor / hire-purchaser / tenant has fallen into hardship due to COVID-19, and could not as a result perform the contract anyway which then led to the termination. However, it is unclear whether the obligation to pay damages can neatly fit into the phrase “an obligation in the contract” under section 5 of the Temporary Measures Act. Again, any further clarification, guidance or directive concerning how the temporary relief provisions and regulations are supposed to operate shall be helpful;
   
   
3. Any variation or compromise agreement entered into before a notification for relief is served may not be captured under the temporary relief provisions.

From the above, any party that wishes to seek protection under the temporary relief provisions should serve the notification for relief at the earliest opportunity.
 
 
#5 Where do the temporary relief provisions leave creditors and landlords?
 
The temporary relief provisions are designed to give debtors and tenants (who qualify) temporary legal protection.
 
To cushion the blow, the government is offering financial relief to creditors and landlords from elsewhere, via the jobs support scheme, foreign worker levy waiver and rebate, and the various grants, schemes and measures from the MAS and other organisations.
 
 
#6 Who can apply for assessor’s determination?
 
Regardless of which party served the notification for relief, either party to the contract may apply for an assessor’s determination.
 
 
#7 What does the assessor determine?

When an application for an assessor’s determination is made, the assessor will determine whether one party’s inability to carry out the contractual obligation was to a material extent caused by a COVID-19 event. If the assessor determines that inability was to a material extent caused by a COVID-19 event, the party that could not perform shall remain protected by the notification for relief. This determination is the assessor’s primary role.

The assessor may, however, make “further determinations” in order to achieve an outcome that is just and equitable in the circumstances of the case. Such further determinations include, but are not limited to, the following:

• requiring a party to the contract to do anything or pay any sum of money to discharge any obligation under the contract;
  
  
• returning possession of a good or property to the party whose good or property was repossessed by the other party while there was a notification for relief served, and if it is found that the inability was to a material extent caused a COVID-19 event.

 
In his speech, Mr Shanmugam gave suggestions of how such further determinations may pan out, as follows:
 
“[in the context of leases]
95. If a tenant applies under the Bill and the landlord and tenant can’t agree, they go to the Assessors. The Assessors will look at the previous year’s tax returns, the accounts, they may ask for additional information, and then will determine if a tenant is unable to pay.
 
96. Generally, if a tenant is a small business and accounts show that it has been impacted by COVID-19, Assessors will likely accept that the tenant was unable to pay. And the Assessors could say, suspend rental payments for three months. Thereafter, if problems continue, come back to us.
……
…
 
[in the context of event contracts]
118. The Bill does not mandate that deposits be refunded immediately. If we asked all companies to immediately refund, they could also be in serious trouble.
 
119. In such situations, there are different solutions possible: to postpone the event, and the deposit is held back; cancel the event, and the deposit is repaid in full or partially, depending on expenses incurred, work done. Where the deposit is to be repaid in part or in full, and if the company needs time to repay the deposit, the Assessor will have to consider and decide if time needs to be given.
 
120. These decisions can be made by the Assessors if the parties cannot agree. The Assessors will seek to make determinations that seek to provide a just and equitable outcome, looking at all the facts.”
 
However, an assessor currently may not make further determinations for construction contracts and supply contracts, as well as their performance bonds or equivalent. The assessor appears limited solely to determining in a binary fashion whether the inability to perform the contractual obligation is to a material extent caused by a COVID-19 event. It also means that after the assessor’s determination, the party seeking relief is either protected for the duration or not protected; there does not appear to be any middle-ground permissible for construction contracts, supply contracts and their performance bonds.


#8 What can an assessor take into account in making a determination

An assessor may take into account the ability and financial capacity of the party concerned to perform the obligation that is the subject of the application.

An assessor may also take into account “other prescribed factors”. However, it is currently not known what the “other prescribed factors” are.

Regardless, the overall objective is to seek to achieve an outcome that is just and equitable in the circumstances of the case.


#9 Can an assessor’s further determination cause any late payment interest to be discharged?

The power of an assessor to make further determinations enables the assessor to seek to achieve an outcome that is just and equitable in the circumstances of the case.

The spirit of the temporary relief provisions makes it clear that an assessor should not be able to cause any obligation to pay any principal sum (e.g. rent or monthly instalment payment) to become discharged without actual payment.

It has also been made clear that it is possible for all principal sums and late payment interest to suddenly become recoverable in full in one lump-sum after the prescribed period is over.

However, one may wonder whether it shall be open to an assessor - if the parties do not compromise - to make further determinations of causing any late payment interest to become discharged or partially discharged, in order to seek to achieve an outcome that is just and equitable in the circumstances of the case. After all, it is very easy for late payment interest to snowball, especially in hire-purchase and conditional sales agreements. A directive on this issue would be helpful.


#10 Are overseas contracts covered?

Contracts not governed by Singapore are not covered by the temporary relief provisions, as is also made clear by the FAQs from the Ministry of Law. Practically, to be enforceable, the matter should not be beyond the reach of the Singapore authorities and the Singapore courts.
 
 
#11 Can the temporary relief provisions potentially be abused?
 
A debtor may potentially try to abuse the temporary relief provisions by serving a notification for relief even if the reason for doing so is frivolous. The debtor may do it to buy time for whatever reason, because once the notification for relief is served, no action may be taken against the debtor during the prescribed period until an assessor determines otherwise or until the debtor withdraws the notification for relief.
 
However, under the notification for relief the debtor is required to declare that all information provided in the notification for relief is true and correct. Such a requirement may act as a deterrent against frivolous claims.
 
To prevent abuse, it will be crucial that the registrar of assessors and the assessors are able to quickly dispose of applications, especially to sieve out debtors who serve the notification for relief frivolously.
 
 
#12 What is next after the temporary relief provisions are over?

The temporary relief provisions will not last forever. If stretched to its maximum term, it will last for one year until 19 April 2021, unless something further is enacted. After the temporary relief provisions have come and gone, businesses and individuals may find themselves in need of more breathing space, whether to find investors, to restructure, to turnaround or simply to survive for awhile longer until a turnaround is possible.
 
Other than any private arrangements that these business and individuals may negotiate, it may be open to them to explore seeking further breathing space (i.e. a moratorium) via voluntary arrangements for individuals or schemes of arrangements and judicial management for corporations.
 
Seeking legal advice on restructuring and rehabilitating a business, with assistance hand-in-hand with a corporate financial advisor should also be explored.
 
Such recourse may be explored even while the temporary relief provisions are in effect, because not all contractual obligations are captured by the temporary relief provisions and the usual mechanisms to seek some breathing space will still be relevant and should be considered.

To end, we hope you find this article helpful. If you have any questions about the various insights above, please feel free to contact us. We will continue to be available via video-conferencing, teleconferencing, and email throughout this challenging period.


Daniel Loh
Associate Director, BR Law Corporation
[email protected]