COVID-19: Suspension of Contractual Rights and Obligations in Singapore (and Possibly Soon Elsewhere)

Contractual rights agreed in the past may look very different today and may not be enforceable tomorrow, but (strangely) could be in the future. Such are the historic times we are living through. 

The traditional means by which parties can avoid (or delay) contractual obligations as a result of unexpected circumstances include the invocation of force majeure clauses and general legal doctrines such as frustration, rebus sic stantibus, and similar principles recognised by various legal systems (see our earlier briefing on the Consequences of the Coronavirus on Contract Performance and the Resolution of Disputes). 

There is increasing recognition that these traditional mechanisms for allocating contractual risk for unexpected events may not be adequate for addressing the enormous disruption caused by the coronavirus. Some states, notably Singapore, are adopting legislation to relieve persons and companies of their legal obligations whilst the pandemic is brought under control; a step that would have been unthinkable in market-orientated societies just a few months ago.

In this OnPoint, we briefly explore how the law applicable to a contract may prevent the enforcement of contractual rights and obligations during these extraordinary times.

Singapore

Singapore passed new legislation on 7 April 2020 to provide temporary relief to businesses and individuals who are unable to fulfil their contractual obligations. The COVID-19 (Temporary Measures) Act 2020 applies to specified contracts that were entered into or renewed before 25 March 2020, including construction contracts, supply contracts, performance bonds, leases or licences for non-residential property, event contracts, tourism-related contracts, and certain types of secured loan contracts, hire-purchase agreements and conditional sales agreements. Obligations under residential tenancy agreements are not affected by the legislation.

The Act suspends contractual obligations during the current lockdown as the Singapore economy struggles to get back on its feet. Specifically, a qualifying party that is unable to perform an obligation under a contract covered by the Act that is due to be performed on or after 1 February 2020 can serve a notification for relief on the other party. The inability to perform must ‘to a material extent’ be caused by a COVID-19 event. Upon receipt of such notification, a party is prohibited from taking various legal actions against the defaulting party (and its guarantors and sureties), including commencing or continuing any court or domestic arbitral proceedings, enforcing security, or applying for winding up proceedings. Additional relief is provided for construction contracts and supply contracts (including preventing performance bonds being called and providing relief from liquidated damages for delay) and event and tourism-related contracts (including relief from the forfeiture of deposits). The prescribed period of relief under the Act is initially six months, although this can be extended for up to 12 months. Depending on the specific circumstances, rights to interest, fees, charges and damages may continue to accrue, albeit unenforceable during the protected period.

Disputes as to whether a particular contracting party is entitled to relief under the Act are to be determined by a Singapore government-appointed assessor, whose decision is final. Parties cannot be represented by lawyers in proceedings before the assessor and the assessor’s decision cannot be appealed.

Importantly, rights to commence or continue arbitration under an international arbitration agreement (even if the contract is subject to Singapore law and/or the arbitration is seated in Singapore) remain unaffected by the legislation. Rights under a contract incorporating a domestic arbitration agreement (i.e. between two Singapore parties), however, will be constrained by the Act. Similarly, enforcement proceedings for an international arbitration award which require the assistance of the Singapore courts will also be affected.

Initiatives by other countries

While perhaps not going as far as Singapore, other states have taken steps to ease the burden of contractual obligations and suspend rights of enforcement as a result of the coronavirus.

For instance, the French president, Emmanuel Macron announced on 16 March 2020 the suspension of rent, water, gas and electricity bills. The United Kingdom Department for Business Energy and Industrial Strategy has announced changes to UK insolvency law so as to allow ‘breathing space’ for companies at risk of default due to COVID-19. This includes an interim moratorium period, during which a company would be protected from insolvency proceedings and directors excused from personal liability for operating companies at risk of insolvency. Finland is adopting similar measures.

Some states, including France and China, have declared that the coronavirus constitutes a force majeure, excusing non-performance under certain contracts. In particular, the China Council for the Promotion of International Trade has issued force majeure certificates to local companies which are not able to fulfil contractual obligations due to COVID-19. While the force majeure certificates are likely to be given full effect under contracts governed by Chinese law, it is an open question whether they would be binding or even persuasive in contracts governed by the laws of other jurisdictions.

The Hong Kong SAR government has announced a series of consultations for the introduction of corporate rescue laws, including a proposal for a six-month moratorium from hostile creditors. The Legislative Committee, however, has not adopted the practice in mainland China of issuing force majeure certificates. Instead, Hong Kong follows the common law approach of allowing parties to decide themselves under the terms of their agreement what events should qualify as a force majeure, thus requiring claims for relief to be dealt with on a case by case basis.

More measures modifying contractual rights and obligations will undoubtedly be introduced over the coming months by other countries to deal with the enormous impact of the coronavirus.

Conclusion

Laws, along with prevailing economic theories and accepted social norms, are rapidly changing in response to the coronavirus. Contractual rights may have been modified, delayed or even extinguished by the applicable law or government policy. Thus, those contemplating bringing – or who need to defend against – claims for a failure to perform contractual obligations as a result of COVID-19 will need to give careful consideration to the terms of the relevant contract and the current state of the applicable law.

The choice of dispute resolution forum will also impact the analysis of a party’s rights and entitlements. For instance, a right to commence or continue an international arbitration under a Singapore law-governed contract will be unaffected by Singapore’s COVID-19 (Temporary Measures) Act 2020. In contrast, a claim under an otherwise identical contract, but which provides for Singapore court jurisdiction, could not presently be pursued.

This briefing was written by Dechert partner Mark Mangan and associates Daniel Gaw, Lukas Lim, Ananya Mitra, Shilun Chen and Miranda Elvidge with assistance from Anna Richstein.