A novel approach to addressing the novel Coronavirus – Singapore’s approach to contracts under COVID-19
By Sam Thyne, Associate, Fenwick Elliott
When measures to combat the COVID-19 pandemic began to escalate across the world the sound of thousands of bottom drawers opening in unison could be heard as construction contracts were recovered from their hiding places and dusted off. The relief construction contracts can provide is dependent on many variables and can leave parties with a huge amount of uncertainty – and with uncertainty comes cost. In a novel step to mitigate this uncertainty, the Government of Singapore has passed legislation that temporarily grants relief to contracting parties impacted by the COVID-19 pandemic which, for the most part, makes parties’ entitlement much clearer.
Many construction projects have been hit hard by the COVID-19 pandemic. Efforts to quell the spread of the virus have had the side-effects of disrupting supply chains, limiting working hours, lengthening programmes (by the need to account for social distancing requirements), along with myriad other issues great and small that have left contractors staring at completion dates they have little hope of meeting.
Uncertain relief under construction contracts
This has had contractors turning to their contracts to understand their entitlements to relief. In common law countries in particular, the contract is king. Contractors are therefore reliant on their contracts containing provisions granting relief for force majeure events. In some circumstances, contractors may even be able to claim for additional costs where a change of law can be demonstrated to have escalated construction costs.
However, relief under force majeure or change of law provisions is highly dependent on a number of factors:
- First, they must be included in the contract, as without a contractual entitlement, contractors operating within common law jurisdictions are left with far fewer options.
- Whether the COVID-19 pandemic amounts to a force majeure event will also depend on the exact contract wording. While many force majeure clauses broadly define force majeure as a set of circumstances, others provide a prescriptive list of events – as such it is not a given that the COVID-19 pandemic may be considered a force majeure under every contract.
- Additionally, the exact wording of the contract, and the conduct of the government within a jurisdiction, will be relevant in ascertaining whether there is relief under the contract. For instance, there may be questions as to whether government “guidance” amounts to a change in law, which will depend heavily on the contract wording and how that “guidance” has been implemented.
The approach in Singapore
While many scrambled to determine whether their contract would grant relief, contractors in Singapore received a degree of comfort when the COVID-19 (Temporary Measures) Act 2020 (the “Act”) was passed on 7 April 2020.
The Act is designed to provide temporary relief to contracting parties who, due to COVID-19, are unable to meet their contractual obligations. The Act applies where a party to a scheduled contract (which includes construction contracts) that is entered into or renewed before 25 March 2020, is unable to perform an obligation in a contract on or after 1 February 2020.
The inability to perform the obligations must be, to a material extent, caused by a COVID-19 event. A COVID-19 event is defined broadly as:
“the COVID-19 epidemic or pandemic; or
the operation of or compliance with any law of Singapore or another country or territory, or an order or direction of the Government or any statutory body, or of the government or other public authority of another country or territory, being any law, order or direction that is made by reason of or in connection with COVID‑19.”
The definition includes issues that a party to a contract may encounter due to the laws of other countries, which would be very useful in circumstances where a party is delayed by suppliers or where personnel are unable to travel due to COVID-19 measures.
In order to get protection under the Act, a party must first serve a notice in accordance with the Act. Once this is done (despite anything at law or in the Contract), the other party must not take certain actions.
The prohibited actions include (but are not limited to):
- the commencement or continuation of court or arbitral action/proceedings against the party serving the notice or their guarantor or surety;
- the enforcement of any security over any immovable property or movable property used for the purpose of a trade, business or profession; and
- taking certain insolvency actions including an application to approve a creditors’ compromise or arrangement, an application for judicial management, an application for winding up, an application for bankruptcy, and the appointment of a receiver or manager.
The Act also includes additional relief for construction and supply contracts specifically. There is a limitation on calling on performance bonds and, crucially, a moratorium on calculating liquidated damages in the prescribed period, where the delay is caused by a COVID-19 event. The prescribed period referred to is an initial six-month period that commences 20 April 2020.1
In respect of liquidated damages the Act provides that, despite anything in the contract, for the purposes of calculating the liquidated damages payable under the contract or assessing other damages in respect of an inability to perform a contractual obligation due to a COVID-19 event, where the inability occurs on or after 1 February 2020 but before the expiry of the prescribed period, any period for which the inability subsists and falls within that period is to be disregarded in determining the period of delay.
The Act further provides that a COVID-19 event will be a defence to any breach of contract claim if it is the reason for the inability to do something.
One area of the Act which requires further scrutiny is the provisions relating to assessors. To accompany the request for relief, the Act includes a system where, if a notification for relief is served, a party may dispute the non-performing party’s entitlement to relief.
The Act introduces an inbuilt dispute mechanism where the assessors determine whether a party does fall within section 5 of the Act – i.e. whether their non-performance was in fact due to a COVID-19 event.
Regulations have been issued that flesh out the assessment process including details of how notices are to be served, how hearings are to be conducted, and the qualifications required to be an assessor.2 To be an assessor you must be a lawyer, public accountant, or chartered account with at least three years’ experience, or have at least three years of working experience in or relating to law, accountancy, finance, business management, building and construction, or architecture.
At first glance the assessor’s powers appear to be limited to determining this threshold question alone. However, the assessors are given wider-ranging powers pursuant to section 13(3) which states that:
“… the assessor may make further determinations in order to achieve an outcome that is just and equitable in the circumstances of the case, including (but not limited to) —
requiring a party to the contract to do anything or pay any sum of money to discharge any obligation under the contract …”
While the Act generally appears to be directed at granting no-fault temporary relief of contractual obligations, it does contain an ability for assessors to grant wide-ranging relief including ordering the payment of money. What makes this unfettered ability more concerning is that there is no appeal against an assessor’s determination.
To compound this problem, the Act provides that in proceedings before an assessor, no party may be represented by an advocate or solicitor, and that each party must bear their own costs for the proceedings.
In making its determination, the 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, along with other prescribed factors, and must seek to achieve an outcome that is just and equitable in the circumstances of the case.
There are financial penalties for failing to comply with a determination, being a S$1,000 fine. Further, a determination can be enforced as a judgment in court.
The processes of having claims determined by assessors raises many questions, most concerning of which being the ability to order the payment of sums to discharge obligations under the contract. While we do not think the intention of the Act is to allow an assessor to make substantive determinations on the merits of a complex construction dispute, the wording of the Act appears to allow for this.
The Act is a novel way of addressing the commercial ramifications of the COVID-19 pandemic. There are sure to be many contractors grateful that there is an avenue to relief from liquidated damages, particularly those who did not have provisions in their contract that would grant it. Conversely, others may see this as a step too far in interfering in the contractual obligations between parties, which are typically seen as sacrosanct.
Regardless of philosophical stance, the Act goes a long way in providing certainty, something desperately sought in the current tumult. With certainty, transaction costs associated with arguing over whether a contract provides relief can be mitigated and parties can focus their attention on moving forward.