Singapore Acts to Temporarily Suspend the Enforcement of Certain Contracts During the Economic Storm Caused by the Coronavirus Outbreak

Extraordinary circumstances attract extraordinary measures. The COVID-19 (Temporary Measures) Act passed by the Singapore Parliament on 7 April 2020 will stand out as one such measure in these extraordinary times. The coronavirus outbreak necessitated a host of public health measures globally, resulting in massive disruption to economic activity and contractual performance. Pursuant to a certificate of urgency signed by the President, all three readings of the bill were taken in one sitting. 

The Act covers a variety of subjects. Contract lawyers will be most interested in Part 2, in particular section 5, which provides for the temporary suspension of enforcement actions in scheduled contracts. A party who is unable to perform an obligation in a scheduled contract that falls on or after 1 February 2020 may serve a notification for relief if the ‘inability is to a material extent caused by a COVID-19 event’.  Contracts entered into or renewed on and after 25 March 2020 are excluded. The prescribed period for the suspension for an initial period of 6 monthsstarting on 20 April; further extensions are possible. During the prescribed period, the obligee may not take a variety of actions. These range from commencing or continuing an action in court, to self-help actions like termination of a lease for non-payment of rent and the appointment of receiver or manager over the obligor’s undertakings. Contravention attracts criminal penalties.

The scheduled contracts reveal that the moratorium primarily benefits businesses. For example, only loans to an ‘enterprise’ are covered. The enterprise is defined as a body corporate or unincorporate that carries on business in Singapore where not less than 30% of its shares (or other ownership interest) is held by citizens or permanent residents of Singapore, and the turnover of the group did not exceed $100 million. Hence, enterprises with majority foreign interest may be protected.  

To be a scheduled loan, the loan must be secured (whether wholly or partially) against commercial or industrial immovable property located in Singapore, or secured against plant, machinery or fixed asset located in Singapore and used for business purposes. An unsecured loan is currently not covered. This raises a priorities issue. The creditor in an unsecured loan can institute legal action, obtain judgment and execute against the property of the debtor. The covered secured creditor cannot do likewise. This is probably unsustainable, and is likely to be addressed by the Minister’s power to amend the list of scheduled contracts. 

Business loans secured by residential properties are not covered, unless the security package also covers either commercial or industrial property, or plant machinery and fixed asset located in Singapore which was used for business purposes. Whether small and medium enterprises (SME) enjoy relief from enforcement thus depends on whether their loans fortuitously fall within the scheduled contracts. To the extent that they are exposed, there will be social consequences as a significant proportion of jobs are related to SMEs. 

The moratorium takes effect upon the qualifying obligor in a scheduled contract serving the required notifications. No formal certification is required. If there is dispute over whether the qualifying conditions are satisfied, the matter can be brought before an assessor. Many disputes will foreseeably revolve around whether there is ‘inability  (to perform)… to a material extent caused by COVID-19 event’: section 5(1)(b).  The insufficiency of liquid assets is key to establishing this. Where there are competing demands for limited resources, difficult questions can arise over the precise meaning of ‘inability’. The causation test is neither ‘but…for’ causation, nor ‘a’ cause. The closest common law analogue is the notion of ‘a significant cause’ articulated in The Evia Luck [1992] 2 AC 152, which is a relatively undeveloped concept. The causation test thus goes into relatively uncharted waters, and some effort need be taken to ensuring that this is applied in a consistent and principled manner.  

There is no provision for appeal from the assessor’s determination, though judicial review is possible. The assessor is empowered to make further determinations to achieve a ‘just and equitable’ outcome; the enforcement of such further determinations requires the leave of the court. This raises questions relating to the nature of the oversight over the ‘further determination’, and how it differs (if it does differ) from the determination simpliciter. 

Section 5(13) intriguingly states that section 5 ‘does not affect the taking of any other action in relation to the subject inability, including an action pursuant to the Frustrated Contracts Act … or a force majeure clause in the contract where applicable.’ This appears to allow a carve-out for restitutionary action following on a frustrating event. It appears rather odd that legal action can only proceed on the basis that there is a frustrating or force majeure event, but perhaps this is explicable as creating the structural incentives for parties to unravel contracts on the basis of frustration, or for that matter, the force majeure clause. 

Construction and supply contracts receive special attention: section 6. The beneficiary to a performance bond given in the context of a construction or supply contract is unable to call on the performance bond until the 7 day period immediately preceding its expiry; within this 7 day period, the obligor has the right to take action to extend the term of the performance bond to 7 days after the end of the prescribed period. The computation of liquidated damages must also disregard the delay period related to the subject inability. In a supply contract, the inability to perform is to be treated as a defence in a claim for a breach of contract. This is of no small moment since without breach, there is no obligation to pay damages. 

In event contracts and tourism-related contracts, the right to forfeit deposits is now qualified: section 7. The deposits have to be returned unless the assessor makes a further determination.  One can predict that there will many cases coming before the assessors over how much of the deposit ought to be returned and when it ought to be returned. 

Given the urgency to take measures to stabilize the business environment, it is understandable if the Act reveals some rough edges that will need to be ironed out. Further refinements can therefore be expected. Lawyers seldom agree with one another, but one can be confident that all will wish that the pandemic will come to an end soon.   

Alexander Loke is Professor at City University of Hong Kong School of Law and Director of the Hong Kong Commercial & Maritime Law Centre.