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    05:36 PM Daniel Ho (LLB (Summa cum laude, Singapore Management University), Associate, Rajah & Tann Singapore LLP) and Pesdy Tay (LLB (Magna cum laude, Singapore Management University), Part B Candidate at SILE)

    In Frustrating Times of Disruption and Uncertainty: the COVID-19 (Temporary Measures) Act 2020 and beyond

        

    Introduction

    The COVID-19 pandemic has brought about a wave of unprecedented disruption and uncertainty. Indeed, many in the commercial world have been left wondering how contractual obligations that were previously agreed to in times of normalcy are going to be performed in the unpredictable future. In this regard, the COVID-19 (Temporary Measures) Act 2020 (“the Act”) was recently passed to respond to the difficulties posed by the pandemic. Broadly speaking, the Act seeks to provide temporary relief for the performance of particular categories of contracts, and to financially distressed individuals, firms and other businesses.

    This article seeks to examine the temporary relief regime under the Act; in particular, the scope and threshold of section 5(1) of the Act. Section 5(1) is critical as it is the trigger provision for relief. It states:

    5.––(1) This section applies to a case where ––

    (a)       a party to a scheduled contract (called in this Division A) is unable to perform an obligation in the contract, being an obligation that is to be performed on or after 1 February 2020;

    (b)       the inability to a material extent caused by a COVID-19 event (called in this Division the subject inability).

    The words of the provision are not without difficulty. Two questions arise: (a) what constitutes inability to perform a contractual obligation (see section 5(1)(a) of the Act); and (b) what is meant by the phrase “a material extent caused by a COVID-19 event” (see section 5(1)(b) of the Act). This article attempts to address both these questions, as well as areas beyond the Act that may be of interest to commercial parties, namely, cross-border chain contracts, the doctrine of prospective frustration and observations on how the Act may inform the drafting of force majeure clauses in the future.

    Background to the COVID-19 (Temporary Measures) Act 2020

    It is useful to sketch the policy underpinning the Act, and to contrast that with the doctrine of frustration at the outset.

    A fundamental object of the Act is to mitigate the unfairness and hardship arising from the strict insistence of contractual performance (see Singapore Parliamentary Debates, Official Report (7 April 2020) vol 94, per K Shanmugam, Minister for Law). As alluded to by the Minister for Law, “[s]trict enforcement of particular economic rights may not be desirable because of the damage that [it] will cause to the whole economy”. Indeed, without legislative intervention, and given the prevailing economic conditions and governmental measures, businesses (especially small and medium enterprises) would struggle to stay afloat. Thus, the clear intention of the Act is to respond to the economic hardship that businesses may face in present times.

    In contrast, the doctrine of frustration shifts the focus away from financial hardship. It is instead predicated on the radical change in the performance of obligations as originally contemplated. This was recognised by the House of Lords in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, where Lord Radcliffe observed that (at 729) (endorsed by the Court of Appeal in Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] 3 SLR 857 (“Alliance Concrete”) at [33]):

    [F]rustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

    In this connection, the doctrine of frustration is said to only apply in exceptional circumstances (Alliance Concrete at [38]). Inasmuch as it may be onerous to hold parties to their contracts where an external event has rendered performance radically or fundamentally different from what was originally contemplated, the court must be wary against assisting undeserving parties from exiting what is essentially a bad bargain. In other words, regard must be had to the sanctity of contracts (Alliance Concrete at [38]).

    Interpreting section 5(1) of the COVID-19 (Temporary Measures) Act 2020

    Preliminary points – the legal requirements for temporary relief

    The contract must be a scheduled contract under the Act and must have been entered into or renewed before 25 March 2020 for section 5 to be of any relevance (see sections 4(1) and 5(1)(a) of the Act). Once those hurdles are crossed, section 5 will be triggered if:

    (a)       the party to the scheduled contract is unable to perform an obligation in the contract which was originally due to be performed on or after 1 February 2020 (see section 5(1)(a) of the Act); and

    (b)       the inability is to a material extent caused by a COVID-19 event (see section 5(1)(b) of the Act).

    A COVID-19 event, in turn, is statutorily defined under section 2 as:

    (a)       the COVID-19 epidemic or pandemic; or

    (b)       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.

    Apart from meeting the above requirements, a party seeking relief must serve a notification for relief on the other party/parties in the contract, or any guarantor or surety for the other party’s obligation in the contract for the relief to take effect (see section 9(1) of the Act). Should there be disagreement over that party’s eligibility to temporary relief, an application may be made for an Assessor’s determination on whether section 5 applies, and if so, whether temporary relief ought to be granted (see section 9(2)(a) of the Act). The Assessor’s decision is final and binding on all parties and cannot be appealed against (see sections 13(9) and (10) of the Act).

    What does “unable to perform” under section 5(1)(a) mean?

    The words of section 5(1)(b) (ie, that the inability to perform a contractual obligation is to a material extent caused by a COVID-19 event) are self-evident and commonsensical. As stated by the Minister for Law, the presence of multiple causes is not fatal, and the COVID-19 event need not be the dominant cause, as long as COVID-19 is the material cause (see Singapore Parliamentary Debates, Official Report (7 April 2020) vol 94, per K Shanmugam, Minister for Law). It is section 5(1)(a) that warrants greater scrutiny.

    At first glance, section 5(1)(a) (ie, the party to the scheduled contract is unable to perform an obligation in the contract) appears straightforward. However, one practical difficulty that presents itself almost immediately is that the Act does not define the phrase “unable to perform” under section 5(1)(a). Depending on whether the phrase “unable to perform” is read literally and whether the relevant contractual obligation is construed narrowly or broadly, the scope of section 5(1)(a) may be quite different. Read literally, the scope of section 5(1)(a) seems limited – the phrase “unable to perform” suggests notions of incapacity or unavailability to perform obligations, as opposed to impracticability or a frustration of purpose.

    This point is best illustrated in the example raised by MP Mr Murali Pillai SC at the second reading of the COVID-19 (Temporary Measures) Bill (see Singapore Parliamentary Debates, Official Report (7 April 2020) vol 94, per Murali Pillai, Member of Parliament). Picture the hire of a venue from a hotel for a wedding ceremony.  If the couple’s obligation were construed narrowly as simply the making of payment for the hire of the venue and taking the literal meaning of the word “unable”, the couple could hardly be said to be “unable to perform” the obligation. However, taking a narrow construction of the obligation and a literal reading of the phrase “unable to perform” without reference to the purpose of the contract would be contrary to the object of the Act. Thus, in the Minister for Law’s response to the questions posed by the various members of Parliament, he made clear that (see Singapore Parliamentary Debates, Official Report (7 April 2020) vol 94, per K Shanmugam, Minister for Law):

    The intention is to look at whether a party can perform a contract. In the situation that Mr Murali pointed out, the couple have as much obligation to accept the goods and services as an obligation to pay the price for it. If the contract is to have a wedding banquet of a photography services, but they have become unable to accept the services because of the new measures, they are unable to perform.

    It is therefore clear that the phrase “unable to perform” is not to be read restrictively and literally. Section 5 applies not only to situations where performance is impossible but also to where it is impractical to expect performance, or where the purpose of the contractual adventure has been frustrated. One can therefore readily conclude that the couple in the example above would be entitled to relief under section 5 of the Act. Indeed, the purpose of hiring the wedding venue has been frustrated. Afterall, a marriage is meant to be a joyous occasion to be celebrated in the company of many.

    From the foregoing, it can be concluded that the scope of section 5(1)(a) of the Act generally mirrors the categories of frustration under the common law, viz, impossibility of performance, legal impossibility, and impossibility of purpose (see generally, Tham Chee Ho, “Frustration” in Andrew Phang Boon Leong (Gen Ed), The Law of Contract in Singapore (Academy Publishing, 2012)). The question then is this: what is the threshold to be met before section 5(1)(a) is invoked?

    Under the common law, the couple would arguably be unsuccessful in invoking frustration given its high threshold. To invoke frustration of purpose, for example, it must be shown that the contract was entered into for the fulfilment of a common purpose in the first place (see Tham Chee Ho, “Frustration” in Andrew Phang Boon Leong (Gen Ed), The Law of Contract in Singapore (Academy Publishing, 2012), [19.050];  Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 at 689). It is arguable that the couple and the hotel renting out the wedding venue do not partake in a common purpose; the hotel is likely only interested in renting out its space.

    In contrast, the threshold of “unable to perform” under section 5(1)(a) is not meant to be as onerous as the doctrine of frustration. As it would appear from the Minister’s remarks above, section 5(1)(a) may be invoked even where the frustration of purpose is “one-sided”. Afterall, the Act and the doctrine of frustration under common law serve different purposes. The former seeks to relieve parties of financial hardship by temporarily suspending contractual enforcement whereas the latter discharges the contract altogether, thus warranting a higher threshold (see Sir Guenter Treitel, Frustration & Force Majeure (Sweet & Maxwell, 3rd Ed, 2014), [1.006]).

    Limits of the Act

    Cross-border contracts

    Moving away from the Act, an important area of discussion is the disruptive effect of COVID-19 (and related governmental measures) on cross-border contracts, which is an inherent limitation of the Act. While a Singaporean-based business may take advantage of the Act to suspend obligations owed to another Singaporean-based business, contractual obligations with foreign counterparties would not be covered by the Act since the Act does not purport to have any extraterritorial effect. This presents unique problems to middlemen in chain contracts. Take for example a contract between a developer and a contractor to build apartments. The contractor may seek relief under the Act to suspend its obligations to build the apartment on the basis of the prevailing governmental restrictions. However, the contractor may have ordered raw materials from an overseas supplier. The contractor may eventually be saddled with having to pay for the materials while not being able to continue construction to seek progress payments. Cash flow may be affected. Parties in these situations would therefore have to turn to force majeure or similar clauses in the relevant contracts for relief, or any other relevant principles under the applicable governing law to suspend or terminate their contractual obligations.

    Prospective frustration

    For many businesses, it may be more practical for commercial parties to simply rely on the common law to discharge the contract, rather than to rely on the Act to obtain temporary relief. There are good reasons for this. Given the uncertainty and volatility presented by the pandemic, parties may wish to terminate their contracts forthwith rather than having to wonder if the pandemic or relevant governmental measures would outlive the temporary relief afforded by the Act. In addition, parties may also wish to make a decision on termination now in respect of obligations that would be performed in the future. In this regard, it is useful to consider the doctrine of prospective frustration.

    The doctrine of prospective frustration applies where it is uncertain how the supervening event would affect future performance of the contract. As was laid down in Embiricos v Sydney Reid & Co [1914] 3 KB 45 (“Embiricos”), a contract will be discharged if there were reasonable grounds to believe that the frustrating event would lead to a sufficiently serious interference with future performance of the contractual obligation (see Embiricos at 54). In Embiricos, a Greek ship was chartered to carry cargo from a port on the Sea of Azoff to the United Kingdom. This passage required it to pass through Turkish territory. Prior to departure, however, war broke out between Greece and Turkey, and the charterers refused to load the ship, claiming that the contract had been frustrated. As it was, the Turkish authorities subsequently allowed a two-week grace period during which Greek ships would be allowed safe passage. In other words, the supervening event (ie, the war) would not have affected contractual performance. Nevertheless, according to Scrutton J, even though it turned out that the supervening event would not have interfered with the charterer’s contractual performance, this had no bearing on the discharge of the contract. This was because there were reasonable grounds for the charterers to believe that performance was impossible at the point when war broke out. Thus, Scrutton J held that the contract was frustrated (see Embiricos at 54).

    While it remains to be seen if the Embiricos principle will be embraced under Singapore law, there is no reason why it should not. The rationale underlying the Embiricos principle is sound and desirable. In the words of Scrutton J, “[c]ommercial men [should] not be asked to wait till the end of a long delay to find out from what in fact happens whether they are bound by a contract or not; they must be entitled to act on reasonable commercial probabilities at the time when they are called upon to make up their minds” (see Embiricos at 54). This observation applies with greater force in today’s context, as commercial parties should not have to wait and see how the COVID-19 situation would evolve before taking firm commercial decisions.

    Lessons on drafting force majeure clauses in the future 

    While the Act may no longer be in effect once the pandemic comes to an end, it is suggested that the thinking behind the Act may continue to inform the drafting of force majeure clauses.

    A force majeure clause is a contractual clause that alters parties’ rights and obligations upon the occurrence of a stipulated event beyond the control of contracting parties (see Tham Chee Ho, “Discharge by Agreement” in Andrew Phang Boon Leong (Gen Ed), The Law of Contract in Singapore (Academy Publishing, 2012), [18.003]–[18.006]). Traditionally, boilerplate force majeure clauses turn on concepts of “disruption”, “prevention”, “hindrance”, or “delay”. For example, in Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd [2011] 2 SLR 106 (“Holcim”), the force majeure clause provided that the supplier would not be required to supply the concrete if the supply was disrupted by certain events (Holcim at [4]). In interpreting the term “disrupted”, the Court of Appeal observed that a mere increase in price, save for instances where the increase is so astronomical (Holcim at [53]), would not constitution “disruption” (Holcim at [54]).

    The Act is useful in that it brings the notion of financial hardship due to a strict insistence of contractual rights to the fore. Insofar as parties intend that their contracts be suspended in times of extraordinary hardship, they may do so by drawing on the concept of “unable to perform”. Further, the definition of COVID-19 event under the Act is a useful reminder that public health crises and pandemics often go hand in hand with governmental restrictions, and that the impact of such events often ripple beyond a single country. Drafters would be prudent to ensure that the scope of their force majeure clauses are sufficiently broad.

    Conclusion

    COVID-19 represents an age of disruption to the global economy, but it also represents an opportunity for change, and urgently highlights the need for the law to deal with the heavy inflow of problems in an expedient, practical and principled fashion. While the Act is a valuable legal weapon to battle the crisis, this article has sought to highlight some of the issues left unaddressed by the Act and has attempted to offer some suggestions and perspectives where possible.

    Moving forward, it would perhaps be ideal for relevant stakeholders to consider other solutions to complement the Act in battling the effects of the COVID-19 pandemic. For example, it has been suggested elsewhere that Parliament should legislate beyond the Act by allowing the courts to modify and adjust parties’ contractual rights (see VK Rajah and Goh Yihan, “The Covid-19 pandemic and the imminent legal epidemic” (7 May 2020), The Straits Times), an approach that has been looked upon favorably in civil law jurisdictions (see Mariana Pargendler, “The Role of the State in Contract Law: The Common-Civil Law Divide” (2018) 43 Yale Journal of International Law 143, 161). This would complement the Act as it provides parties with another alternative to temporary relief. While this may place strain on available resources, it may be of greater importance that parties are given the legal bandwidth to seek the best solution possible to tide through this crisis.

    * This blog entry may be cited as Daniel Ho and Pesdy Tay, “In Frustrating Times of Disruption and Uncertainty: the COVID-19 (Temporary Measures) Act 2020 and beyond”  (22 July 2020) (http://www.singaporelawblog.sg/blog/article/247)

    ** A PDF version of this entry may be downloaded here

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