Covid-19 and contractual obligations
When unforeseen or unexpected events occur, parties to contracts are quick to refer to contractual documents to see whether their contractual obligations, whether for the completion of construction of buildings or roads or for the supply of goods and services, have been violated or there are grounds to justify the delay with impunity.
References to Act of God, force majeure clauses, unexpected contingency clauses etc. are some of the common terminology employed in drafting contracts and legal systems differ in the usage of terminology as well as in relation to the scope and coverage of these terms. Precedents- previous judicial decisions- as well as the exchange of correspondence prior to execution of contracts are sometimes referred to shed light on the respective rights and duties of the parties to the contract.
The unexpected outbreak of COVID-19 has posed interesting and perplex issues as to how delays in the execution of contractual obligations can be justified due to mandatory lockdowns, compulsory quarantine measures, travel bans etc. The issues are not confined only to the provision of goods and services and the construction industry but also to employment contracts including non-payment of wages and commissions or part-payment of salaries, delays in the commencement of new employment etc. Defaults in loan payments or non- payment of installments in the financial sector have enormous implications at the macro level, posing a serious threat to the very foundation of the economy, whether it be national, regional or global. Systemic risk is one of the worst risks an economic system has to cope with.
Contractual obligations can be best understood only by a reading of the entirety of the agreement and related contractual documents which form part and parcel of the agreement.
As to how COVID-19 can be classified as justifying a delay cannot be judged in the abstract but only in the context of the clauses in the agreement, the understanding between the parties as reflected in relevant documentation, the applicable legal system and previous judicial decisions.
Needless to state, most jurisdictions have had the experience of long and protracted litigation in resolving similar issues. In fact, in Sri Lanka when the Tsunami stuck a deadly blow in December 2014 insurance companies faced a dilemma as to whether the Tsunami can be considered as one of the natural perils against which the insured had taken cover or not.
The issue came up before the Insurance Board of Sri Lanka of which the author was then the Chairman and was quickly resolved by directing insurance companies to make payment, a directive which was readily complied with by all affected insurance companies.
Singapore is perhaps among the first countries to enact a new Act of Parliament to clarify the status of COVID-19 in relation to a number of areas. Within a short period of 9 days an inter-ministerial drafting committee formulated a Bill which went through the Parliamentary process within a day and was enacted into law the same day as The COVID-19 (Temporary Measures) Act 2020.
The Act and the regulations enacted thereunder clarified a number of matters which would otherwise have resulted in endless, costly and protracted litigation. In introducing the legi s l ation the relevant Minister remarked that the Bill does not violate the sanctity of contracts but the current situation demands relief without altering too much contractual rights- it was described as a sort of legal circuit breaker- a time out- until this virus dies out and contracts, like life, can return to normal.
The COVID- 19 ( Temporary Measures) Act ( the Act) will have a considerable impact on the enforcement of certain contracts and commercial disputes in Singapore for the next 6 to 12 months. Space does not permit a detailed account but some of the key provisions are set out below
Temporary relief from the inability to perform contractual obligations under certain contracts if that inability is materially caused by a COVID -19 event. Temporary changes to bankruptcy and insolvency laws to increase the debt thresholds for winding up and bankruptcy, and give a safety net to allow businesses to continue to trade while technically insolvent.
Allow the conduct of certain meetings, such as AGMs, to continue using alternative arrangements other than personal attendance. Temporary Relief from Inability to Perform Contracts
The nature of this relief is to put a freeze on taking legal action for breach of certain contracts for the next 6 and possibly up to 12 months.
The relief also provides for a binding dispute resolution mechanism to ensure that contracting parties are not abusing this system. These measures are only intended to be temporary and will only freeze legal rights and obligations in place while the Act is in force, allowing proceedings to be commenced, if necessary, after the COVID- 19 situation is under control. Relief only applied to certain scheduled contracts entered into before 24 March 2020. A party to a scheduled contract is entitled to relief if they are unable to perform an obligation due to be performed on or after 1 February 2020.
The inability must be materially caused by either the COVID-19 pandemic or any law made because of COVID- 19. The law made because of COVID -19 is not limited to the Singapore Government and can be by any national government. The party must then proceed to serve a notice for relief on all counterparties as well as any surety or guarantor. If served with notice for relief the counterparty is prohibited from: 1. Commencing or continuing any court or arbitral proceedings against the party or their guarantor or surety; 2. Enforcing any security over any immovable property or over any movable property being used for the purpose of trade, business or profession; 3.
Taking bankruptcy or insolvency action against the party or their guarantor or surety. 4. Seeking to repossess goods under a leasing, hire- purchase agreement or retention of title agreement. 5. Terminating a lease or licence of immovable property for the non-payment of rent or money. 6. Any action to enforce a court judgement, arbitral award or adjudication under the Security of Payment Act.
Singapore has shown the way how countries might clarify the legal position in certain areas in the wake of the COVID-19 outbreak. Hopefully, Sri Lanka will enact a similar law no sooner the new Parliament commences its sessons.
As to how COVID-19 can be classified as justifying a delay cannot be judged in the abstract but only in the context of the clauses in the agreement, the understanding between the parties as reflected in relevant documentation, the applicable legal system and previous judicial decisions.