• Proposed changes to the Covid-19 (Temporary Measures) Act will create a new framework allowing small firms to renegotiate some contracts easily
• Eligible businesses can serve a notice to their contract counterparties, compelling them to go to the negotiating table
• If no agreement is reached within the four-week negotiating period, the contract may be terminated
• Businesses remain liable for the outstanding debts and obligations of terminated contracts and can call on an independent assessor to rule on any disagreements

SINGAPORE — Firms that are severely disrupted by Covid-19 and need to overhaul their businesses may soon tap a new framework to renegotiate certain types of contracts, rather than being forced to fight costly lawsuits over terminated deals.

The proposed Re-Align Framework, unveiled in Parliament on Monday (Nov 2), will empower eligible small- and micro-sized enterprises to serve a notice to a counterparty, which will compel them to renegotiate specific types of contracts in order to reach a mutual agreement.

If such an agreement cannot be reached within four weeks, the contracts may be terminated and businesses will remain liable for any outstanding debts and obligations, though penalties for early termination are voided.

Introduced by Second Minister for Law Edwin Tong, the framework is part of the latest legislative tweak to the Covid-19 (Temporary Measures) Act, which provides various forms of relief to businesses impacted by the coronavirus pandemic.

The emergency law has been amended in Parliament twice this year since it was first introduced in April, in a move which effectively granted eligible businesses a moratorium to fulfil their end of contracts and repay debts arising from contract breaches due to Covid-19.

The latest amendment Bill will be fast-tracked in Parliament under a Certificate of Urgency — it was introduced on Monday and will be debated on Tuesday.

If passed, the new framework is expected to come into effect later this year.

WHY IT MATTERS

Mr Tong said in a media briefing on Monday: “We’ve since looked at the economic landscape. Some sectors have been recovering, but in the longer term, the realistic problem is that many of the parties are now discharging obligations on a contract that they had entered into (during) pre-Covid days.”

This meant that these existing contracts were negotiated at a time when the assumptions on the operating environment, the cost and the profit margins were different from those prevailing amid today’s pandemic, he added.

Typically, firms that are unable to hold up their end of a contract due to an unforeseen event — such as a global pandemic — can apply to the courts to be released from the contract obligations on the basis of contract frustration.

However, this legal route involves time and resources for already stricken firms. It also means that the contract is necessarily terminated, which does little to help companies — especially small enterprises — get back on their feet.

If passed, the new framework essentially allows firms to re-align their existing contracts without the courts, and avoid the legal and financial burden of litigation.

Instead, they can renegotiate contracts with their counterparties rather than terminating them.

Mr Tong emphasised that firms may still pursue the legal route of contract frustration if they wish — the amendments will not stop firms from going through the courts as a recourse.

HOW IT WORKS

The proposed Re-Align Framework is available only for a short period — around six weeks — if it comes into force, which means businesses must decide quickly if they want to seek relief.

First, an eligible contractual party who wishes to renegotiate or terminate a contract can serve a notice to the counterparties of the contract.

This will kickstart a four-week renegotiating period between the parties to work out new contract arrangements that suit the new circumstances precipitated by Covid-19.

However, if the renegotiation is unsuccessful, the contract will be terminated. Any accrued liabilities remain payable or enforceable, but future liabilities after the date of termination are generally extinguished.

If there are disagreements, parties can refer to a panel of assessors to resolve the dispute in a fast and efficient manner.

Assessors can also determine if additional compensation is needed for smaller landlords who may not be able to absorb the renegotiated terms, such as lower rent, for example.

For hirers or renters of commercial equipment, the framework may allow them to take up a repayment scheme to pay outstanding arrears in instalments.

“This is in recognition of feedback from some hirers and renters that while they have been substantially affected by Covid-19, they do not wish to terminate their agreements as that would mean they have to… lose their source of income,” said the ministry.

WHICH FIRMS ARE ELIGIBLE?

Like past measures under the Covid-19 (Temporary Measures) Act, the proposed changes also constitute significant state intervention in privately negotiated contracts — unprecedented in pre-Covid days.

The Law Ministry said on Monday that it does not intervene in contracts lightly, but will do so in a “targeted and conservative” manner under exceptional circumstances and for the greater public good.

It added: “Sanctity of contract remains an important feature of Singapore’s attractiveness as an international commercial centre and a fundamental pillar of legal policy.”

Nevertheless, Mr Tong stressed that since the changes involve the sanctity of contracts, the Law Ministry wants to intervene “narrowly and in a very calibrated fashion”.

The proposed framework therefore applies only to small and micro businesses based on an annual revenue cap which is still to be determined. These firms tend to have less bargaining power in contract negotiations.

These businesses must also have experienced a significant fall in revenue, in order for the policy to aid those whose businesses have fundamentally changed due to Covid-19 and have not recovered.

Additional criteria include:

• The contracts have to be governed by Singapore law

• Eligible contracts are those entered into before March 25, 2020

• At least one of the contract parties must have a place of business in Singapore

Five types of business-to-business contracts are covered, since they involve substantial obligations that may need renegotiation or restructuring. These are:

• Leases or licences for non-residential immovable property

• Hire-purchase and conditional sales agreements for commercial equipment or commercial vehicles

• Rental agreements for commercial equipment or commercial vehicles

• Contracts for sale and purchase of goods

• Contracts for sale and purchase of services

However, certain types of prescribed contracts are excluded from the framework, such as:

• Contracts affecting national interests and essential services

• Consumer contracts

• Employment contracts

• Financial and insurance contracts

• Construction and supply contracts (there are other means of relief for such contracts)

• Long-term leases