Singapore: COVID-19 & Your Global Renewables Supply Chain

By Sandra Seah, Eef Gerard Van Emmerik

05-2020

The renewables sector has been affected by COVID-19 due to its reliance on global supply chains for raw materials and components which have been disrupted by the virus, and as social distancing has stymied the ability of workforces to physically build, operate & maintain renewable power generation facilities.

Though manufacturing hubs are now at various stages of restarting and ramping up capacity, production across the globe is far from performing at optimal capacity.

Examples of the impact of COVID-19 on the renewables supply chain include:

  • Imports/Exports stopped - countries are enacting different measures concerning import of goods and services from COVID-19 high risk countries. For instance, the European Commission has allowed each Member State to adopt measures (proportionate and not prejudicial) aimed at safeguarding the health of its citizens and to prevent the spread of the virus COVID-19. There are also intricate independencies to be reckoned with: many countries rely on China for components, certain raw materials and assembly, while also themselves exporting to China and the rest of the world.

  • Factories and test facilities closing/reducing output – countries are adopting differing approaches as to whether or not production must halt, and these "lockdowns" and their rules are changing almost daily. With infections breaking out in waves, countries which have restarted production may be forced to halt again.

  • Reduced workforce – employees may be coming to work due to self-isolation, sickness or fear or may be forced to work from home due to governmental directives.

  • Travel bans – many countries have closed their borders. Certain work in the sector (such as specialist installation or operation and maintenance) may require oversight from overseas-based specialists who are unable to get to the location of work due to travel restrictions.

Contracting in the renewables sector is characterised by strict deadlines and liquidated damages for delays. In the current COVID-19 situation, independent power producers (IPPs) for instance may find themselves caught in a bind if there is a mismatch between the relief they must grant to their construction contractors (EPC and O&M) and the relief they are entitled to from their offtakers or customers under the Power Purchase Agreement.

Customers and suppliers are keen to understand (i) their liabilities under their contracts should COVID-19 cause delays and breaches, and (ii) the options to work collaboratively to find solutions. Of particular interest is whether liquidated damages remain payable by suppliers, and whether parties have any other options such as suspension, termination or entitlement to claim increased costs under their contractual terms.

This note looks at how Singapore contract law principles apply to contracts in the renewables sector in the COVID-19 pandemic, and highlights other ancillary contractual issues which both customers and suppliers should be aware of.

Step 1 - Which law applies?

In assessing whether or not a party is entitled to relief from its obligations, it is important to check both: 

  • The governing law of the applicable contract; and

  • The laws in the jurisdiction where the obligations are being performed (particularly with regards to any mandatory restrictions in place regarding imports/exports, production and travel bans).

If a contract is governed by Singapore law, the terms of contract will be interpreted under Singapore interpretation principles including its force majeure and frustration doctrines. However, obligations under the contract may be physically performed overseas (for example at a factory or testing site) in which case the overseas jurisdiction's law will be relevant in assessing whether there has in fact been a force majeure or frustrating event (see steps 4 & 5 below).

Step 2 - Is COVID-19 a force majeure event?

A force majeure (FM) clause is a contractual risk allocation mechanism, which excuses the non-performance of a contract in defined situations.

Generally, a force majeure event is a supervening event arising without the fault of the contracting parties and where neither party has assumed responsibility for the supervening event. When a party wishes to claim that a force majeure instance has occurred, the burden is on the claiming party to prove that the event falls within the ambit of that clause. Furthermore, the claiming party must also show how the supervening event prevents it from performing an obligation required by the contract.

Under Singapore law, there is no general legal rule defining when a FM situation occurs. Whether a FM situation has arisen depends entirely on the interpretation of the express FM clause. By way of illustration, a FM clause may read:

"Event of Force Majeure" means, in relation to a party, any event or circumstance, or combination of events or circumstances, (a) that is beyond the reasonable control of that Party; (b) that substantially prevents or delays such Party from fulfilling its obligations under this Agreement; and (c) the effects of which could not have been foreseen and prevent¬ed, overcome, remedied or mitigated in whole or in part by that Party through the exercise of diligence and reasonable care, including by not limited to any act of God, strikes, lockouts, labour or civil disturbances, wars, sabotage, vandalism, blockages, landslides, lightning, geo-magnetically induced currents, earthquakes, fires, storms, floods and other natural catastrophes; provided however, for greater certainty, that the lack, insufficiency or non-availability of funds shall not constitute a Force Majeure Event"

Events such as "quarantine", "lockdown", "epidemic" or "pandemic" are not typically included in the construct of a FM clause in Singapore, although "quarantine" and "epidemic" may have crept into some of the contracts after SARS.

In the absence of "quarantine", "lockdown", "epidemic" or "pandemic" or similar words being incorporated into the definition of FM, the supplier will not be able to rely on FM to excuse non-performance on account of COVID-19.

If "quarantine", "lockdown", "epidemic" or "pandemic" or similar words are incorporated into the definition of FM, the supplier may be able to rely on FM to excuse non-performance on account of COVID-19.

Step 2a - How does an affected supplier claim relief under FM?

Once COVID-19 is established as a FM event, the supplier has to show it has been rendered unable to perform its obligations in large part or wholly due to the FM event.

Under Singapore law, it is usually not enough to show that it has merely become more difficult or more expensive for the party to discharge its obligations. For example, if the price of raw materials or labour has increased, an affected party would still be able to perform its obligations and the affected party would not be able to claim relief under the FM rule.

Step 2b - Does the affected supplier need to take steps to mitigate the impact of the FM event?

The supplier has to show it has taken steps to mitigate the impact of the FM event. This is an implied duty which applies even if the contract contains no express clause requiring the affected party to mitigate the impact of the force majeure event.

It will be a question of fact as to whether an affected party has taken steps to mitigate the impact, but relevant factors may include ways in which the affected party could have acted to continue its obligations such as switching suppliers or redeploying staff.

Step 2c - What does entitlement to FM relief actually mean under the contract?

An entitlement to force majeure relief generally means (1) that the affected party is excused from contractual liability, including damages, in relation to its non-performance (or delay); and (2) either party may terminate the contract where the force majeure event continues for the length of time specific in the contract. Relief may take the form of:

  • Relief from liability for liquidated damages with an extension of time to delivery dates;

  • Relief from breach of contract claims for non-performance; and

  • Relief from termination for default.

Generally, the unaffected party does not have to do more to assist the affected party unless assistance is in the form of mitigating its damages or loss arising from the non-performance.

There may also be contractual clauses requiring the unaffected party to come to the aid of the affected party, for instance a party located in a particular jurisdiction may be specifically required to assist an alien party with making regulatory submissions and to seek permits and approvals for shipment from authorities.

Such a clause may be triggered if shipments are affected by COVID-19 even though there is no general legal duty or obligation to come to the aid of an affected counterparty.

Step 3 - Could the contract be frustrated on account of COVID-19?

Singapore law recognises the common law doctrine of frustration. A frustrated contract can be discharged. For a contract to be frustrated, parties generally need to show:

  1. The frustrating event was unexpected and beyond the control of the parties; and

  2. The event renders it physically or legally impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken when the contract was agreed.

Under the Frustrated Contracts Act (Cap 115 of Singapore), the rights and liabilities of parties to frustrated contracts may be adjusted and the parties discharged from further performance. Sums that were pre-paid (or payable to any party) before the time of discharge by frustration may continue to be recoverable (or cease to be payable) depending on the equities of the case. Expenses incurred for the performance of the contract before discharge can be recovered (to the extent it is just to do so). If a party has obtained a valuable benefit (other than money) from the contract before discharge, it may be required to pay a just amount for such benefit taking into account its expenses, overheads, work done and the benefit that it has gained.

Depending on the nature of the contract and the contractual obligations, COVID-19 may or may not be a frustrating event. An increase in price is unlikely to be a frustrating event (Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35). An increase in the level of difficulty in performing a contract is also unlikely to be a trigger (Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293).

COVID-19 is an unprecedented event, and as such it might lead one to conclude that it is a de facto frustrating event. However, it is not just the existence of COVID-19 which is determinative. Rather, the outbreak must have a direct impact on the contract sought to be avoided, and must render the mode of performance under the contract radically destroyed or changed in order to be considered a frustrating event.

In Hong Kong, whose law is persuasive in Singapore as both jurisdictions share the same common law background, there was a case where a tenant did not succeed in making a frustration argument in respect of a tenancy agreement where the tenancy was affected by an outbreak of SARS virus that rendered the building in which the tenancy was located uninhabitable for a short period. In that case, an isolation order only prevented access to the premises for 10 days, and the Hong Kong courts did not consider the 10 day period sufficient enough to render the tenancy frustrated (Li Ching Wing v Xuan Yi Xiong [2003] HKDC 54).

Although the legal doctrine of frustration in a real estate context may not have direct parallels with the renewables industry, the case of Li Ching Wing illustrates the high bar for those who wish to make a frustration argument. It also shows how the mere occurrence of a viral outbreak, no matter the severity in terms of lives lost and number infected, may not amount to a frustrating event if there is no direct and significant impact on the contract in question.

Step 4 - What other provisions of the contract might be impacted by COVID-19?

The following contractual provisions may warrant a closer review in a COVID-19 situation:

  • Payment – consider whether there are any rights of the customer to withhold payments if obligations or milestones are not performed (even if due to force majeure).

  • Suspension/hardship – consider whether there are any rights for the affected party to suspend its performance (for example due to economic change or under an express 'hardship' clause).

  • Termination – consider rights to terminate for convenience or for causes aligned to COVID-19, and the consequences of termination.

  • Material adverse effect – such a clause entitles a party to terminate the contract if there is an event that has material adverse consequences to the economy at large, such a clause may also entitle termination of the contract if circumstances change in a material way that renders performance loss making.

  • Change in Law – many countries are introducing new laws to deal with COVID-19. Consider if there a change of law clause in the contract which deals with the outcome of such change in law and which party bears the risks associated with such change.

  • Health & safety – consider if the supplier can still meet contractual commitments to comply with health & safety regulations in the midst of the COVID-19 pandemic.

  • Variation – any amendments agreed due to COVID-19 will need to be made in accordance with any variations clause (which may require variations to be in writing).

  • No waiver – a 'no waiver' clause does not necessarily protect a party from damages and losses incurred due to inaction following a breach. A non-breaching party should still reserve its rights and remedies and notify the party in breach by formal contractual notice.

  • Dispute resolution – relevant to consider costs and options outside of self-help on a contractual basis.
Step 5 - Is the contract one which is subject to legislative intervention?

In Singapore, the COVID-19 (Temporary Measures) Act ("COVID-19 Act") provides temporary relief to a supplier from legal action for inability to perform certain contracts because of COVID-19.

The following categories of contracts are covered by the COVID-19 Act and are likely of relevance to the renewables sector:

  • Secured loan agreements to SMEs

  • Construction contracts and supply contracts

  • Hire-purchase and conditional sales agreements

  • Leases and licences of non-residential property

The period of relief will be for 6 months, from 20 April 2020 to 19 October 2020, and may be extended to up to a year.

Suppliers which are unable to perform their contracts because of COVID-19 are encouraged to negotiate with their customers or counterparties to resolve the matter.

If they require protection from legal proceedings and wish to obtain temporary relief under the Act, they should serve a Notification for Relief on the other party or parties to the contract, using the form at http://www.mlaw.gov.sg/covid19-relief/notification-for-relief.

The Notification for Relief sets out the obligation that is or was supposed to be performed, how the inability to perform the obligation was materially caused by a COVID-19 event, and any proposed alternative solution. The Notification for Relief must also be served on any guarantor or surety for the obligation in the contract, and/or the issuer of any related performance bond (if any).

The other party or parties to the contract on whom the Notification for Relief is served are prohibited from taking certain types of actions to enforce the obligation during the period of relief. These include commencing or continuing an action in court.

The COVID-19 Act also provides for a third party assessment process in the event that the parties are unable to come to a compromise after a Notification for Relief has been issued.

Conclusion

As the pandemic forces businesses and supply chains to evolve, businesses in the renewables sector will have to ensure their contracts help rather than hinder the process. An understanding of the underlying contractual obligations and the various legal mechanisms available to defer or counter such obligations or to deal with any inevitable breaches or fallouts is useful as businesses gird up for the challenges ahead, and prepare for longer term growth.

 

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please note that the information in this article is accurate as at 13 May 2020. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.