The rapid escalation of the Novel Coronavirus 2019 (COVID-19) has sent ripple effects across global economies and businesses. In a bid to control infections, Governments have imposed heavy restrictions on movement and ‘lockdowns’ across the world, adding on to the disruption felt by many businesses. Tele-commuting is now highly encouraged and 'Stay-at-Home' appears to be new norm.
As new norms and new regulations emerge to combat the spread of the virus, businesses should also take the time to understand their new obligations and (along with sanitising premises and washing hands) undertake a certain level of legal housekeeping to put them in good stead to weather this challenging business climate.
In this legal feature, we explore the new obligations imposed on business owners and highlight areas of potential risk to businesses. We’ve also offered pertinent suggestions on navigating this troubled times to come out stronger on the other side.
This is a comprehensive legal feature, and we will touch on several legal topics pertinent to businesses charting a course through these times. Feel free to jump ahead to whichever topic piques your interest.
1. Building Management
1.1 Owners and Operators
The National Environment Agency (NEA) has put out comprehensive advisories urging premise owners and operators (collectively "owners") to maintain high standards of sanitation and personal hygiene to prevent or contain the spread of COVID-19. The recommended practices cover personal hygiene, housekeeping, refuse management and pest control. The advisories do not have the force of law but owners possibly remain on the hook for any harm caused to entrants and occupants (collectively "entrants") under the doctrine of occupier's liability if the owners are delinquent on observing the COVID-19 advisories.
The doctrine of occupiers’ liability imposes a duty of care on owners to the entrants of a building if the following elements are met:
- Factual foreseeability: The Singapore courts have held that it was eminently foreseeable that entrants to the premises would suffer damage if owners did not take reasonable care to eliminate danger, in this case, the danger of viral infection or contamination. Factual foreseeability is certainly established if the entrant is an invitee of the owner.
- Legal proximity: Proximity embraces physical, circumstantial and causal proximity, and included proximity arising from the voluntary assumption of responsibility and concomitant reliance. The Singapore courts have found that there was undoubtedly physical proximity between an owner and an entrant merely by virtue of the fact that the entrant was physically situated on the occupier’s property.
- Public policy: The courts are free to make policy considerations that negate the existence of the prima facie duty of care imposed on the owners. However, these policy considerations must be cogent in order to displace the prima facie position. In the case of COVID-19, an owner delinquent in adopting the NEA advisories would not have public policy considerations on its side.
In our assessment, the risk of litigation against an errant owner is very real if an occupant is infected with COVID-19 or if a cluster of infection is bred through the failure of the owner in diligently complying with the advisories. Owners should therefore exercise utmost diligence in complying with the advisories, and document the precautionary steps or measures taken in case of any adversarial action taken by entrants.
Tenants should be wary that their lease and tenancy agreements may contain onerous provisions. Such lease terms may exculpate the landlord if there is a COVID-19 infection arising from poor building management or negligence. Landlords may also impose additional financial obligations on the tenant for the cost of sanitization on the basis of the tenancy agreement.
There is generally a very broad exclusion of the landlord's liability for any injury, death, loss or damage (including indirect, consequential and special loss) which the tenant may suffer in respect of a wide range of causes, whether or not due to the landlord's acts or negligence. Most leases would also broadly exempt the landlord from any damage, injury or loss of life or property due to any accident or circumstances "whatsoever" occurring at the premises or the building. Such limitation of liability or exclusion clauses should be carefully scrutinised – these clauses do apply to exempt a landlord if a tenant's employees or invitees contract COVID-19 from the building or poor building management (e.g. ineffective sanitation, poor cleaning protocols or inadequate screening) whether or not due to the landlord's acts or negligence.
2. Employee Management
Employees are the heart of an organization and employers should know their obligations in respect of managing their employees.
2.1 Employee travel
Employers should have in place policies to obtain health and declaration details from their employees on whether they have travelled to affected countries recently, or if they have any upcoming overseas travel plans.
For work-related travel, all work-related travel plans should be reviewed and all non-essential travel must be deferred with the preference of using video-conferencing or other means of business communications. Should travel be unavoidable, employers must ensure employee health is protected under MOH guidelines. If employers are required to be quarantined, self-isolated or delayed overseas, the employer is expected to cover these additional costs and pay for additional paid leave.
For non-work-related travel, should employees insist on proceeding with such travel, the employer may require the employee to use his own annual leave entitlements to cover the duration of delays imposed by the destination country. If an employee does not have sufficient annual leave entitlements, the employer may allow him to use advance leave or be placed on no-pay leave.
2.2 Malaysian employees
Many companies in Singapore rely heavily on manpower resources from Malaysia. As Malaysia declared a lockdown till 14 April 2020, companies with Malaysia employees must take especial note of the safety of their Malaysian employees who are commuting between borders or staying put in Malaysia.
Work-pass holders planning to enter Singapore from Malaysia must first obtain approval from the Ministry of Manpower (MOM) before they begin their journey. The requirement applies to work-pass holders now outside Singapore and workers whose work permits have been approved but have not yet entered the country. The entry approval requirement is effective immediately and applies to all modes of travel into Singapore, the MOM said on Wednesday (March 25). Workers are encouraged to stay and work in Singapore with either their relatives or friends. MOM may provide assistance with housing for such workers on a case-by-case basis and employers who require such assistance should contact MOM.
However, those conveying essential services and supplies over land and sea crossings such as lorry drivers delivering food are exempt from entry approval and the stay-home notice (SHN) requirements. Aside from these workers, affected work-pass holders will be placed on a mandatory 14-day SHN. Employers applying for entry approval must declare that they have arranged for suitable accommodation and food supplies for workers serving a SHN.
Employers can apply for entry approval using the form here.
MOM also provides housing options for affected employees who are not able, due to Malaysia’s lockdown, to return to Malaysia.
2.3 Safety at the Workplace
Effective from 7 April 2020, all business, social and other activities that cannot be conducted through telecommuting will be suspended till 4 May 2020 (inclusive).
Essential services are exempt from this suspension period but employers must adopt processes to remind employees to practice social responsibility by observing good personal hygiene, monitor their health (temperature checks) and encouraging employees to seek medical assistance should they feel unwell. Safe distancing policies should also be practiced at the workplace as is reasonably practicable. Next, physical meetings should be put off in favor of teleconferencing to reduce physical contact time. Should a staff become infected with COVID-19, operations should be suspended.
Essential services include supermarkets, delivery services, energy suppliers and others that are allowed to continue to operate from their premises. A guide on what are essential services is found at this link: https://covid.gobusiness.gov.sg/essentialservices/
For companies providing essential services, they will have to make a declaration that they are providing an essential service. For companies providing non-essential services, they may still apply for an exemptions subject to stricter scrutiny. If your company is a supplier to an essential service, you may continue to operate its business as it awaits the result of the application from the government.
Many companies operating at the workplace have also implemented shift work or staggered work hours called Business Continuity Planning (BCP). BCP measures help minimise disruption to company operations and ensure that the business remains viable during the virus outbreak. A common example of a BCP action involves splitting the company into different teams and ensuring no physical contact between the two teams occurs.
A guide to BCP can be found here.
3. Retrenchment Issues
3.1 Excess Manpower
The Ministry of Manpower (MOM), the National Trades Union Congress and the Singapore National Employers Federation (Tripartite Partners) have collectively issued a tripartite advisory on managing excess manpower and responsible retrenchment, which all employers should take heed of – the official stance is that retrenchment should always be the last resort, and employers are encouraged to adopt a longer-term view of their manpower needs.
As demonstrated by many established companies in Singapore and around the globe, management should first lead by example in attempting to defray costs. Executives have agreed to work for no pay or to accept significant pay cuts, sending a clear signal to the rest of the organisation that everyone is playing their part in weathering these difficult times.
Other suggestions by the Tripartite Partners that employers could consider before resorting to retrenchment include the following:
- Retraining of employees;
- Redeployment of employees to alternative areas of work within the organisation;
- Introduction of flexible work schedules, work arrangements, shorter work-weeks or working hours, or furloughs (temporary layoffs);
- Adjustment of wages in accordance with tripartite norms; or
- Implementation of no-pay leave.
Employers with at least 10 employees should also take note that the MOM must be notified within 1 week of any cost-saving measures being implemented that would affect employee salaries.
It should be noted that the Singapore government provides a multitude of support schemes to employers that demonstrate a willingness to invest in its people, such as the SkillsFuture and Adapt and Grow initiative.
This ensures that when the economy recovers, employers can reap the benefits by enjoying enhanced contribution from their upskilled employees, whether by way of productivity gains or expanded technical knowhow.
There are also various other government grants that businesses are also encouraged to leverage on during these times in order to digitalise and restructure for the future economy – SMEs Go Digital Programme, the Productivity Solutions Grant and Enterprise Development Grant, amongst others.
In the Supplementary Budget 2020 announced on 26 March 2020, the government will be rolling out an extended Jobs Support Scheme, in which the government will co-fund 25% of local workers' wages until December 2020, as well as the Enhanced Wage Credit Scheme, where the government co-funds wage increases for qualifying employers, in a bid to help employers retain their local employees.
October - December 2019
14 February 2020
25% of the first S$46,000 of gross monthly wages per local employee
End of May 2020
February - April 2020
14 May 2020
25% of the first S$46,000 of gross monthly wages per local employee
End of July 2020
May - July 2020
14 August 2020
25% of the first S$46,000 of gross monthly wages per local employee
End of October 2020
Table 1: Job Support Scheme Tranches
Table 2: Additional Tiers of the Job Support Scheme
Tier 1 - Aviation
• Airport ground handlers
• Airport operators
• Qualifying licensed hotels
• Qualifying licensed travel agents
• Qualifying gated tourist attractions
• Cruise lines and Cruise terminal operators
• Purpose-built meetings, Incentives, Conferences and Exhibitions venue operators
75% of the first S$4,600 of gross monthly wages per local employee (this includes the 25% base support)
|Tier 2 - Food
• Licensed food shops and food stalls (including hawker stalls)
50% of the first S$4,600 of gross monthly wages per local employee (this includes the 25% base support)
2018, 2019, 2020
|Level of co-funding
• 20% of qualifying wage increases in 2018
• 15% of qualifying wage increases in 2019
• 10% of qualifying wage increases in 2020
• 20% of qualifying wage increases in 2019
• 15% of qualifying wage increases in 2020
|Gross monthly wage ceiling
| Qualifying wage increases
|| • Increases in gross monthly wage of at least S$50 given to Singaporean employees in the qualifying year, up to a gross monthly wage level of S$4,000, will be co-funded.
• In addition, increases in gross monthly wage of at least S$50 given in 2017, 2018 and 2019 up to a gross monthly wage level of S$4,000, and sustained in subsequent years of the scheme, will be co-funded.
| • Increases in gross monthly wage of at least S$50 given to Singaporean employees in the qualifying year, up to a gross monthly wage level of S$5,000, will be co-funded.
• In addition, increases in gross monthly wage of at least S$50 given in 2017, 2018 and 2019 up to a gross monthly wage level of S$5,000, and sustained in subsequent years of the scheme, will be co-funded.
Table 3: Wage Credit Scheme
If employers have exhausted all means and have no other choice but to resort to retrenchment, it is imperative that the retrenchment exercise is carried out fairly, and that employees are treated with dignity, sensitivity and respect. Employers should assess, based on an objective criteria, the ability of each employee to contribute to the organisation's future needs, and ensure that there is no discrimination based on factors such as age, gender, race, religion, marital status, disability or family responsibility.
Employers must ensure that they communicate to their employees clearly the intentions of the retrenchment exercise, before any notice of retrenchment is given. This includes:
- Explaining the business situation faced by the company resulting in the need for a retrenchment exercise;
- Explaining how the retrenchment exercise will be conducted;
- Explaining the objective criteria that is used; and
- Specifying the assistance offered to those affected (e.g. counselling support).
For every employee serving at least 2 years with the organisation, it is recommended that 2 weeks to 1 month's worth of salary be paid for every year of service by the retrenched employee. Although the Employment Act provides for a minimum requirement of termination notice, it is recommended that employers adopt a longer retrenchment notice period or to minimally pay salary in lieu of such notice.
Employers are required to notify MOM within 5 working days of a retrenchment exercise if said employer has at least 10 employees and at least 5 of whom were retrenched within a 6-month period. All salaries and unused annual leave must be paid on the last day of work, and employers should provide reasonable assistance to look for alternative jobs in associated companies or companies in related sectors.
As mentioned above, employers can consider implementing alternative arrangements in lieu of retrenchment, such as incorporating flexible work arrangements, schedules or temporary layoffs. Employers must ensure that consent from the employee (or, where applicable, the employee union) is obtained prior to the adoption of such alternatives.
Employers are also encouraged to adjust wage components such as annual wage supplements, wage increments, bonuses and/or allowances to cut costs, before proceeding with alternative work arrangements that could affect employee salaries.
A key part of flexible work arrangement and business continuity plans would be for employees to work remotely, either at home or at an offsite location. It is important that employers ensure that the necessary infrastructure, licenses and arrangements are in place to support such remote working arrangements. Remote working policies and expectations should be clearly communicated to employees. When implemented, employers should continually monitor and review remote access to their systems to manage network resources and capacity as well as to ensure there is no unauthorized access to company networks. Employees should be made aware of their surroundings when working remotely to avoid any unintended disclosure of confidential information, particularly where employees are working from home and they may have personal recording or voice-activated devices that may not be as secure.
Ultimately, employers should, as much as possible, communicate clearly and regularly provide guidance or updates to employees on the business' situation to set expectations or to calm nerves. It would go a long way if employers take steps to protect the wellbeing of their employees during these tumultuous times.
For more information on managing excess manpower and responsible retrenchment, please refer to the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment here.
For more information on Government Wage Grants and other Relief for Singapore Employers, please refer to our previously published article here.
4. Contractual Breach of Existing Contracts
Generally, the failure to perform an obligation under a contract would give rise to a breach of that contract.
- If a breach is material, meaning one that results in substantial non-performance, the innocent party can treat the contract as immediately repudiated, and, typically sue for damages.
- If a breach is minor, the innocent party cannot immediately take action, and must instead allow the offending party some time to cure the breach.
If, however, the offending party has a valid legal excuse for breach, then there is no breach of contract. Instead the contract is discharged by lawful excuse. In such case, damages would generally not be awarded (since there is no breach), although statutory remedies may apply if the situation involves the doctrine of frustration.
COVID-19 may fall under one of two lawful excuses:
- Discharge by agreement
- Discharge by frustration
4.1 Discharge by Agreement
COVID-19 may trigger a discharge of contract by agreement in 2 broad ways.
- COVID-19 triggers pre-existing clauses present in the wording of contracts, such as a Material Adverse Change (MAC/MAE) clause or a force majeure clause.
- Parties agree ex post facto to discharge each other from their obligations under an existing contract, due to extenuating circumstances caused by Covid-19, notwithstanding their rights and obligations under the existing contract.
4.2 Force Majeure
Section 5 of this article explains more on force majeure clauses in the COVID-19 context.
Such clauses in existing contracts may also be triggered by the COVID-19 situation, depending on how the relevant clause is drafted. MAC/MAE clauses are more commonly found in project financing and credit documents, and, occasionally in highly negotiated M&A contexts. This would not often be a concern for commercial and other corporate documents. It would also be unusual to find such clauses in equity investment contexts, and such a clause is not found in subscription agreements.
Sample MAC/MAE definition in Financing context: "a Material Adverse Effect on (a) the business, assets, properties, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects, of the Borrower, individually, or the Borrower and its Subsidiaries taken as a whole; (b) the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party; or (c) the validity or enforceability of any Loan Document or the rights and remedies of any Agent or any Lender."
Sample MAC/MAE definition in the M&A context: "Material Adverse Effect as used with respect to a party, means an event, circumstance, change, effect or occurrence which, individually or together with any other event, circumstance, change, effect or occurrence: (i) is materially adverse to the business, financial condition, assets, liabilities or results of operations of such party and its Subsidiaries, taken as a whole; or (ii) materially impairs the ability of such party to perform its obligations under this Agreement or to consummate the Merger and the other Contemplated Transactions on a timely basis."
If expressed in the above terms, COVID-19 may allow lenders to avoid funding commitments under financing arrangements, or purchasers to avoid the obligation to consummate an M&A project.
Please note, however, that particularly in the M&A context, qualifiers are often included in MAC/MAE clauses. For instance, qualifiers that require market comparison to other companies in the industry. Insofar as COVID-19 is a global event and affects entire economies at the same time, an MAC/MAE clause would not be triggered by COVID-19 if the adverse change is not unique to the company or group in question.
Whether an MAC/MAE clause would indeed be triggered by COVID-19 would depend significantly on the factual circumstances of the locality of the contract and the exact wording of such a clause in the relevant contract.
4.4 Discharge by Agreement
Unlike force majeure and MAC/MAE clauses, which are contained within the terms of the original contract and are already operative prior to the occurrence of COVID-19, discharge by agreement is a subsequent agreement by the parties to treat the original contract as discharged.
Parties are always free to contract and enter into agreements, and as such it may be the case that parties have identified that COVID-19 has rendered their existing arrangements as unprofitable or no longer mutually beneficial.
In such a case, the parties may mutually agree to discharge the existing contract in a properly documented manner, with careful thought put into the exchange of consideration for such discharge.
4.5 Discharge by Frustration
Frustration defined: Frustration occurs when an unforeseen event beyond the control of the parties intervenes in the performance by a party of its obligations under a contract. In such event, the contract is treated as 'frustrated', and the contract is discharged.
COVID-19 is just such an event that would seem to fit the classic definition of frustration. Particularly in terms of the satisfying the 'frustration' rule that the event must arise through no fault of either party.
However, parties should not be too hasty to claim frustration due to COVID-19 without careful consideration of the circumstances.
Frustration has always been an exceptional common law excuse to contract performance, and COVID-19 should be viewed from this lens.
Exceptionality of the frustration doctrine: One common oversight is to take a contract as frustrated if COVID-19 makes it more expensive or onerous for one party to perform the contract. This is not typically enough to be considered a frustration as increased expense or onerousness on one party is not sufficient to meet the high standard for frustration of contracts.
Rather, the frustrating event must go toward the very nature of the contractual rights and obligations of the parties i.e. the event renders the obligations “radically or fundamentally different” from what had been agreed (Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd (2014)). An often cited example is where a contractor hits impermeable bedrock that was not known to be there when constructing the foundations of a building. In such a case, the building cannot even be built, and is not merely the case that it would be more expensive to dig the foundation. The discovery of a bedrock would be a frustrating event that goes to the very nature of the contract to build a building.
COVID-19 is a novel situation, especially seeing how recent epidemics such as SARS and MERS have not hit the global economy at such a scale as to result in the exceptionally extensive social distancing rules and lockdowns; it would not be surprising if COVID-19 indeed results in a few instances of contractual frustration.
It should be noted however, that if a party wrongfully claims frustration, it may be liable for extensive damages to the other party for anticipatory repudiation of the contract. As such we recommend careful consideration of any action taken based on the frustration doctrine.
Remedies if frustration is established: If frustration is established under Singapore law, statutory rules under the Frustrated Contracts Act (Cap. 115 of Singapore) will intervene to prevent any one party from enjoying exceptional and unfair outcomes arising from the discharge of the frustrated contract.
- If advance payments have been made prior to the occurrence of COVID-19, and a contract is frustrated due to the epidemic, the party who received those payments must make a refund.
- If a party incurred costs expended towards the performance of its obligations prior to the occurrence of COVID-19, and the epidemic frustrates the contract, the other party should pay for reasonable costs incurred.
- If the benefits exchanged prior to COVID-19 are non-monetary in nature, the Singapore courts are empowered to make valuations and to order the recipient of those benefits to pay for such value received.
Overall, the statutory regime aims to place parties in the position as if there were no loss and no gain, save for reasonable costs incurred in good faith towards achieving the contractual objective prior to the occurrence of the frustrating event.
Timing of frustration remedies: As the above statutory remedies indicate, the actual time of "occurrence" of the frustrating event is highly material to the calculation of payments. In the COVID-19 situation, the epidemic did not occur at one singular time like a bomb going off. Instead, the epidemic unfolded and spread over time, with the WHO officially designating it a 'pandemic' on 11 March 2020, sometime after its effects were significant in certain locations. As such, the cut-off date as to when COVID-19 actually frustrated any particular contract is a highly factual question, and would depend significantly on the circumstances faced by a party.
5. Force Majeure Provisions for Existing Contracts
As cases of COVID-19 rise throughout the world, national borders are restricted and entire industries are affected. Singapore has been steadily ramping up measures to combat the spread of the virus causing disruption to most, if not all businesses.
A frequently asked question is what happens when business contracts are delayed from completion due to obstructions to the supply chain. The legal question to answer is whether a COVID-19 viral outbreak is considered a force majeure event under contracts. Without such provisions in a contract, there may exist, in common law, other doctrines which excuses contract non-performance such as frustration or impracticability as explored in Section 5 of this article.
A force majeure clause is a contractual risk allocation mechanism, which excuses the non-performance of a contract in defined situations.
Under Singapore law, there is no general legal rule stipulating when a force majeure situation occurs. Whether a force majeure situation arises depends on the construction of the force majeure clause.
Generally, courts apply a presumption that a force majeure event is restricted to supervening events arising without the fault of the contracting parties and where neither of the parties 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 causes the obligations it was supposed to perform under the contract to be impossible to fulfil.
In the context of a COVID-19 outbreak, parties should look toward the construction of the force majeure clause, to see whether terms such as “epidemics”, “natural disasters”, or “acts of government” are covered under such a clause. For “acts of government”, many contract obligations would be impossible to perform due to government measures which restrict air travel, or impose countrywide human traffic lockdowns which may constitute force majeure events.
However, not all force majeure clauses may be drafted so specifically as to reference “epidemics”, such as the sample below.
Sample Force Majeure Clause: “Parties shall not be liable for any loss or damage arising from its failure to perform any of its obligations under these General Terms & Conditions and/or Specific Service Terms & Conditions if such failure is the result of circumstances outside its control including but not limited to the outbreak of war, any governmental act, act of war, explosion, accident, civil commotion, riot, industrial dispute, strike, lockout, stoppages or restraint of labour from whatever cause, whether partial or general, weather conditions, traffic congestion, mechanical breakdown, obstruction of any public or private road or highway or outbreak of any communicable disease or any other force majeure, fire, flood or any other act of God.”
With a specific reference to “epidemic” a party seeking to invoke force majeure would have to find some other basis on which to base their assertion. In the above clause, we see the words “… circumstances outside its control … any other act of God.” We also see the words “industrial … stoppage”… The COVID-19 outbreak is likely to be such a situation that is out of the parties’ control. And, with lockdowns and government closure of non-essential businesses, COVID-19 may also result in a force majeure event on the basis of labour shortages.
Another important point to note is to see whether the force majeure event provides for the contract to be terminated completely or temporarily. If the disease outbreak causes the government to ban certain events from happening but the government eventually lifts the ban in a period which merely suspends the force majeure event, it is possible that the contractual obligations of the parties will resume after the ban ends.
In determining whether COVID-19 constitutes as a force majeure event, several civil law countries have taken a governmental interventionist approach by labelling COVID-19 as a force majeure event. In China, force majeure exists as a doctrine under Article 180 of the General Rules on the Civil Law and Articles 117 and 118 of the PRC Contract Law. This doctrine applies automatically to contracts governed by PRC law where the contract does not contain force majeure clauses. Businesses affected by COVID-19 may apply for a governmental certificate stating that their business has been affected by COVID-19 to an extent that a force majeure event has arisen, potentially discharging the parties from their legal obligations.
France has taken a similar approach by declaring that COVID-19 is a force majeure event. Therefore, under French law, companies are protected from liability if the company has been severely affected by the virus and falls under the ambit of Article 1218 of the Civil Code.
Although there has been no official pronouncement of whether COVID-19 is a force majeure event in Singapore whose legal system is based on English common law, it is very possible that COVID-19 could be a force majeure instance based on stringent precautionary measures to combat the spread of the virus. On 26th March 2020, the Singapore government enforced rules to:
- Close all entertainment venues with a high risk of transmission such as night clubs, discos, karaoke outlets, cinemas and theatres;
- Close all centre-based tuition and enrichment classes;
- Cancel shows within attractions, whether indoor or outdoor, group tours at museums and open atrium sales events; and
- Cancel organised tours within public venues such as sightseeing and guided walking tours will also be suspended.
In this disruptive climate, many events have to be cancelled and operators of the entertainment industry and their stakeholders also have to contend with deferring their contractual plans or cancel them.
In this regard, it is important to note the difference between non-legal advisories issued by the Ministry of Health (MOH) and legal rules or regulations. For example, an advisory issued by MOH on 8 February 2020 which advised the deferment or cancellation of large-scale events do not have legal force as a pronouncement of law – although whether this amounts to a force majeure event would turn on contractual interpretation. On the other hand, measures taken on the 26 March 2020 mentioned above would be covered by regulations and laws, which may make the flouting of such rules a criminal act. In this case, it will likely be a force majeure event if performing a contract would result in breach of those laws.
In this economic climate, it is possible that there will be a weaker demand for products such as oil and liquefied natural gas (LNG), which may prompt buyers to terminate existing fixed-volume or take or pay contracts based on force majeure. The renewable energy sector may similarly see a decrease in demand, as well as international supply chain disruptions that delay the shipment and contractual completion of renewable energy projects such as solar or wind farms. Ultimately, whether force majeure can be successfully invoked depends on the law governing the contracts between the parties.
There is also growing anxiety among landlords and commercial tenants with regard to the ability for tenants to maintain some or all of their business operations. Depending on the lease terms, landlords may potentially be able to restrict the tenants’ operations or close down the building if there is unavoidable governmental action qualifying as a force majeure event. Landlords and tenants who need clarity on their respective roles and obligations may wish to seek legal assistance as each case really turns on its facts and the express terms of the lease.
Force majeure insurance
Parties affected by force majeure may be able to mitigate or minimise losses that arise from force majeure events if appropriate insurance has been purchased. Recourse to insurance policies of this nature would depend on the legal construction of the insurance contract.
6. Negotiation of Existing Contracts
The economic impact of COVID-19 is already being felt with sharp losses in the stock markets, cancellation of almost all air travel, and orders to close all except essential businesses and services in a number of countries. In light of this situation, businesses have had to review existing business arrangements with customers and suppliers, and many have had to call upon existing credit lines and negotiate for extensions or new ones.
While many agreements have force majeure provisions not all provide for pandemics or health crises. Further, for those that do, it may not be clear whom the parties should refer to for the declaration or what to do in situations where stringent measures or restrictions may be in place without or prior to an official declaration of a pandemic or health crisis.
The first step for any business in managing its relationships with its counterparties is to identify its rights and liabilities under existing agreements; a tall order if only physical records are available and there are manpower issues and movement or travel restrictions. Businesses then need to conduct a self-assessment in order to determine their ability to perform their obligations and how long they can continue to do so. This will likely prove to be difficult given these uncertain times but businesses have to be conservative if not realistic about this assessment in order for any subsequent steps to have meaningful impact.
If force majeure or termination is not a viable option, businesses can first engage with counterparties on a good faith basis. In the current climate, counterparties may be just as badly affected and may be amenable to reaching a compromise for the collective good. There is, separately, also a public relations angle to consider particularly if government assistance is involved or there are consumer protection concerns.
When parties have reached a commercial understanding, this can be formalized as an amendment or variation of the existing agreement (if provided for), an addendum to the existing agreement, or a new agreement superseding and replacing the existing agreement. Whichever the approach, parties should take care to ensure that specific and limited waivers are included to address incidents during negotiations.
7. Negotiation of Future Contracts
Although it is far from ‘business as usual’, contract negotiations will still take place – whether in the form of re-negotiating existing contracts or negotiating new or pre-COVID-19 contracts. These contracts will now need to be viewed in light of the pandemic, and this section highlights several key considerations.
7.1 Key Considerations
As a start, the strength of a party’s reliance on frustration clauses will be greatly diminished when parties enter into a new contract during the COVID-19 pandemic. Frustration is a narrow remedy that is only invoked for unforeseen events. A party cannot rely on events related to COVID-19 to discharge a contract by frustration, as it would be deemed to be reasonably aware of the associated risks when entering into a contract.
As previously detailed, force majeure clauses have become particularly important. Force majeure clauses are generally drafted to account for potential disruptive scenarios such as “natural disaster”, “epidemic” or “acts of Government”, and it may be possible to fit the COVID-19 pandemic into one of these events, depending on the scope of the clause. In many contracts, force majeure clauses are boilerplate clauses – contingencies in the unlikely event that any such intervening factor occurs. With the pandemic currently underway, negotiating parties will likely delegate risks associated with COVID-19 on the basis of negotiation since it is no longer unforeseen and we expect specific carve outs for COVID-19 in force majeure clauses moving forward.
Additionally, parties may also wish to embed sufficient flexibility in the contract to cater to contractual performance risks and delays. The extent of such flexibility will vary depending on the nature of the contract. A balance will need to be struck between flexibility, and also ensuring these terms are sufficiently certain so that (i) they are enforceable in Court and (ii) can define each parties' contractual obligations within reasonably clear bounds. This may come in the form of flexible payment terms where interest or loan repayment may be waived in light of the pandemic. In construction or service contracts, this may also take the form of contractual terms that provide allowances for delays, grant extensions of time or revise performance milestones when certain conditions are met. For service contracts, this may mean the allowance to provide decreased service levels or temporary suspension of certain features in the event of business interruptions due to the pandemic.
Parties should also consider appropriate BCPs and include clauses to ensure the counterparty has sufficiently robust BCPs in place. This means whether there are operational contingencies to support contractual performance, when foreseeable risks such as factory closures, geographical lockdowns or mandatory telecommuting materialise. With the fluid nature of BCPs, the parties may also wish to include a term to notify each other on material changes to the BCPs and update on when such BCPs have been invoked.
Lastly, it is important to note that, as with all crises the passage of time would ultimately bring situations back to normal or create some new norms. If a contract has been negotiated in the midst of a global pandemic, parties must also consider whether these contracts are sufficiently malleable to operate post-COVID-19.
COVID-19 has wrought unprecedented business interruption challenging numerous business models that have been riding the wave of globalisation and technological innovation. It serves as a stark reminder of the volatility of businesses and economies, and the importance of contingency plans and nimbleness in managing risk. Businesses must adapt quickly and keep abreast of existing and up-coming legal obligations as governments around the world step-up measures to counter the spread of COVID-19. Businesses affected by the pandemic may also consider if there are legal avenues or suitable recourse to minimize losses or to provide reprieve in riding out the COVID-19 storm.
We hope the above legal feature provides some measure of assurance and guidance, whatever your concerns might be. We are behind all our clients during this challenging time, and believe that we will all come, having weathered the storm, Stronger Tomorrow.
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 contact our lawyers if you have any specific queries. Please note that the information in this article is accurate as at 6 April 2020. Although further measures may be imposed by the various authorities depending on the development of COVID-19, both within and outside of Singapore, we are under no obligation to update this article.