COVID-19 & Commercial Agreements- What India can reap from the Singapore’s COVID-19 (Temporary Measures) Act, 2020?

– Priyanshu Agarwal & Vaishnavi Vyas

The catastrophic outbreak of the novel coronavirus (hereinafter referred to as “COVID-19”) has not only unleased the human life but also poses a devastating impact on commerce and business globally. In order to curb the spread of COVID-19, countries are resorting to travel bans and partial lockdowns which has also been extended to corporate sector, thereby bringing it to an unprecedented standstill. The pandemic has immensely impacted the global supply chain as numerous contracts will now be suspended or terminated due to impending delay in fulfilling contractual obligations. Whilst the government across the world is trying to win the battle against COVID-19 by developing vaccines, it is imperative that we initiate steps to safeguard the businesses, whether small or big, from the imminent threat of the virus. It is the need of the hour to harmoniously channelize the contractual obligations set forth in various contracts. Hence, in order to fight back the economic dislocation, the government of Singapore passed the COVID-19 (Temporary Measures) Act, 2020. The Act would extend temporary relief to the contracting parties on account of non-performance of contractual obligations.

Decoding the COVID-19 (Temporary Measures) Act, 2020

The Ministry of Law, Singapore passed the COVID-19 (Temporary Measures) Act, 2020 (the “Act”) on April 7, 2020. The Act was passed with an aim to relieve the corporate sector and the businesses in Singapore from the impact of global widespread pandemic. This piece of legislation has been meticulously drafted and specifically caters to needs of financially distressed companies, individuals and businesses amidst the pandemic. The provisions of the Act would temporarily safeguard the affected parties from non-performance of contractual commitments on or after February 1, 2020. However, such non-performance should be a direct consequence of COVID-19. For the ease of understanding, the act has been divided into seven parts specifically dealing with temporary measures and reliefs granted to financially distressed firms, businesses and individuals.

Scheduled Contracts under the Act

The Act extends temporary relief to the contracts entered into or renewed before March 25, 2020. The Annexure to the Act provides a list of scheduled contracts which shall be the granted protection. It shall extend to the following contracts:

• Contract for loan granted by banks or financing companies wherein the loan is secured (wholly or partially) by immovable property, plant, machinery or fixed assets located in Singapore;
• Construction contracts or Supply contracts;
• Hire Purchase Agreement;
• Event and Tourism contracts;
• Lease or license of non-residential immovable property.

It is noteworthy to mention that the Act also confers power to Minister of Law to add or amend the list of scheduled contracts as per the circumstances.

Temporary Relief extended to Schedule contracts under the Act

Part 3 of the Act extends temporary relief to financially distressed firms, individuals and businesses in respect of scheduled contracts. Once a notification for relief is invoked by a party to the contract, the following relaxations are granted:

• Non- commencement of legal proceedings against non-performing party, guarantor or surety;
• Non-commencement of Arbitration proceedings under Singapore Arbitration Act against non-performing party, guarantor or surety;
• Prohibition against filing of an application for winding up of non-performing party, guarantor or surety;
• Non-enforcement of security over an movable/ immovable property used to carry out trade, business or profession;
• Non-termination of lease or license of immovable property due to inability of party to make pay rent.

Lastly, any breach of construction and supply contracts will not lead to invocation of performance bond. Individuals and Companies have been provided with various relaxations ranging from extension of limitation period to increasing the threshold limits of filing applications under the Bankruptcy Act, Insolvency and Restructuring Act, Companies Act and Business Trusts Act.

Mode of availing benefits

The crux of the Act is that it shifts the burden of proof on the contesting party instead of the invoking party. Once a notification for relief is served upon the counterparty it cannot undertake any of the prohibited actions mentioned in Part 3. If the notification is contested, then the Assessor will review if the non-performance was due to COVID-19 and accordingly grant relief. Furthermore, the measures provided under the Act will stay in force for six months which can be extended to twelve months vide an amendment made by the Law Minister.

The Act is a bold initiative taken up by Singapore and sets a perfect example to tackle the mishaps caused to Corporate Sector due to the pandemic.

Action-Reaction of the Indian Government

The Government of India (“GoI”) has swiftly responded against the pandemic by assisting the businesses to fulfill their contractual obligations. As a pre-emptive step, the Ministry of Home Affairs has served guidelines under Disaster Management Act, 2005 on March 24, 2020 ordering all commercial establishments to shut down and maintain social distancing for a prolonged period of 21 days which has been lately extended till May 17, 2020. Furthermore, the Ministry of New & Renewable Energy has directed, to treat any delay in performance of contractual agreements due to disruption in supply chains caused by COVID-19 as Force Majeure Event thereby allowing extension to the projects of renewable energy. Additionally, the Ministry of Finance released an office memorandum, notifying that interruption in supply chains causing problems related to public procurement of goods by government organizations be considered as a natural disaster and henceforth allowed invocation of Force Majeure Clause (“FMC”) under a contract. However, the order is silent on status of private contracts and the enforcement of FMC is left for judicial interpretation.

It is noteworthy to understand that invoking FMC would be challenging for private entities unless they establish a causal link between the non- performance and the pandemic. The burden of proof lies on the party invoking FMC. According to Section 32 of the Indian Contract Act, it is essential to establish that the force majeure event was unforeseeable and beyond the control of the parties. An important aspect to consider is whether the contract was executed before the outbreak when the parties had no knowledge of its implications, or after the outbreak. Establishing the existence of FMC would be difficult in case of latter. Hence, it is crucial to determine the date on which the parties entered into a contract. The above discussed notification issued by GoI, classifying COVID-19 as a disaster under the Disaster Management Act, 2005, helps the party to invoke FMC as the non-performance of an act could fall within the ambit of disaster/calamity. However, absence of FMC in a contract would leave the parties in murky waters and the contract would be left for an open interpretation by the courts, thereby resulting into increased litigations.

Has India Done Enough?

The pandemic and the distressed economic activities has been a proverbial final nail in the coffin for the already suffering and slowing Indian economy.  Furthermore, the 70 years old archaic Indian laws are surely not vigorous enough to act as a recourse for the businesses fighting COVID-19. The threshold to apply FMC is extremely high thereby leaving private parties in the hands of court without a binding legal remedy. This is indeed challenging and might cause tremendous delay and frustration. Moreover, it is unreasonable to expect that all contracts with a FMC would include pandemic in its purview. Therefore, when a contract is devoid of FMC, the parties will have to resort to the Doctrine of Frustration, which is difficult to establish as it requires high standard of proof and time and again Indian courts have ruled against it. On the other hand, the Act, which is specifically tailored for the current pandemic, makes it the model law that India could adopt. As discussed previously, the heart of the legislation is that it shifts the burden of proof on the contesting party rather than the one invoking the notification for relief. Unless it is proven by the counterparty that the non-performance of contract is unlikely by the impact of COVID-19, the invoking party shall be entitled to all the temporary reliefs. This approach, unlike the Indian legislation offers essential safeguard to invoking party from any possible coercive steps that could be taken by the contesting party. Lastly, the Act is comprehensive and shall remain in force for a period of 6 months (which can be increased to 12 months) thereby offering protection to financially distressed individuals, firms and businesses. It clearly intends to operate post lockdown by critically understanding the aftermath of this pandemic which will be equally challenging for the enterprises to stand up. Most of the guidelines issued by the Indian Ministry are temporary in nature and restricted to the period of lockdown. Such short time frame offered to businesses, might not prove as a resolution and a contractual moratorium of a longer period is therefore the need of the hour. In light of this, it is crucial to understand the effect of the pandemic which has tremendously affected the commercial sector and therefore, a contemporary and dynamic legislation should be introduced to uplift these enterprises and elevate the downgrading Indian economy.

This article has been authored by Priyanshu Agarwal & Vaishnavi Vyas. Both the authors are students of law at NMIMS KPM School of Law, Mumbai.