How to Deal With Termination of Contract By Clients Due to COVID-19
COVID-19 Disrupts The World
The outbreak of the novel coronavirus, COVID-19, which has been classified as a global “pandemic” by the World Health Organisation, is one of the most serious calamities that mankind has ever faced.
Not only has COVID-19 claimed the lives of many worldwide, but it has also affected the way people live. Business operations are disrupted and almost every economy in the world is now facing a recession.
Contractual Obligations during COVID-19
Due to lockdown measures, COVID-19 has also left businesses worldwide worried about the prospects of not being able to meet their contractual obligations and the possibility of subsequent contract termination by clients.
It is no surprise, therefore, that law firms in Singapore recently reported a surge in business-related queries triggered by the coronavirus pandemic.
Read on to find out more about how you can deal with the termination of contract by clients due to COVID-19.
First, What is Contract Termination?
Contract termination is defined as an act that may occur wherein a contract can be legally terminated before the contractual duties have been fulfilled.
When Can a Contract be Terminated?
There are six common scenarios whereby a contract may be terminated:
Mutual Agreement Between Two Parties
A contract may be terminated with the mutual assent of both parties.
This is usually governed by the termination clause, if any, in the contract.
Fulfilment of the Contract
A contract is essentially terminated once the obligations outlined in the contract have been fulfilled.
To prevent disputes in the future, it is therefore always a good idea for you to keep documentation showing that the obligations have been fulfilled on your part.
Impossibility of Performance
A contract may be terminated when the contract becomes impossible to perform due to unforeseen events that severely hinder the ability of a party to discharge his or her contractual obligations e.g. natural disasters.
Instances of Mistake, Fraud or Misrepresentation
Any of the above instances may warrant termination of contract due to the contract not being formed under sound principles.
Even without termination of contract, the contract may be rendered unenforceable or voidable in such instances.
Breach of Contract
A contract may be terminated when a breach of contract occurs, which arises when a contracting party fails to perform, without lawful excuse, a contractual obligation.
Generally, with a material breach of contract, the injured party has the right to seek monetary damages.
A contract may be terminated if both parties have a written agreement that calls for contract termination for specific reasons. The term for this type of provision is a break clause.
The agreement must give the details of what qualifies as a reason for contract termination, as well as the actions that must be taken by both parties to terminate the contract.
Understand the Common Types of Contracts
A contract is an agreement between 2 or more parties that creates mutual obligations, which are enforceable by law.
There are a few types of common types of contracts:
An employment contract (contract of service) is a legal agreement that defines the employer-employee relationship, including the terms and conditions of employment.
The employment contract must include certain terms and essential clauses, such as hours of work and job scope.
According to the Ministry of Manpower, either the employee or the employer may terminate employment without notice when the terms of the employment contract have been breached.
For example, an employer has the right to terminate an employee’s contract due to breach when an employee is absent from work continuously for more than 2 working days without a valid reason.
A tenancy agreement is a legal agreement that defines the scope of the contractual relationship between landlord and tenant by stipulating each parties’ rights and duties in respect of the tenancy.
Landlord-tenant disputes are one of the most common forms of disputes in Singapore.
Possible instances of tenancy contract breaches include failure of the tenant to pay rent, damage caused to the premises during the tenancy period, and the subletting of premises to a third party.
As the tenancy agreement is a contract between the landlord and the tenant, the failure of the tenant to follow any of the clauses in the agreement would also constitute a breach of contract.
As contrasted to an employment contract, a contract for service, also known as a freelance service contract, is an agreement between an organisation and an independent contractor who is engaged to carry out a particular assignment or project for a defined fee.
A contract for service may be terminated if the performance of the project or service is disrupted due to unforeseen circumstances.
It may also be terminated if it becomes impossible to continue on a project that is already in progress.
Seeking Resolution for Contract Termination
There are a few avenues that parties can undertake to seek resolution in Singapore when a contract is breached, namely 1) court proceedings or arbitration, 2) seeking resolution at the Small Claims Tribunal, and 3) private mediation.
- If parties prefer a more formal mode of dispute resolution, court proceedings or arbitration may be the best option. However, these tend to be more costly and protracted given the high level of formality involved.
- Parties dealing with claims up to S$20,000 may wish to seek resolution at the Small Claims Tribunal, which is a relatively quicker, cheaper and less formal forum for dispute resolution. Parties may not be represented by lawyers at the Small Claims Tribunal.
- The least confrontational form of dispute resolution is private mediation. Dissimilar to the aforementioned avenues of dispute resolution, it is aimed at arriving at an outcome that is most favourable to the interests of all parties involved.
Seeking Resolution for Contract Termination Dispute During COVID-19
The resulting public health measures put in place by governments around the world have caused “unprecedented and unforeseeable social and economic impact and led to supply chain disruptions and manpower shortages”.
In many cases, this has undermined the ability of individuals and businesses to fulfil contractual obligations.
As such, firms need not be overly worried amidst the rapidly evolving situation due to the following two reasons:
COVID-19 Fulfils the Basic Criteria for the Invoking of Force Majeure Clause
As COVID-19 is considered as a pandemic, it fulfils the basic criteria for the force majeure clause to be invoked.
The force majeure is a clause that allows a party to be excused from performing its obligations when some unforeseen event, such as Civil Commotion, Natural Disaster, or Pandemic, beyond both parties’ control that prevents or delays performance occurs.
However, this only applies to contracts possessing a force majeure clause.
Contracts Without a Force Majeure Clause Can Rely on Frustration for the Termination of Contract
For contracts that do not contain a force majeure clause, parties can still rely on frustration for their contracts to be cancelled with no legal repercussions when an unforeseen event beyond both parties’ control that prevents or delays performance occurs.
In Singapore, the Frustrated Contracts Act exists as a safeguard in such situations to relieve parties of their duty to discharge their contractual obligations.
It is important to note here that force majeure clauses and the Frustrated Contracts Act will prevail over the recently passed COVID-19 (Temporary Measures) Bill in Parliament (which will be explained in greater detail subsequently).
Hence, businesses will have to scrutinise their contracts for such clauses and examine the available evidence objectively to determine whether (amongst other things) the non-performance is materially due to COVID-19 or otherwise.
By doing so, they can better understand and strategise whether they should assert force majeure and/or attempt to show that the contract has become frustrated and/or rely on the Act.
COVID-19 (Temporary Measures) Bill for Singapore Businesses
If you are a business operating within the legal jurisdiction of Singapore: with the COVID-19 (Temporary Measures) Bill recently passed in Parliament, you will be temporarily relieved from legal actions taken as a result of your failure to meet your contractual obligations for a period of six months.
Hence, clients will not be able to unilaterally terminate their contracts with you due to your failure to meet your legal obligations.
Do take note that relief is only applied to the following scheduled contracts:
Secured Loan Agreements to SMEs
These loans are secured against the commercial and industrial immovable property that is located in Singapore or plants, machinery or fixed assets located in Singapore which are used for business purposes.
Additional conditions to fulfil include the business being in operation during the COVID-19 period, citizens or permanent residents of Singapore hold at least 30% of the business’ shares.
This also includes the turnover of the group to which the business belongs does not exceed $100 million in the latest financial year.
Construction and Supply Contracts
These contracts apply in the relief so long as they are within the meaning of section 2 of the Building and Construction Industry Security of Payment Act.
These contracts also apply to performance bonds and any of its sort.
Additionally, liquidated damages will be disregarded during the period that the Act is in place if the party is unable to perform their contractual obligations due to COVID-19.
Event and Tourism-Related Contracts
For an event contract to be qualified for relief, it should be defined as a contract for the provision of a venue, accommodation, amenities, transport, entertainment, catering, or any other form of goods or services.
These can be for the purpose of business meetings, incentive travels, conferences, exhibitions, sales events, concerts, shows, weddings, parties, sporting events, or other social events, as well as the participants, attendees, guests, patrons or spectators of any such events.
For a tourism-related contract to be qualified for relief, it should be defined as a contract for the international carriage of passengers by sea or land.
In the second instance, it should be a contract for the provision of transport, short-term accommodation, entertainment, dining, catering, tours, or other tourism-related goods or services for visitors to Singapore, domestic tourists, or outbound tourists.
Lastly, it should be a contract for the purpose of promoting tourism in Singapore, or the distribution for the purposes of trade or retail of products related to such tourism.
Additional Notes For The Relief of Event and Tourism-Related Contracts
It is important to take note that any non-refundable deposit must be refunded unless an assessor determines otherwise.
Furthermore, no cancellation fees will be payable if the inability to perform the contract was materially caused by COVID-19.
Hirers in hire-purchase agreements can qualify for relief when their hire-purchase agreements cover commercial vehicles as well as plants, machinery, or fixed assets located in Singapore which are used for business purposes.
Non-Residential Property Tenants
Tenants qualify for relief when there is a lease or license for non-residential immovable property.
Additional Points to Take Note for COVID-19 (Temporary Measures) Bill
It is important to note that the Bill will only cover relevant contractual obligations that are to be performed on or after 1 February 2020, for contracts that were entered in or renewed before 25 March 2020.
It is also equally important to note that the act only applies to breaches caused by COVID-19, and does not apply to international commercial arbitration.
Seeking Relief From Contract During COVID-19
Parties who are unable to perform their contracts because of COVID-19 are encouraged to first negotiate with the other party to resolve the matter, said the Ministry of Law.
If they require protection from legal proceedings and wish to obtain relief under the Act, they should:
- Confirm that they are eligible for relief at this website.
- Serve a notification for relief on the other party or parties of the contract, using this form.
Since the measures for contract relief do not automatically apply, this will set out the obligation that was supposed to be performed and how the coronavirus has affected your inability to perform that obligation.
Once your notification for relief has been served, the counterparty will not be allowed to:
- Start or resume any court or arbitral proceedings against the party or their guarantor or surety;
- Enforce any security over any immovable property or movable property being used for the purpose of trade, business or profession.
- Take bankruptcy or insolvency action against the party or their guarantor or surety.
- Seek to repossess goods under leasing, hire-purchase agreement or retention of title agreement.
- Terminate a lease or licence of immovable property when the party did not pay any rent or money.
- Take any action to enforce a court judgement, arbitral award or adjudication under the Security of Payment Act.
It is a serious offence to breach the prohibitions and this could lead to a criminal conviction and a fine of up to $1000.
Furthermore, any court or arbitral proceedings under the Arbitration Act must be dismissed by the court or tribunal.
For this reason, the party would lose their substantive right to enforce the contract at all, even once the temporary freeze has been lifted.
The Role of Independent Assessors in Relief of Contract During COVID-19
The Ministry of Law has been empowered to appoint a panel of independent assessors to resolve any disputes as to whether the Act applies.
The qualifications of assessors and the process that the assessors adopt will be covered by subsequent regulations.
The assessor determines whether the party’s inability to perform contractual obligations was the result of COVID-19.
With respect to event or tourism contracts, the assessor also determines whether it is reasonable for any deposit or part of a deposit to be forfeited.
The assessor’s determination will be binding and will not be appealable.
Parties appearing before assessors have no right to legal representation and will each have to bear their own costs.
For more information on how to seek relief under the new Act, refer to this article.
Understandably, dealing with termination of contracts by clients due to COVID-19 can be a thorny issue to settle and will most likely be your chief concern amidst these trying times.
If you would like to engage the services of a specialised commercial lawyer to advise you with regards to dealing with termination of contracts by clients amidst COVID-19 or even after COVID-19 has subsided, do feel free to contact us and we will get back to you at the soonest.