How to Make Your Contracts Pandemic-Proof
How to pandemic proof your contract
Written by Justin Chan, Senior Partner & Head, Litigation & Dispute Resolution Practice
Its about minimizing liability in a COVID-19 world
Six months after it announced its arrival to the world, COVID-19 continues to have a devastating impact on life around the globe. Singapore is no exception, with virtually no sector of the economy spared as measures to curb the virus has interfered with the ability of businesses to meet their contractual obligations. In the wake of these global lockdowns and Singapore’s circuit-breaker, businesses are scrutinizing the terms of their contracts and agreements to find ways to minimize their liability for non-performance. This article highlights issues that parties may consider before entering into new contracts, or in seeking to amend existing contracts, in light of the pandemic.
Drafting your contract – how to make it ‘pandemic-proof’?
Force Majeure Clauses
The first step is to consider the terms of the contract: in particular, whether it contains a force majeure clause. A force majeure clause typically excuses one, or both, contracting parties from performance of the contract in some way following the occurrence of certain events. Such events ought to be specified in the clause, or at the very least, broadly defined as events beyond the control of the parties.
A well-drafted force majeure clause should address the following:
- The definition of the events and circumstances that constitute force majeure; and
- The rights and obligations that follow upon the occurrence of the force majeure event. Examples include the right to terminate the contract, suspend the defaulting party’s duty to perform the contact, or the obligation to follow a certain agreed procedure.
Currently, the case law pertaining to force majeure clauses remains limited. Nevertheless, Singapore courts appear to have adopted a literal approach in their interpretation of force majeure clauses. In short, much depends on the clarity and scope of the wording of the force majeure clause. Hence, whether an event such as the COVID-19 pandemic constitutes a force majeure event will depend on whether the clause was clearly intended by parties to include such an event.
In order to increase the likelihood that the force majeure clause will be given effect, businesses should consider including a specific reference to “pandemics” or “diseases” among the list of specific force majeure events. Additionally, businesses can consider including the “measures of any governmental authority” such as those taken in response to a pandemic. The inclusion of such terms will be useful where it is argued that a party’s inability to perform is not strictly caused by the COVID-19 pandemic itself.
Standard of Relief
In entering a new contract, the party seeking to rely on the force majeure clause will need to consider the standard of relief that must be established to excuse performance under the force majeure clause. Where the clause requires the force majeure event to “prevent” the performance of contract, the standard of proof is high in that the party seeking to rely on it must show that performance has been rendered impossible. A mere increase in costs or inconvenience in performing the contract is insufficient. On the other hand, words such as “delay” or “disrupt” connote a lower standard of proof and do not require performance to be rendered impossible. Nevertheless, the choice of the appropriate standard of relief will still depend on the particular contract and the performance obligations of the parties.
For new contracts, parties should also consider whether one or both parties should have the right to terminate the agreement in the event of a prolonged force majeure event, whether caused by the COVID-19 pandemic or governmental measures. In particular, a termination clause may be beneficial for contracts concerning products with short shelf lives or time-sensitive services.
Doctrine of frustration
For existing contracts that do not contain a force majeure clause, or if the current COVID-19 pandemic does not fall within the scope of the clause, parties can consider if this event:
- renders the contractual obligations to be physically or commercially impossible to be fulfilled; or
- transforms the obligation to perform into a radically different obligation.
If the above condition(s) are met, the common law doctrine of frustration may apply to discharge the contract in its entirety. However, as courts are generally slow to intervene in contracts that are freely entered into by the parties, the doctrine of frustration is not easily invoked and remains confined to exceptional circumstances. There has yet to be any Singapore case concerning the doctrine of frustration caused by a pandemic.
COVID-19 Specific Clause
For businesses entering into new contracts, another issue to consider is whether a stand-alone provision ought to be included to address the consequences and obligations of the parties following the occurrence of further difficulties arising from, or measures implemented in response to the COVID-19 pandemic. As we can now draw on our experience with respect to the manner in which governments around the world have responded to the current crisis and how it has affected different sectors of the economy, the inclusion of such a stand-alone clause to specifically address such circumstances would eliminate the ambiguity and uncertainty of the parties’ contractual obligations following the occurrence of various events.
COVID-19 Temporary Measures Act 2020 (“CTMA”)
The CTMA applies to scheduled contracts entered into or automatically renewed before 25 March 2020 with its obligations to be performed on or after 1 February 2020. The party who wishes to claim relief under the CTMA must serve a prescribed notice for relief on the other party. He must also show that his inability to perform his contractual obligations was caused to a material extent by a COVID-19 event. The term ‘material extent’ is not defined in the CTMA, but it appears to have a lower threshold than the common law test of frustration since the purpose of CTMA is to provide relief to contracting parties during the COVID-19 pandemic.
Nevertheless, it must be noted that the CTMA only provides temporary relief. Hence, it does not operate to discharge parties from their contractual obligations.
It is useful to keep records of all documentation evidencing the key considerations of commercial actions, including events giving rise to delays. In addition, all amendments and delays ought to be recorded in writing. This is particularly crucial for variations that are made orally. These will assist with decision-making and, in the event matters should escalate into a dispute, these records can be crucial to the outcome of any legal proceedings.
With the ongoing COVID-19 pandemic, things are constantly changing. Hence, it is important for businesses to stay updated on the various measures that are put in place. A recent update is the COVID-19 (Temporary Measures) (Amendment) Bill 2020 which was passed by the government on 5 June 2020 which may be found here. Amongst other changes, the Amendment Bill provides for measures which seek to mitigate the economic impact caused on tenants and landlords, purchasers and developers by the ongoing COVID- 19 pandemic.
Singapore Statutes Online
COVID‑19 (Temporary Measures) (Control Order) (Amendment No. 8)
Singapore Statutes Online
COVID‑19 (Temporary Measures) (Control Order) Regulations 2020
Ministry of Law, Singapore
COVID-19 (Temporary Measures) Act 2020
Seek legal advice
It is critical that parties seek legal advice in the reviewing of contracts and/or to seek clarification on the laws and regulations passed. This helps to save time and ensure that your interests are protected.
Stay informed to protect your interests in a changing world
The ongoing COVID-19 pandemic continues to create many challenges for businesses. Given the ever-changing nature of the pandemic and our collective response to its effects, it is important for businesses to keep abreast of the latest developments so that they are armed with the requisite knowledge to protect their contractual interests and minimize their exposure. In this regard, this article aims to help businesses understand some legal principles that may be useful amid this period of uncertainty.
If you have any questions, do not hesitate to reach out to us and we will be happy to assist you.
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