Re-Align framework introduced for businesses impacted by COVID-19

Photo by Pixabay

The Ministry of Law intends to introduce a Re-Align Framework to help businesses that have been significantly impacted by COVID-19 renegotiate selected types of contracts with their counterparties to realign with current economic conditions and business objectives.

This framework is provided for in the COVID-19 (Temporary Measures) (Amendment No. 3) Bill tabled in Parliament on 2 November 2020.

The COVID-19 pandemic has had a significant impact on businesses. Although economic and social activities have now partially resumed in a careful and calibrated manner, safe distancing requirements and travel restrictions continue to have a great impact on some businesses, seriously affecting their viability.

Businesses that have been severely impacted by COVID-19 will need to review their business models in the face of the significantly changed economic conditions. As the assumptions upon which they entered their future contracts before COVID-19 have fundamentally changed, they may also need to review their contractual obligations.

However, especially for smaller and micro enterprises, they may find it difficult to navigate these options on their own and may be deterred from renegotiating or exiting their contracts by the sizable penalties or damages they may incur. Without any relief, many of these businesses will be driven into litigation or insolvency.

Sanctity of contract remains an important feature of Singapore’s attractiveness as an international commercial centre and a fundamental pillar of legal policy. The Government therefore does not intervene in contracts lightly. When it is necessary to do so, under exceptional circumstances, and for the greater public good, this will be done in a targeted, conservative manner.

Against this context, the Bill seeks to provide a targeted legislative framework to enable these businesses to renegotiate specified types of contracts with their counterparties. The framework provides parties with a basis to renegotiate and come to a mutual agreement.

If the negotiations are unsuccessful, the contract may be terminated, and the consequences of such termination will be prescribed in the Bill. For terminated contracts, businesses will remain liable for any outstanding debts and obligations, but will not be liable to pay penalties for early termination.

This allows businesses to re-align quickly in a just and fair manner and move forward in this vastly changed business environment. Overall, this will be beneficial for businesses if they are able to pivot or downscale their operations more quickly, and more productive for the economy.

A) Eligibility criteria

The Bill is targeted at smaller and micro enterprises whose business outlook has been severely impacted by COVID-19 even after economic and social activities have resumed.

There will be two key criteria to identify eligible businesses.

a. First, they will be subject to an annual revenue cap to be eligible. This criterion will cover the majority of enterprises in Singapore.

b. Second, businesses must have experienced a significant fall in revenue across a comparable time frame pre-COVID19. This will identify businesses who have been severely impacted even after the resumption of economic and social activities.

The Ministry of Law is in consultation with industry on these key criteria. We aim to find a threshold that helps smaller and micro enterprises and at the same time reaches out to a broad enough spectrum. Details, when finalised, will be set out later in the subsidiary legislation.

B) Contracts covered

  1. The framework is designed to cover key business-to-business contracts, and will only apply to a contract that is governed by Singapore law; was entered into before 25 March 2020; has at least one party who has a place of business in Singapore; and falls within the following five categories which are likely to have substantial obligations that may need renegotiation or restructuring:

i. Leases or licences for non-residential immovable property;

ii. Hire-purchase and conditional sales agreements for commercial equipment or commercial vehicles (except agreements entered into with banks and finance companies regulated by the Monetary Authority of Singapore (MAS))1;

iii. Rental agreements for commercial equipment or commercial vehicles;

iv. Contracts for sale and purchase of goods; and

v. Contracts for sale and purchase of services.

Certain contracts will be excluded from the Re-Align Framework, even if they fall within the list of Scheduled Contracts. These include consumer contracts, employment contracts, insurance contracts, financial services contracts, construction and supply contracts, and contracts affecting essential services and national interests.

Similar to the Rental Relief Framework, the Re-Align Framework will seek to mitigate hardship that smaller landlords in financial hardship might face arising from the termination of the contract. The tenant will have to pay to an eligible small landlord additional compensation for early termination of the lease or licence agreement, that is to be determined by an Assessor. The details will be set out later in subsidiary legislation.

As an alternative to contract termination, the Bill will provide an option for eligible hirers and renters of commercial equipment and vehicles to take up a Repayment Scheme to pay outstanding arrears in instalments.

This is in recognition of feedback from some hirers and renters that while they have been substantially affected by COVID-19, they do not wish to terminate their agreements, as that would mean they have to return the equipment or vehicles and lose their source of income. Instead, they have requested for more time to repay their accumulated arrears.

If the Bill is passed, The Ministry of Law aims to introduce subsidiary legislation and implement the Re-Align Framework, including the compensation for landlords in financial hardship and the Repayment Scheme. More details will be announced in due course.