Re-aligning Contractual Obligations under COVID-19: An Executive Summary

Re-aligning Contractual Obligations under COVID-19: An Executive Summary

Published On: November 4, 20203.1 min read

What is the Re-Align Framework?

The new Re-Align Framework under the COVID-19 (Temporary Measures) Act will allow SMEs to renegotiate or terminate onerous commercial contracts provided that certain elements are satisfied as follows:

Only applies to SMEs that have suffered significant fall in revenue

Only businesses under a certain annual revenue (to be decided) and which have suffered a significant fall in comparative revenue over a similar timeframe pre- and during the pandemic will qualify.

Only applies to certain contracts

The following contractual conditions must be met:

▪ Governed by Singapore law

▪ Entered into before 25 March 2020

▪ At least one contractual party must have a place of business in Singapore

▪ Falls within 1 of 5 specific contractual categories:

▪ Leases / licences for non-residential immovable property with a term of 5 years or less

▪ Hire-purchase / conditional sales agreements for commercial equipment or vehicles (except for agreements entered into with banks / FIs regulated by MAS)

▪ Rental agreements for commercial equipment or vehicles

▪ Contracts for sale and purchase of goods

▪ Contracts for sale and purchase of services

Certain types of contracts are excluded, including:

▪ Consumer contracts

▪ Employment contracts

▪ Insurance contracts

▪ Leases / licenses for non-residential immovable property of more than 5 years

▪ Contracts made in connection with a financial transaction, or for the supply of financial services (other than hire-purchase)

▪ Construction and supply contracts

▪ Contracts of carriage of goods for freight by sea, land or air (including freight forwarding and logistics services)

▪ Commodity contracts

▪ Contracts for factoring of receivables

▪ Contracts (or series of contracts) for transfer of a business or part thereof as a going concern

▪ Contracts contrary to Singapore’s international obligations (e.g. Aircraft financing under Cape Town Convention)

▪ Contracts affecting essential services and national interest – these may be renegotiated but may not be terminated under the new Framework

How will this work?

The Re-Align Framework allows for the following renegotiation / termination process:

▪ Re-negotiation will only be allowed during a limited period of 6 weeks from when the Framework takes effect

▪One contractual party must give notice that it intends to re-negotiate or terminate an applicable contract

▪Re-negotiations are mandatory; if re-negotiations fail within a specified time period (4 weeks), contracts may be terminated

▪ Disagreements will be subject to determination by independent Assessors (to be appointed)

▪ Existing debts or liabilities under the contract will continue to stand notwithstanding termination; no early termination penalties will be allowed

▪Additional compensation (to be determined by an Assessor) will be allowed to small landlords for terminated leases

▪ Hirers / renters of hire-purchase equipment may opt for instalments / repayment schemes to extend time for payment of arrears instead of terminating such contracts.

Who will this affect?

The Re-Align Framework is designed to affect largely micro/small companies and to only allow a limited window of opportunity for businesses to review and renegotiate their obligations. It is designed to provide a short breathing space to a segment of small businesses under financial pressure due to the present situation – it is not intended to do away wholesale with the legal sanctity of contracts.

It will not apply to consumer contracts, nor will it apply to significant major contractual obligations like loan/trade finance obligations with banks/financial institutions, long institutional leases or infrastructural contracts. It may however have the possibility of applying to international trade contracts/having offshore application provided that such international contracts are expressed to be governed by Singapore law.

While it is logical that most contractual parties would at first instance renegotiate contractual payment obligations, the Framework does not restrict parties’ ability to creatively renegotiate other terms which may alleviate pressure or arrive at a solution that may be palatable to both parties – it merely brings parties to the table to relook at contractual obligations afresh in light of present circumstances.

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