The Singapore Government has recently passed a law to provide temporary relief to contractors affected by the COVID-19 pandemic and lockdowns, restrictions arising from it (the “COVID-19 event”). This is the COVID-19 (Temporary Measures) Act 2020 (the “Act”), which deals with a number of topics including construction contracts.
The relief is to last for a period of 6 months, from 20 April to 19 October 2020. This period is referred to in the Act as the “prescribed period”.
The temporary relief is in respect of the following areas in relation to construction contracts – performance bond, liquidated damages, COVID-19 defence and suspension of legal proceedings.
An employer cannot call on the performance bond if the contractor defaults due to the COVID-19 event. This restriction is to last up to 7 days after the prescribed period.
Liquidated Damages (“LD”)
Most construction contracts make the contractor liable for LD if he is late in finishing his work. The LD is calculated at an agreed rate over the period of delay.
Under s 7(5) of the Act, the calculation of LD is to exclude the period during which the contractor is unable to perform the contract due to the COVID-19 event.
If a contractor is sued by the employer for failing to supply goods and/or services under the construction contract, it is a valid defence for the contractor to show that he was unable to supply due to the COVID-19 event. See s 6(6) of the Act.
Suspension of Legal Proceedings
The employer cannot start or continue any court action or arbitration against the contractor for the latter’s default due to the COVID-19 event. This restriction is for 6 months. See s 5(2), (3) of the Act.
If such proceedings have already begun, then they are to be stayed. See s 5(8) of the Act.
The limitation period for claims is also extended. The amount of extension is equivalent to the period that legal proceedings are suspended. See s 5(7) of the Act.
There are a few common threads that run through the above reliefs, the most important of which are set out below.
First, the obligation that the contractor defaulted on has to be one that is to be performed on / after 1 February 2020; see s 5(1)(a) of the Act. Therefore, the contractor is not saved from any breach of contract before 1 February.
Second, the contractor’s default must have been caused – “to a material extent” – by the COVID-19 event. This suggests that if there are two or more causes, the main cause has to be the COVID-19 event in order to qualify for protection. On the flipside, if the default was caused primarily by other factors, then the contractor is still in breach of contract and the employer can call on the performance bond.
Third, to invoke protection of the Act, the contractor has to serve the prescribed notice on the employer, and also on the bond issuer if relevant. See s 5(1)(c).
Fourth, the operation of force majeure clauses and the doctrine of frustration of contract are not affected; see s 5(13) of the Act. Both are therefore still available to excuse the contractor from non-performance where their conditions are fulfilled.
The Act also provides for a dispute resolution mechanism – if the employer disputes that the contractor qualifies for protection under the Act, he can refer the dispute to an assessor to decide. The position of the “assessor” is specially created under the Act, for this purpose.
The Malaysian Government should seriously consider enacting a law similar to the Act, to give relief to contractors during these unprecedented times. In the absence of such a law, a defaulting local contractor is left with the options of relying on a force majeure clause (if his contract has one) and/or arguing that the contract has been frustrated and terminated due to the COVID-19 event. Unfortunately, both options are not clear cut and do not protect contractors as well as an Act of Parliament will. See here for more on force majeure and here for frustration.
The contents of this article are published for the purpose of general information only; they are not to be regarded, used or relied on as legal advice for any matter. Please contact us if you require legal advice specific to your case.