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Re-Align Framework: What SMEs Need To Know If They Want To Negotiate Or Terminate Pre-Pandemic Contracts Without Penalty
Proposed legislation introduced in Parliament this week sees an opportunity for small businesses adversely impacted by the Covid-19 pandemic to terminate their contracts without penalty if they are unable to negotiate new terms with the other party.
Named the Re-Align Framework, this pits the government (temporarily) against the convention that private entities are free to determine their own terms in contracting with each other.
For a limited period of time, selected commercial contracts can be renegotiated or set aside without incurring any liabilities that would otherwise apply, either from common law or set out within the terms of the contracts themselves. Businesses will remain liable for outstanding obligations but will not need to pay early termination penalties.
Many companies would have entered into contracts just before the coronavirus outbreak, and as such find themselves in an untenable situation or unable to fulfil said contracts due to the unforeseeably huge impact of the global pandemic.
The Re-Align Framework thus allows some of these companies to re-align their resources, scale, and direction with the current situation instead of remaining beholden to pre-pandemic contracts.
Who is eligible
Eligible businesses under the Re-Align framework will be identified via two key criteria:
(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 intended scope of this framework is to cover the majority of small and micro businesses.
Details are being finalised as consultations with the various industries are ongoing, and will be set out later in secondary legislation.
What kind of contracts are covered
The framework will only apply to a contract which meet the following conditions:
(a) Is governed by Singapore law;
(b) Was entered into before 25 March 2020;
(c) Has at least one party who has a place of business in Singapore; and
(d) Falls within the following five categories (“Scheduled Contracts”), which are likely to have long-term obligations that may need renegotiation or restructuring:”)
(i) Leases or licences for non-residential immovable property which have a term of 5 or less years;
(ii) Hire-purchase and conditional sales agreements for commercial equipment or vehicles (except agreements entered into with banks and finance companies regulated by the Monetary Authority of Singapore (MAS);
(iii) Rental agreements for commercial equipment or vehicles;
(iv) Contracts for sale and purchase of goods; and
(v) Contracts for sale and purchase of services.
Contracts which are excluded
Certain contracts will be excluded from the Re-Align Framework, even if they fall within the list of Scheduled Contracts (“Excluded Contracts”).
- Consumer contracts
- Employment contracts
- Insurance contracts
- Leases or licences for non-residential immovable property which have a term of more than five years
- Contracts made in connection with a financial transaction, or for the supply of financial services (except hire-purchase)
- Construction and supply contracts
- Contracts for the carriage of goods for freight by sea, land or air, including any contract for freight forwarding and logistic services
- Contracts for the supply, storage, transportation, collection, treatment or disposal of certain hazardous materials
- Commodity contracts
- Contracts for factoring of receivables
- Contracts (or series of contracts) for the transfer for a business or part thereof as a going concern
- Contracts to which section 4 of the International Interests in Aircraft Equipment Act (Cap. 144B) apply
- Contracts to which the Sale of Goods (United Nations Convention) Act (Cap. 283A) apply
- Contracts affecting essential services and national interest
Process for renegotiation and termination of contracts
Under the Re-Align Framework, a contractual party who wishes to renegotiate or terminate a contract, must serve a notice on the other party or parties to the contract.
Parties will be required to enter into renegotiations. If parties are unable to successfully renegotiate, contracts may be terminated. To encourage these arrangements to take place quickly, these measures will only be available for a limited period from the time of commencement. Limiting the time period to seek relief provides greater certainty to counterparties.
Where there are disagreements on a party’s eligibility or the liabilities payable upon termination, parties may serve a notice to have an independent Assessor make a determination on these issues.
In addition to allowing contracts to be renegotiated and terminated, the Bill also provides for some other potential solutions, with more details to follow.
This includes allowing smaller landlords facing financial detriment from the termination of their tenancy or license agreement to receive additional compensation.
The Bill will also 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. For many such people, the termination of a contract will result in a total loss of income since they would have to return the equipment of vehicles. Instead, this allows them to continue working while lessening the burden of repaying their arrears.
Approved by Parliament
The Re-Align Framework comes under the third set of proposed amendments to the Covid-19 (Temporary Measures) Act. They were tabled by Second Minister for Law Edwin Tong on 2 November under a Certificate of Urgency, allowing the Bill to be passed the day after, following a debate.
More details will be announced in due course.
Follow this post for more details!