New framework lets small and micro firms renegotiate contracts, terminate without penalty

SMALL and micro enterprises hit by Covid-19 will have a six-week window in which to renegotiate certain contracts, with no penalties for early termination if negotiations fail, under the proposed Re-Align Framework in a Bill introduced in Parliament on Monday.

The framework will cover leases or licences for non-residential immovable property, with a term of no more than five years; hire-purchase or conditional sales agreements for commercial equipment or vehicles, except agreements with banks and finance companies; rental agreements for commercial equipment or vehicles; and contracts for the sale and purchase of goods or services. This includes contracts with the government.

It will apply to businesses under a certain annual revenue cap, and which have suffered a "significant fall" in revenue during the pandemic, with specifics to be announced in due course and set out in subsidiary legislation. It applies to contracts entered into before March 25, 2020, and does not apply retroactively to contracts terminated before Nov 2.

With the Covid-19 crisis, the business assumptions upon which firms entered past contracts may have fundamentally changed, said Second Minister for Law Edwin Tong at a media briefing on Monday.

While Singapore continues to take the sanctity of contracts seriously and does not intervene lightly, small and micro enterprises may find it hard to renegotiate or exit contracts due to the penalties or damages they may incur, he said. The framework thus provides an opportunity for such firms to do so, and "re-align" with the new economic conditions.

Implementation details will be announced after the Bill is passed, with the framework to be available for six weeks only. This limited period aims to encourage quick renegotiation and provide greater certainty, as opposed to if firms could renegotiate at any time, said Mr Tong.

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The Covid-19 (Temporary Measures) (Amendment No 3) was introduced in Parliament on a Certificate of Urgency, with the second reading debate to take place on Tuesday.

Under the Re-Align Framework, an eligible business may serve a notice on other contracting parties, triggering a four-week negotiation period. If negotiation fails, the contract can be terminated on a "no fault" basis.

Accrued liabilities remain payable or enforceable, but prospective liabilities will generally be extinguished. Parties will not have to pay penalties for early termination.

Any disagreements will be handled by a full-time team of assessors, whose decisions are final.

To help small landlords in financial hardship, the framework provides that tenants who terminate such contracts will have to pay "just and fair compensation", as determined by an assessor. The criteria to qualify as a small landlord will be set out in subsidiary legislation.

The framework also includes an instalment option for hire-purchase and rental contracts, as an alternative to contract termination. This is in recognition of feedback from some hirers and renters that they would like to maintain their contracts but need more time to pay arrears.

The proposed statutory repayment scheme option will allow eligible hirers or renters to repay accrued obligations in equal instalments over a chosen period of up to 18 months, with a cap on the late interest rate.

Under existing law, firms already have the option of arguing that their contracts have been "frustrated", freeing them from obligations, noted Mr Tong. This option remains available. However, invoking "frustration" requires firms to go to court, with an uncertain outcome. The Re-Align Framework provides a simpler alternative.

Together with the Simplified Insolvency Programme introduced in October, which helps firms with restructuring or winding-up, the intention is to give small businesses "a suite of options", said Mr Tong.

One exception to the framework are contracts affecting essential services and national interests, where parties may use the Re-Align Framework to renegotiate but cannot use it to terminate the contracts.

The framework also excludes certain contracts, such as consumer contracts, employment contracts, insurance contacts, and construction and supply contracts.