Singapore is no stranger to adversity.
It has risen from colonisation, warfare and expulsion from the Federation of Malaysia to become an impressive city-state, considered by many as the benchmark on how a modern economy should operate.
It should therefore be no surprise to know that Singapore reacted decisively against the global pandemic. After entering a lockdown on 7 April 2020, which ended on 1 June 2020, this has been followed up with progressive measures that have allowed the level of COVID-19 found in the community to reduce to nearly zero and only 29 deaths being linked to COVID-19 at the end of 2020. Compared with other countries, this is a remarkable feat. However, it has come at a cost. None more so than to the construction industry in Singapore. From Singapore’s construction sector being at a five-year peak in 2019 and contributing around S$17.8 billion to Singapore’s Gross Domestic Product (“GDP”) Statista, https://www.statista.com/statistics/625473/gdp-of-the-constructionindustry-in-singapore/, there was a subsequent 46.6% contraction (Ministry of Trade And Industry https://www.singstat.gov.sg/-/media/files/news/gdp3q2020.pdf). This has been exacerbated by global travel restrictions which affected the inflow of foreign labour that Singapore’s construction industry is heavily reliant on (See footnote 1). Migrant workers were also the most badly affected by the COVID-19 pandemic, forming the largest share of infections in the country (See footnote 1).
In normal circumstances, such a situation could destroy a sector and the businesses found within it. So, the obvious question to ask is - how is Singapore managing to handle this drastic shift to its construction sector? The answer is quickly gathered from an overview of the legal framework in Singapore.
Authors: Alasdair Snadden, Driver Trett Asia Pacific Managing Director, and Danna Er, Partner at Eldan Law LLP.
Protection through law
Singapore introduced the COVID-19 (Temporary Measures) Act (the “COVID-19 Act”) which functioned as a legal moratorium to prevent amongst others, a huge increase in lawsuits and insolvencies arising from the inability to meet contractual obligations under construction contracts, supply contracts and performance bonds.
Part 2 of the COVID-19 Act
On 20 April 2020, Part 2 of the COVID-19 Act which dealt with temporary reliefs for construction contracts, supply contracts and performance bonds came into force.
Under Part 2 of the COVID-19 Act, a non-performing party is generally eligible for relief where it is able to show that:
(i) The contract is one which is entered into or renewed before 25 March 2020 (Section 4, COVID-19 Act) or renewed automatically on or after 25 March 2020
(ii) The contractual obligation which it is unable to perform or will be unable to perform is one which is to be performed on or after 1 February 2020 (Section 5A(1)(a), COVID-19 Act) and,
(iii) The inability to perform the contractual obligation is one which is materially caused by a COVID-19 event (Section 5A(1)(b), COVID-19 Act).
The reliefs under the COVID-19 Act (Section 5A(1)(c), COVID-19 Act) are not automatic and parties will need to issue a notification for relief under the COVID-19 Act. The period of temporary relief for construction and supply contracts and performance bonds was initially for a period of 6 months from 20 April 2020 but was further extended to 31 March 2021 (Regulation 3(3), COVID 19 (Temporary Measures) (Extension of Prescribed Period) (No. 2) Order 2020).
The types of reliefs under Part 2 of the COVID-19 Act can be categorised into two broad categories:
(i) A legal moratorium on dispute resolution proceedings, and
(ii) Additional reliefs from breach of contract.
Under the first category of reliefs, a party is prohibited from amongst others, commencing court and arbitration proceedings (except for international arbitration proceedings) Section 5(3)(a) and Section 5(3)(b), COVID-19 Act, seeking enforcement on a judgment, award and adjudication determination (although there is no prohibition on commencing adjudication proceedings) Section 5(3)(n), COVID-19 Act, seeking enforcement of security and commencing insolvency proceedings (Section 5(3)(c), (d), (e), (f), (g), (h), (i) COVID-19 Act).
Under the second category of additional reliefs, a party is prohibited from making a call on a performance bond in the seven days before the expiry of a performance bond (Section 6(2), COVID-19 Act), the period of subject inability is disregarded for purposes of calculating any liquidated damages (Section 6(5), COVID-19 Act) and where the inability to supply goods or services in accordance with the terms of the contract is materially caused by COVID-19, it is a defence to a claim for breach of contract (Section 6(6), COVID-19 Act).
Part 8 of the COVID-19 Act
By 30 September 2020, Part 8 of the COVID-19 Act which deals with contracts affected by delay in the performance or breach of a construction contract, supply contract or related contract came into effect.
Part 8 of the COVID-19 Act only applies in three scenarios, of which one is of interest to the construction sector. This deals with a situation where a person who has rented goods used for construction work, is, or will be liable, for rental expenses due to a delay or breach in a separate construction or supply (or related) contract, and that delay or breach is due to COVID-19 (Regulation 3(3)(c) COVID 19 (Temporary Measures) (Part 8 Relief) Regulations 2020).
Once an application for relief is submitted under Part 8 of the COVID-19 Act, an assessor may arrive at a just and equitable outcome, adjust the date by which a party is required to return the rented goods or the rental rate for the duration that the party holds possession of the rented goods (Section 37, COVID-19 Act).
Building and Construction Authority (“BCA”) circulars, Part 8a and 8b of the COVID-19 Act
A set of BCA circulars (Circular on Treatment of Claims Arising from COVID-19 in Public Sector Construction Contracts dated 25 September 2020 and Circular on Ex-Gratia Co-Sharing of Prolongation Costs due to COVID-19 dated 29 June 2020) were issued for public sector projects to expeditiously grant a default 4-month extension of time to contractors for the common period of delay from the start of the circuit breaker on 7 April 2020 until the date when all dormitories are announced to be cleared on 6 August 2020. The government agencies would also co-share on an ex-gratia basis 50% of the prolongation costs for project delays due to the circuit breaker, capped at 1.8% of the awarded sum for a period of nine months.
The above scheme was soon extended to include private sector projects through Part 8A and Part 8B of the COVID-19 Act which came into effect on 30 November 2020. Under Part 8A of the COVID-19 Act, a universal extension of time of 122 days was granted to address delays that arose for the period between 7 April 2020 to 6 August 2020 (both dates inclusive) Section 39B(1) and (2) of the COVID-19 Act. Under Part 8B of the COVID-19 Act, contracting parties are to co-share 50% of the qualifying costs (Qualifying costs include rent, hire purchase agreement, costs for maintaining construction site, costs to extend the validity period of any insurance obtained and performance bond issued, any rent / fee to store construction materials or equipment etc) subject to a monthly cap of 0.2% of the contract sum per month, and a total 1.8% of the contract sum where such costs are due to delays caused by COVID-19 during the period between 7 April 2020 and 31 March 2021 (both dates inclusive) Section 39D(1), (2) and (9) of the COVID-19 Act.
Effects practically
Although the law has sought to calm drastic measures being taken and/or imposed by companies operating in the construction sector, the reality, from a practical perspective, is that many issues remain uncertain and have yet to be addressed.
Claims for Delay and Disruption
Without doubt, the COVID-19 Act and legal assistance provided has meant most businesses have protection from being imposed with liquidated damages from their employer to a certain extent; particularly for the lockdown periods encountered within Singapore. However, what must be remembered is that the number of workers and conditions upon how work can be completed has fundamentally changed for many, from what could have ever been contemplated when the works were tendered.
By way of simple illustration, workers will spend half a day for a bi-weekly and mandatory swab test, which in itself is a loss of productivity of 4% per month.
Alongside this, many projects simply cannot get to the level of resource needed to maintain the original progress allowed for and anticipated.
We have been working on projects where labour levels are at half the level originally allowed. This is because many projects relied upon daily commuters from neighbouring Malaysia coming to Singapore, which remains suspended due to the COVID-19 levels found in Malaysia.
Such restrictions in other countries continue to affect delivery of necessary materials. For example, suspension of manufacturing in China and Malaysia means projects in Singapore are unable to obtain the necessary materials on time and are either having to wait or source materials, often at a premium, from other places. Therefore, it is essential that careful attention is given to the contemporaneous documents being maintained for a project, and that avenues are still being
reviewed to ensure:
- Delays and reduced productivity can be identified and assessed ; and
- Claims for both time and cost against delay disruption are addressing the wider issues.
How this occurs is not universal and will be specific to each case.
Claims for Increased Costs
The effects of the pandemic have meant, essentially, it is now more expensive to build in Singapore. Simply put, the cost per m2 or m3 has increased, and in many instances, increased significantly. Both labour and material shortages are, naturally, causing a supply and demand issue whereby the average cost will, and has, increased. Similarly, significant extended periods of time are being required to build, which causes the time related costs to become much higher.
Even though some recovery of the increased costs is allowed under the new COVID-19 Act, it is, without doubt, leaving a significant hole in the construction sector as the original revenue anticipated will not cover the actual costs being incurred. As such, the obvious question being asked and needing to be answered is - who should pay? Needless to say, all parties are, or should be, looking to consolidate what these additional losses are and the extent to which they can be recovered.
What next for the Construction Industry in Singapore?
While the COVID-19 Act has temporarily staved off a multitude of lawsuits, with the impending deadline of 31 March 2021 looming over the construction industry, it cannot be ignored that parties must consider their positions very carefully; particularly when so many practical issues which remain unresolved will inevitably be commercially significant.
It is important to pay attention to the variation, recovery of loss and expense and extension of time provisions in the construction contract to determine if these provisions are sufficiently broad to accommodate the COVID-19 event and any consequential effects of the COVID-19 event. Generally, under the major standard form contracts in Singapore (for e.g. SIA Building Contract and PSSCOC 2020), parties would likely be entitled to more time but not loss and expense for delays arising from a COVID-19 event. However, the nuances of the particular case must be considered along with the specific conditions and requirements placed upon the parties under the Contract.
Alternative options such as, parties considering force majeure provisions or the possibility of raising frustration as a defence to a COVID-19 event cannot necessarily be ignored and may have to be addressed as disputes look to be resolved.
Notwithstanding this, these immediate challenges will emphasise the need to continue to push forward the construction industry in a positive way. With a strain being placed on traditional forms of building, such as the use of foreign labour, the need to re-think or accelerate new ways of construction should become paramount. For example, Singapore made Design for Manufacturing and Assembly (DfMA) a key pillar of the Singapore Construction Industry Transformation Map. It is a method of construction that involves a much more controlled form of construction, off site in manufacturing type conditions, which in turn reduces reliance on labour intensive methods of construction.
There is no doubt that if anywhere can push these progressive measures forward, it is Singapore!
Dated: 25/03/2021
This article was originally written and released as part of issue 21 of the Driver Trett Digest.
To view the publication, please visit: driver-group.com/digest-issue-21