Contractors may face contractual disputes, claims as legal respite ends

Contractors in Singapore could face yet another hurdle next month, after the temporary relief period protecting them from claims and other legal proceedings expires.

Lawyers told The Straits Times that there are signs of lawsuits brewing, with contractors preparing for contract disputes when the relief period under the Covid-19 (Temporary Measures) Act ends on Thursday.

As a result, companies that are financially weak could go under, with many small and medium-sized enterprises likely to face financial distress, said lawyer Keith Han, co-head of the restructuring and insolvency practice at Oon & Bazul.

This will likely affect major construction projects and the sector at large, although the extent of the impact will depend on the degree of forbearance exercised by creditors such as banks and financial institutions, he added.

"At the very least, though, we may see some delays in projects caused by key sub-contractors going bust," said Mr Han.

The construction industry has been hit hard by the Covid-19 pandemic, with many firms grappling with acute manpower shortages, rising construction costs and reduced cash flow.

Up to this point in time, the temporary legislative measures under the Act have given the industry some breathing room and largely prevented the domino effect of many main contractors and smaller sub-contractors winding up, said lawyers interviewed.

The Act provides, among other things, relief for a contractor's inability to perform its contractual obligations due to the pandemic for contracts entered into before March 25 last year. It also puts a pause on the calling of performance bonds.

Performance bonds are a type of security commonly used in building and construction contracts. They are issued to the developer by an insurance firm or a bank to guarantee the contractor's timely completion of a project. If the contractor fails to complete the project or breaches any contract obligations, the developer can seek to recover any losses by calling on the performance bond.

"These performance bonds typically secure up to the value of the project, so a call on the bonds will typically be financially deleterious for the contractors and sub-contractors," said Mr Han.

Assuming the relief period is not extended, he said, there could be a significant rise in claims and legal proceedings brought by - and against - construction firms and more calls on performance bonds.

Lawyer Daniel Tay of construction law firm Chan Neo said more developers and contractors could also be filing claims against each other, if disputes are not resolved privately. "There are already signs that some litigation is coming, with contractors preparing for contract disputes when reliefs end."

He added: "Payments may perhaps already have been held back (by developers) from contractors in anticipation of such disputes. The same applies to a main contractor and its downstream sub-contractors."

Last Thursday, Minister in the Prime Minister's Office Indranee Rajah said the Act is a temporary legislative measure meant to staunch an immediate problem, and future contracts need to address uncertainties in risk allocation arising from pandemic events.

A work group led by the Building and Construction Authority has been reviewing the standard construction and consultancy procurement contract provisions and will soon announce recommendations and new contracting practices for public-sector construction tenders, said Ms Indranee, who is also Second Minister for Finance and National Development.

TSMP Law Corporation's co-head of construction and engineering Derek Loh said the need for early and rapid action meant government assistance had to be broad and could not address all possibilities amid a constantly evolving pandemic environment.

"Consequently, the effects of the measures were always going to be subjective and could never have been enough to sustain all participants in the industry, in particular those with poor business practices or financial management."

Had the Government not intervened, many more firms would have gone bust, causing "a domino effect of widespread failures and imperilling the industry as a whole", said Mr Loh.

Lawyer Alessa Pang of Rajah & Tann's international arbitration, construction and projects group, said a number of contractors may have avoided financial pressure or an escalation to formal disputes.

"Without the protections offered by the Act, in particular the protection from court proceedings or insolvency proceedings, more contractors may go into distress," she said.

The Government has thrown out a number of lifelines for firms in the built environment sector. They can tap the Jobs Support Scheme and a $1.36 billion construction support package, on top of foreign worker levy rebates and waivers.

Contractors working on Housing Board projects will have steel prices locked in and additional supplies for some raw materials, such as cement, sand and other aggregates, for local pre-cast production.

To alleviate manpower shortages, an initial pilot to bring in migrant workers from India is being scaled up. The pilot started in July and applies to the construction, marine and process sectors.

Companies facing financial difficulties could consider debt restructuring to stay afloat, said Mr Han.

Singapore Exchange mainboard-listed Tee International Limited - along with its four subsidiaries - is one such company. It recently applied for a statutory moratorium and was granted an interim moratorium of six weeks.

Said Mr Han: "A statutory moratorium will stay all legal and enforcement action against the company, and gives the company time and breathing space to engage its creditors and agree on a restructuring plan".