Singapore’s construction sector post-COTMA – Opportunity in adversity? : Clyde & Co.

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This is the first article in our APAC Projects & Construction group’s Road to Recovery series. Over the next few months, we will explore some key market and legislative developments as the infrastructure sector struggles to recover from the pandemic and return to “normality” in a highly disrupted world.

Singapore has taken an unprecedented and highly interventionist approach to trying to shield the construction sector from the impact of the pandemic through its COVID-19 (Temporary Measures) Act 2020, known as COTMA. The main forms of relief for the construction sector finally ended on February 28, 2022 (for Part 2 and Part 8B) and March 31, 2022 (for Part 10A, although a request for a determination of a Part 10A assessor may still be submitted until May 31, 2022). To recap, the main forms of relief included:

  • The moratorium on commencing and continuing legal proceedings and calling performance bonds, and protection against liquidated or other damages for delay and other breaches materially caused by a COVID-19 event, between 1 February 2020 and February 28, 2022 (Part 2).
  • The “universal extension of time» 122 days for all construction contracts covering a specified period of delay between April 7, 2020 and August 6, 2020 (Part 8A).
  • The sharing of certain eligible costs between employers and contractors that arise from contractors’ inability to complete work on time – not including labor costs – where such inability was materially caused by a COVID-19 event. 19 (Part 8B).
  • The power of “assessors” to make binding, “fair and equitable” adjustments to contract sums to account for the problematic issue of increased “foreign” labor costs resulting from the pandemic (Part 10A ).

COTMA appears to have played a role in containing any increase in insolvencies and litigation in the construction industry resulting from the pandemic. Figures from Singapore’s Accounting and Business Regulatory Authority (ACRA) show that fewer companies in the construction sector went out of business in 2020 and 2021, after the hit of COVID, compared to 2019. The Business Times has also reported recently that more construction companies have been created than liquidated in recent years.

However, as we have already discussed here, the announcement of the liquidation of Greatearth – a leading construction company with a long history in Singapore – in September 2021, despite protections provided by COTMA, have sounded the alarm and the pandemic continues to impact the industry in Singapore. Besides the ripple effect of China’s zero-COVID approach, travel restrictions on the movement of labor, as well as tightened health and safety measures, continue to have a large, albeit more subtle, impact, and in turn can be difficult to assess.

It should also not be forgotten that the construction sector has suffered from very serious challenges before to the pandemic. Some of these have been further highlighted by the impact of COVID 19 – the very heavy reliance on manual labor and transient migrant labor in Singapore, for example. Other issues have been overshadowed by the focus on COVID 19 lately, but remain, including relatively low productivity, low profit margins, low technology adoption compared to some other sectors, a track record of relatively poor security and poorly thought out risk allocation in some cases. In turn, it is well recognized that time and cost overruns, and therefore litigation, are far too common.

On top of all this, of course, the sector has to deal with rising costs and inflation, as well as the impact of the war in Ukraine.

Looking forward

Uncertainty about the impact of the pandemic has obviously abounded, but arguably COTMA itself, and the repeated additions to its reliefs and extensions to its protection periods, have also compounded that uncertainty for some companies. In turn, some construction companies appear to have adopted a “wait and see” approach and have deferred proactively pursuing their rights and making other critical business decisions, despite being involved in large-scale projects. difficulty in some cases.

Against this backdrop, and with the recent end of COTMA protections, potential trends in Singapore include the following:

  • An increase in SOP judgments: Although official figures have not been released, based on our involvement with judgments towards the end of 2021 – which are numbered sequentially – there appears to have been a drop in the number of proceedings, certainly compared to the 426 judgments in 2019 as reported by Sal. The fact that judicial decisions were not enforceable during the period of protection under COTMA was likely an important factor, in addition to the uncertainty discussed above. With arbitration determinations once again binding, other remedies under COTMA are no longer available, and some parties are looking to make up for lost time and pursue their contractual rights with more assurance, SOP arbitration may be a compelling option. It should also be kept in mind that cost sharing of eligible costs under COTMA Part 8B – as incurred during the applicable period of April 7, 2020 to February 28, 2022 – may still be pursued. in the adjudication of SOPs.
  • An increase in provisional duty submissions and assessments: In some cases, submissions and assessments of entitlements to additional time and money, as well as the collection of damages for delay, have been postponed in view of significant uncertainty arising from the pandemic and the relief offered by COTMA. Our impression is that parties, including contract administrators, are now more proactively pursuing and assessing contractual rights and beginning to take more decisive action to get projects back on track.
  • An increase in calls on performance bonds: COTMA Section 6(2) had prevented the beneficiary of a performance bond from making a call earlier than 7 days before its expiration date, but this provision is now obsolete. Calling on performance bonds or other guarantees will likely be another attractive option for some parties after COTMA. If done at the right time and in the right way, it can protect a party financially, improve their negotiating position, and mitigate the risks associated with having to recover losses through arbitration or other means.
  • An increase in insolvencies and terminations: In some other jurisdictions where parties have not been afforded as extensive protection from the impact of the pandemic as in Singapore, we have seen a significant increase in cases where a party is simply unable to perform (and, in turn, an increase in bankruptcies and consequent terminations). Small businesses down the supply chain may be particularly vulnerable and the concern is that with the end of relief under COTMA, combined with the other pressures discussed above, this trend could take hold in Singapore.

Will necessity be the mother of invention?

With the protection afforded by COTMA gone, the onus rests with the contracts and relationships of the parties when it comes to taking steps to get projects back on track and manage the likely trends envisioned above.

In some cases, encouraged by COTMA, parties have seen first-hand the benefits of operating flexibly and negotiating their way out of difficult situations whenever possible, instead of shifting as much risk as possible down the line. supply chain and then strictly enforce onerous contracts. terms, calling obligations or initiating proceedings, for example. We anticipate that this shift in mindset could be a positive and lasting legacy of COTMA.

In other cases, however, the concern is that the parties have stood idly by and suffered “analysis-paralysis” in the face of the extreme uncertainty and complexity of their challenges, and that the postponement of difficult decisions actually aggravated their plans.” distress. Time will tell.

There is certainly tremendous opportunity for other positive trends in the construction sector to accelerate in the wake of the pandemic, and in future articles in our Road to Recovery series, we will explore other key market developments. and legislation in the current climate.

Please feel free to contact us if you would like to discuss any of the issues discussed in this article.

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