Using the Re-Align Framework to Renegotiate SME Contracts

businessman and woman hands clasped on table while negotiating contract

What is the Re-Align Framework?

SME businesses significantly impacted by COVID-19 may be able to benefit from a new framework that allows them to renegotiate their contracts.

Called the Re-Align Framework, parties to selected contracts may use the framework to renegotiate the terms and conditions of these contracts, such as the purchase price or effective period of the contract. If parties are unable to come to a mutual agreement, the contract may be terminated.

Parties are also exempted from paying early termination penalties under the Re-Align Framework. However, parties will remain liable for outstanding obligations.

The Re-Align Framework will be available for use for a limited duration of time, from 15 January 2021 till 26 February 2021.

This article will cover:

Businesses Eligible for the Re-Align Framework 

To qualify for the Re-Align Framework:

  1. The business will be subject to an annual revenue cap of S$30 million, which is intended to cover smaller and micro-enterprises; and
  2. The business must have experienced at least a 70% fall in monthly average gross income from 1 July 2020  – 31 December 2020 as compared to 1 July 2019 – 31 December 2019.

Further, only contracts which meet the following requirements are eligible for the Re-Align Framework:

  • Governed by Singapore law;
  • Entered into before 25 March 2020;
  • Has at least one party who has a place of business in Singapore; and
  • Falls within 1 of the following 5 categories, as contracts in such categories are likely to have long-term obligations that may need renegotiation or restructuring:
    • Licences or leases for non-residential immovable property that have a term of up to 5 years;
    • 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);
    • Rental agreements for commercial equipment or vehicles;
    • Contracts for sale and purchase of goods; or
    • Contracts for sale and purchase of services.

Meanwhile, the following types of contracts are excluded from the Re-Align Framework:

  • Consumer contracts
  • Employment contracts
  • Insurance contracts
  • 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 apply
  • Contracts to which the Sale of Goods (United Nations Convention) Act apply

A special category of contracts are those affecting essential services and national interest, which may use the Re-Align Framework only as a platform for renegotiation, but not termination.

Renegotiating Under the Re-Align Framework 

For businesses and contracts eligible under the Re-Align Framework, a party to the contract (including the party’s guarantor, surety or assignee) seeking to negotiate the rights and obligations must first serve a notice of negotiation on the other party or parties to the contract.

The notice of negotiation must be served within 6 weeks, from 15 January 2021 till 26 February 2021. However, parties may wish to start negotiations even before 15 January 2021, in order to have more time to reach an agreement.

After the notice of negotiation is served, parties have 4 weeks from the date of notice to negotiate for a way to realign the agreement, in light of the impacts of COVID-19, that is acceptable to both parties. If renegotiations fail, the contract may be terminated.

The consequences of terminating a contract being renegotiated under the Re-Align Framework is that the parties will still be liable for obligations accrued on or before the date of termination. However, there will be no penalties for early termination.

If there are any disagreements relating to:

  1. A party’s eligibility to serve the notice of negotiation under the Re-Align Framework; or
  2. Liabilities payable upon termination,

an independent assessor may be appointed, upon the filing of a Notice of Objection for (1) and/or a Notice of Adjustment for (2). Thereafter, the independent assessor will make a determination on the issue(s) and/or make further adjustments to the rights and obligations of the parties on a just and fair basis.

No party may be represented by a lawyer at proceedings before the independent assessor, unless the independent assessor gives permission for this.

Additional Considerations 

The Re-Align Framework will also assist smaller landlords, who are individuals/sole proprietors/holding companies of individuals. Under the framework, tenants may have to pay compensation for terminating their leases early, once the small landlord files a Notice for Compensation (with the amount to be determined by an independent assessor).

Besides this, eligible hirers and renters of hire-purchase equipment will have the alternative of paying outstanding arrears in instalments instead of terminating the contract altogether.

Further details on these arrangements may be found on the Ministry of Law website.