SINGAPORE HIGH COURT RULES ON LEASE DISPUTE ARISING FROM COVID-RELATED MEASURES

Summary of the Facts

Dathena is a cybersecurity company in the business of developing software that provides data security and privacy applications to its customers. On 16 January 2020, Dathena and JustCo (a company that provides workspaces to its customers in offices or commercial buildings that it rents) entered into a Membership Agreement whereby Dathena agreed to lease 4 units in OCBC Centre East (“OCBC Premises”), a prime location in the Central Business District area in Singapore. The lease was to run from 1 May 2020 to 30 April 2022, for a period of two years.

Due to the nature of Dathena’s business, of which JustCo was aware as Dathena had rented office space from the same JustCo’s representative at JustCo’s Bangkok office, JustCo knew that it was of paramount importance to Dathena that the OCBC Premises could meet Dathena’s information technology (“IT”) requirements and that Dathena could move its servers into the premises before the start date of the lease on 1 May 2020.

Upon the signing of the Membership Agreement, Dathena made payment of SGD 186,900 as a refundable security deposit and SGD 99,991.50 as the monthly membership fee for May 2020. Dathena also paid SGD 18,350.50 for its set up and separate housing of IT and servers within the OCBC Premises.

However, the Singapore Government implemented Circuit Breaker Measures on 7 April 2020, under the COVID-19 (Temporary Measures) (Control Orders Regulations 2020). These restrictions disrupted the IT set up that were scheduled in April 2020 and also caused delays to the construction and renovation works at the OCBC Premises. Although the Circuit Breaker Measures were originally scheduled to end on 4 May 2020, the measures were extended to 1 June 2020 as the pandemic situation remained critical in Singapore.

JustCo informed that it could not ready the OCBC Premises for Dathena in time for moving in on 1 May 2020, which was problematic for Dathena as its tenancy at its previous premises expired on the date it was supposed to move into the OCBC Premises. On 26 May 2020, JustCo expressed that it could not be certain when the OCBC Premises would be ready. On 29 May 2020, Dathena issued a Notice of Termination to discharge the Membership Agreement on either of two grounds: termination or frustration, and requested a refund of the security deposit and advanced payment of membership fees (amounting to SGD 286,891.50).

JustCo rejected Dathena’s request for a refund and denied that the Membership Agreement had been terminated or frustrated, arguing that Dathena had no contractual right to terminate the Membership Agreement, and that Dathena’s inability to commence its lease was due entirely to the mandatory circuit breaker measures imposed by the Singapore government to address the pandemic crisis. JustCo then sought to offer alternative comparable office space in lieu of the OCBC Premises as a temporary measure, citing its discretion and right to do so under the Membership Agreement.

Dathena commenced the suit against JustCo on 4 September 2020 when JustCo refused to give a refund and insisted that Dathena move into the OCBC Premises on 9 September 2020 (as it was finally ready). JustCo counterclaimed for SGD 2.4 million on the basis that it was entitled to the full membership fees it would have earned under the 2-year lease.

Grounds of Decision

The Singapore High Court found in favour of Dathena on all counts, holding that:

• Dathena was entitled to give its Notice of Termination even though there was no clause in the Membership Agreement that allowed Dathena to terminate the contract. Even though the Membership Agreement had an entire agreement clause, it did not operate to constrain the application of common law or statutory legislations. The Court found that the one-sided termination clause (under which only JustCo had the option to terminate the Membership Agreement and to demand payment for membership fees for the entire length of the agreement), among other onerous terms, was unreasonable under the Unfair Contract Terms Act (“UCTA”) and thus unenforceable. The Court accepted Dathena’s position that there was a repudiatory breach of the contract by JustCo when it failed to deliver the OCBC Premises by 1 May 2020, thereby giving rise to Dathena’s right to termination at common law.
• Although Dathena had the right to waive its termination notice, the Court held that Dathena’s willingness to consider alternatives offered by JustCo after the issuance of its Notice of Termination and actions in visiting the OCBC Premises in September 2020 did not amount to any waiver.
• The application of the Frustrated Contracts Act was not dependent on parties’ agreement, and once a supervening event occurs after the formation of the contract without the default of either party which renders the contractual obligation radically and fundamentally different from what was agreed or, a contract becomes impossible to perform, a contract is frustrated. JustCo’s four-month delay in delivering the OCBC Premises, non-comparable alternatives and additional moving costs were not what parties had agreed to. The result is that both parties were discharged from their contract by operation of law, and Dathena was entitled to the refund.
• JustCo was ordered to return Dathena’s security deposit and advance payments, while JustCo’s counterclaim was dismissed.

Conclusion

As many businesses reconsider their template or standard terms contracts based on challenges arising from the pandemic, this judgment comes at an opportune time to highlight that parties dealing under Singapore law must bear in mind the potential constraints of Singapore statutes such as UCTA that may apply to render certain unfair terms unenforceable, especially if a commercial party is dealing on its counterparty’s standard terms of business. It is also helpful to note that even if parties have not considered possible supervening events and the consequences that should follow under a Force Majeure clause, the doctrine of frustration is nevertheless available in statute and at common law for a party looking to be discharged from its obligations under a contract. The Singapore High Court has shown that it is prepared to recognize the restrictions resulting from the COVID-19 pandemic as a supervening event that entitles a party to discharge the entire contract.