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Dathena's win against JustCo: will it trigger more such cases?

Dathena's win against JustCo: will it trigger more such cases?

Source: Business Times
Article Date: 11 Oct 2021
Author: Fiona Lam

The judgment is said to provide some clarity on the concept of frustration of contracts; previously, it was unclear how Singapore courts would view Covid-19's consequences in that context.

Cybersecurity firm Dathena Science's victory in its lawsuit against co-working operator JustCo (Singapore) has sparked chatter in the legal community and the commercial leasing scene.

It stands out as possibly the first court case here that resulted from pandemic measures. With scores of businesses battered by Covid-19, legal practitioners foresee more contracting parties attempting to bring similar cases.

In the judgment, some of the contract terms - such as the tenant not having the right to terminate the contract - were flagged as "grossly unfair" and unenforceable. But some observers are sceptical of its impact in helping to tip the scales in favour of co-working or office occupiers.

The judgment is said to provide some clarity on the concept of frustration of contracts; previously, it was unclear how Singapore courts would view Covid-19's consequences in that context.

Melvin See, senior partner in Dentons Rodyk's litigation and dispute resolution practice group, said past events that were found to constitute frustration included compulsory acquisition of land and Indonesia's ban on sand export to Singapore.

"On the other hand, the Singapore courts have found that increases in price, devaluation of currency, and winding-up of a company did not constitute frustration," See said.

A contract is frustrated when an unforeseen intervening event renders it impossible to be fulfilled, or transforms the obligation into a radically fundamentally different one. Parties are then automatically discharged from the contract.

Besides the Frustrated Contracts Act, the Unfair Contract Terms Act (UCTA) was also applied in this case.

Eugene Thuraisingam LLP partner Suang Wijaya told The Business Times (BT): "Both these Acts are seldom litigated to trial, so this judgment provides a useful illustration of situations in which these laws may apply."

Danny Quah, TSMP Law Corp director, litigation department, said the case potentially has far-reaching consequences for contracting parties.

More Covid-related disputes

It will not be surprising if other co-working or office occupiers, encouraged by Dathena's win, commence legal proceedings or seek alternative dispute resolution for similar issues.

The judgment may support the argument that Covid-19 restrictions are grounds on which the courts may find contracts were frustrated. "If this is the case, that will open the floodgates to parties in all types of contracts to get out of their agreements on the basis of the pandemic," Quah noted.

If the doctrine of frustration is successfully invoked, there will likely be "a great deal of uncertainty in the market", he added. "More work for disputes lawyers is seldom a good thing for the economy."

To be sure, the chances of success of any legal action will depend on each case's facts and the relevant contractual provisions; parties planning an action should obtain legal advice.

Another lawyer cautioned against interpreting the judgment as a sure sign that the courts will always establish that there was a frustrating event due to the pandemic.

With the fluidity of the Covid-19 situation and the varying severity of measures, the precise circumstances of this case are unlikely to be replicated, he noted.

For JustCo, the halt in construction and fit-out works during the circuit breaker contributed to the 4-month delay in the lease start date. That significant delay, coupled with JustCo's inability to deliver comparable premises, frustrated the agreement as the co-working firm's obligations became radically, fundamentally different from what was agreed.

The court observed that 4 months amounted to one-sixth of the 2-year lease duration.

"By way of contrast, in a Hong Kong case arising out of the Sars epidemic, a court found that the inability to use a premise for 10 days out of a 2-year lease due to an isolation order did not significantly change the parties' obligations from what they had reasonably contemplated," See said.

As more cases work their way through the Singapore courts, "we can expect greater clarity on how radically different things must be before frustration can be invoked to discharge parties from their leases, or indeed any contract that is impacted by the Covid-19 pandemic", he added.

In the construction sector, the impending expiry of temporary relief could also be a precursor to disputes, lawyers said. Till Dec 31, construction firms can seek relief from legal and enforcement actions under some contracts hit by Covid-19.

The Singapore Mediation Centre expects to see more Covid-related matters in general as the pandemic's effects are far from over, said the centre's executive director Ban Jiun Ean.

However, the Dathena suit will have no bearing on the rise in mediation cases, as the court decision does not move the needle towards or away from litigation, Ban added.

Wijaya noted that any increase in Covid-19-related contract disputes should progressively slow, as it has been close to 1.5 years since the strictest restrictions were imposed during the circuit breaker, and Singapore's economy is also gradually reopening.

Uneven playing field

It remains to be seen whether the case will spur a shift in the office and co-working landscape.

JustCo chief Kong Wan Sing had told BT that the company's contract terms reflected "general market practice". Industry observers likewise said terms heavily skewed in the co-working operator's or office landlord's favour are a dime a dozen.

Considering the prevalence of such practices today, what will it take to level the playing field?

Adding another layer to the issue is the grey area in which co-working clients fall. They do not officially pay rent, but are dubbed "members" and pay "membership fees".

The co-working firm, usually the master lessee, pays the operating costs and rent for the premises. If the amount of rent relief it receives from the landlord is not sufficient to keep it afloat, that will, too, limit any help it can pass down to the members.

In June, co-working startup The Working Capitol filed for debt restructuring after it failed to reach an agreement with two landlords to renegotiate about S$610,000 of rental payments, BT earlier reported.

In JustCo's case, the court noted that the firm's conduct suggested it was operating under financial pressures. JustCo also told Dathena it could not change the commercial terms because it still had to pay the full cost of rent, services and salaries to the landlord, vendors and staff.

That said, JustCo did not present evidence it had invoked the Covid-19 (Temporary Measures) (Amendment) Act 2020 to obtain rental waivers or reduction from the landlord.

As for the UCTA, it should be emphasised that not all parties will be able to rely on the Act to argue certain provisions are unenforceable.

For instance, its Section 3 applies when one party "deals as consumer or on the other's written standard terms of business".

The court said Dathena was a consumer, and the burden was on JustCo to prove otherwise.

Quah said: "In my view, it is unusual that a contract between two substantial businesses would come under UCTA."

Similarly, another lawyer told BT it was unexpected for a big tenant like Dathena - which could fork out S$99,992 per month to take up units across four floors in a prime location - to be treated as a consumer.

Room for negotiation

The court noted that even if Dathena were not a consumer, it was still dealing with JustCo on the latter's written standard terms of business, which comes under the second limb of Section 3.

It was "quite apparent" that the terms in Dathena's agreement were JustCo's standard terms and conditions applicable to all its clients, the court said. No evidence was presented that there was room for negotiation of those standard terms.

Quah said there is a chance that some companies may take this case as a cue to start separately negotiating all their contracts in the future so that they are not on "standard terms" and Section 3 will thus not be applicable.

"This will only add to their costs. And it's likely for these costs to be passed on to consumers, which is unfortunate as consumers are the very stakeholders UCTA intends to protect," he explained.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

Dathena Science Pte Ltd v Justco (Singapore) Pte Ltd [2021] SGHC 219

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