Introduction
Facts
UCTA and lease agreements
Comment
Over the past two years, the Singapore government has introduced various measures to curb escalating covid-19 infections among the public. Singapore's "circuit breaker" in mid-2020 and the "heightened alert" phases in 2021 were designed to reduce human interaction. This resulted in, among other things, the temporary closure or limitation of businesses, including construction, retail and food and beverage.
In the recent case of Dathena Science Pte Ltd v Justco (Singapore) Pte Ltd,(1) the High Court considered a dispute between a co-working space operator and a customer, which arose from delays caused by the government's measures.
One of the key issues in contention between the parties in Dathena was whether various terms in the contract between the parties were unenforceable due to the Unfair Contract Terms Act (Cap 396) (the UCTA). The High Court eventually ruled in favour of the customer and held that the terms were unenforceable.
One question that remained unanswered was whether the UCTA applies to lease agreements.
The facts of the case are relatively simple. The plaintiff, Dathena, was a multi-national cybersecurity business that had agreed to lease premises at OCBC Centre East for two years under a membership agreement with the defendant, Justco. Due to various delays, the OCBC premises could not be delivered in time for Dathena's usage. When it became clear that the OCBC premises would not be ready until at least four months after the agreed upon commencement date, Dathena elected to terminate the contract and sued Justco for the return of a security deposit and an advance payment.
Dathena's main case was that it was entitled to terminate the membership agreement due to Justco's breach by failing to deliver the OCBC premises on the commencement date.
Justco argued that the membership agreement was frustrated under the Frustrated Contracts Act (Cap 115) as there was an independent supervening event (ie, the governmentally imposed circuit breaker) that rendered Justco's contractual obligation fundamentally different from what was agreed upon.
In defence against Dathena's main argument, Justco sought to rely on various contract terms that purported to grant Justco the right to provide alternative premises and excluded liability for any interruption, disruption or cessation of Dathena's use of the OCBC premises. In its defence, Dathena argued that these terms were unreasonable and, therefore, unenforceable under the UCTA.
The purpose of the UCTA is to primarily protect consumers who may be prejudiced by their weaker bargaining power against counterparties through onerous and unfair contract terms. In particular, section 3 of the UCTA operates to prevent a party from relying on contract terms which exclude liability or purport to grant that party the right to render no, or substantially different, contractual performance unless such terms satisfy the requirement of reasonableness.
In line with its primary purpose, the ambit of section 3 of the UCTA is limited to consumers or parties that deal on the other party's written standard terms of business.
In Dathena, the High Court held that the burden on proving that Dathena was not a consumer fell on Justco (which failed to discharge such a burden). Further, even if Dathena was not a consumer, Dathena had dealt with Justco based on the latter's standard membership agreement, which was applicable to all its clients.
However, paragraph 1(b) of the First Schedule of the UCTA provides an exemption as follows:
Sections 2 to 4 do not extend to –
. . .
(b) any contract so far as it relates to the creation or transfer of an interest in land, or to the termination of such an interest, whether by extinction, merger, surrender, forfeiture or otherwise.
If Dathena's contract with Justco was a lease agreement for the OCBC premises, it would ostensibly be a contract that related to the creation of an interest in land, and, therefore, excluded from the application of sections 2-4 of the UCTA. As such, the unanswered question was whether the scope of the exemption applied to the entire lease agreement and all attendant terms, or only the specific part that related to the creation of the lease interest itself. The issue of what is meant by a "contract so far as it relates to the creation or transfer of an interest in land" has not been considered by the Singapore courts.
However, the UK High Court considered this issue in Electricity Supply Nominees Ltd v I.A.F Group Ltd.(2) In this case, parties to a lease of two floors of an office building disputed whether a covenant to pay rent without set-off was rendered ineffective by section 3 of the Unfair Contract Terms Act 1977 (the UCTA 1977).
The High Court held that all covenants that are integral to the lease that creates the interest in land fell within the English equivalent of the UCTA exemption, and that all other provisions not integral to the lease but included in the same document were taken out of the exemption. In that case, the covenant to pay rent and landlord's covenant to repair the premises were integral to the lease, and, therefore, these covenants were exempt from the provisions of section 3 of the UCTA 1977.
Given that the UCTA in Singapore was adopted from the UCTA 1977, the results in the Dathena case raised an interesting question as to why the Singapore High Court (or, why the parties) considered that section 3 of the UCTA applied in the lease of the OCBC premises, notwithstanding the exemption.
It is not apparent from the Dathena judgment whether these issues were canvassed before the High Court. This could be related to the manner in which Dathena and Justco had structured their contractual relationship – the lease agreement was termed a "membership agreement", with Dathena as a "member" that paid a "membership fee", which translated to the "rent". However, the High Court and the parties themselves appeared to treat the parties' contractual relationship as that of a lease of property, with various references to a "lease" of the OCBC premises and the payment of "rent".
It could also be possible that the parties agreed with the English law position and were of the view that the terms that were challenged were not integral to creation of the lease. Yet, if that were the case, it may be thought that, at the very least, the contract term which allowed Justco to provide alternative premises to the OCBC premises should have been considered integral to the creation of the lease.
It is unfortunate that the High Court judgment did not delve into the issue of whether the lease agreement in that case fell within the UCTA exemption (assuming it is a lease). The effect of the government's various covid-19 measures has been felt acutely in both commercial and residential leases. The results of the Dathena case may embolden long-suffering tenants to challenge onerous terms in their lease moving forward. Further clarity on the applicability of the UCTA exemption to lease agreements would also provide much-welcomed certainty.
For further information on this topic please contact Matthew Teo or Kenneth Lim at Helmsman LLC by telephone (+65 6816 6660) or email ([email protected] or [email protected]). The Helmsman LLC website can be accessed at www.helmsmanlaw.com.
Endnotes