Response by Senior Minister of State for Law, Ms Indranee Rajah S.C., to the Motion for the Adjournment - 'Power Imbalance in Contracts Involving Small Businesses'
1. Mr Deputy Speaker, the Honourable Member has spoken about the imbalance in the bargaining positions of small and medium enterprises (or SMEs) vis-à-vis bigger players. He has suggested a general protection approach through legislation.
2. The Government is empathetic to challenges faced by SMEs. The question is – how should we approach this issue and what should be the underlying philosophy that underpins our policy and approach?
3. In Singapore, our underlying philosophy is that in general, free market principles should apply, and the Government should intervene only where necessary, for example, to address systemic, market failures. Even when we do intervene, we try as far as possible to have the right regulatory touch, and avoid heavy handed interventions that could lead to distortion or unintended consequences. This philosophy has ensured that our businesses – big and small – can respond quickly to market signals, and adjust their business strategies accordingly. It has led to growth and good outcomes for all. In a competitive business environment, consumers benefit.
4. In any economy, it is inevitable that there will be competing demands and different interests. The question is how to strike the right balance.
5. So take for example the sample clause on the option to renew, which the Member had handed out. From the landlord’s perspective, what he wants is certainty. He does not want to be put in a position where the tenant can automatically renew the lease without knowing what the rent is, as that would be unfair to the landlord. The landlord would argue his clause is fair because his revisions must be pegged to market rate and the tenant has a choice not to renew and rent elsewhere. So as you can see there are competing viewpoints.
6. Of course, one can legislate to the effect that the landlord must have a clause that the option to renew will be on the basis of market rate, fullstop. But that may not solve the problem as the tenant and landlord may disagree on what the market rate is. If they cannot agree, the tenancy will either not be renewed, in which case the tenant will still have to find new premises (which is the same position the tenant would have been in if he had rejected the landlord’s revision under the sample clause); or the tenant can continue with the lease while both parties litigate the market rate, which will sour the relationship and likely rule out a further lease beyond the option term, which may not be in the tenant’s interest.
7. Of course you can then have a clause that says that the option to renew will be on the basis of market rate to be determined by a third party valuer. Then you will have a question of - “who should pay for the valuer’s fee?” So I highlight this not to suggest whether the standard clause provided by Mr Murali is a good clause or a bad clause, but simply to point out that in every situation, there will be different views on what is fair, and the answer is not always clear cut. Ideally, the contract should reflect a mutually agreed, negotiated position, taking into account the parties’ commercial considerations.
8. Introducing legislation is not without difficulties. Just as in the property market today, there exists a wide spectrum of landlords and tenants, with varying bargaining powers, and in differing circumstances. This makes it difficult to determine whether a particular clause is unfair, or simply the result of a valid, albeit hard, commercial bargain. In making these judgment calls, the courts may run the risk of substantively altering the bargain struck between two commercial parties, causing uncertainty in the process. In fact, this has been one of the common criticisms of the application of “statutory unconscionability” in Australia.
9. Enacting such legislation in Singapore can cause market distortion, and eventually, market inefficiency, to the detriment of all. Unintended consequences can arise as well. For example, should the landlords which these legislation target respond by increasing their rental rate to address the added business costs, this might end up hurting SMEs even more in the long run.
10. However, not having general protection legislation does not mean that there are no safeguards under our laws to protect against injustice.
11. General contractual principles such as the doctrines of duress, undue influence and unconscionability apply to all contracts. These doctrines have been applied by the Singapore courts to prevent a contracting party from being unfairly exploited by the other when entering into a contract.
12. In relation to the “demolition clause” highlighted by the Member, the High Court has held, in the case which the Member referred to, that such an onerous clause will be “usually interpreted very strictly” in favour of the tenant, as the courts recognize that “premature termination of the lease generally imposes inconvenience, if not hardship, on the tenant”. The outcome of Mr Murali’s aunt’s case does in fact illustrate how the law as it currently stands allows the court to protect against unscrupulous behavior.
13. Fundamentally, the issue as the Member points out is that of bargaining power.
14. As such, the way forward for SMEs should be to strengthen their bargaining power through growing their businesses, bolstering their negotiating positions with the assistance of business and trade associations such as the Singapore Business Federation, ensuring that they have other options and alternatives, while at the same time seeking out ways to raise productivity, reduce costs, and maximize profits.
15. The Government has many schemes and programmes which SMEs can leverage on to achieve these outcomes.
16. For one, Government landlords like HDB and JTC have sought to ensure that their respective tenancy agreements do not contain onerously one-sided clauses. These are alternative premises for SMEs to consider renting.
17. SMEs should also consider leveraging on Government schemes to build business capabilities, innovate and improve productivity. For example, SMEs can tap on schemes, such as SPRING’s Capability Development Grant to defray up to 70% of qualifying costs when they embark on projects to develop their capabilities in 10 key areas. In addition, the Government provides near-term support for SMEs to manage their business costs, such as the Corporate Income Tax rebate and Wage Credit Scheme.
18. These support schemes all work together to assist SMEs in transforming their businesses by uplifting their productivity and developing new capabilities. Therefore, SMEs which do not get the benefit of the savings from property tax in the specific clause mentioned by the Member, can nevertheless access various schemes which will help their businesses as a whole.
19. SMEs can also explore whether rental costs can be reduced through new business models. SME retailers, for example, might consider expanding through e-channels, beyond the traditional “brick and mortar” retail shops. This will reduce the need for physical space and hence rental cost, but at the same time expand their businesses.
20. To strengthen their bargaining position, SMEs can also consider working with their respective trade associations to spearhead discussion with landlords, and leverage on the Fair Tenancy Framework (FTF) to level the playing field for themselves.
21. We have also launched the Industry Transformation Maps (ITMs), a collaborative effort between the Government, Trade Association & Chambers, and industry to help our businesses transform and grow. SMEs are encouraged to participate in the ITMs so that they can achieve their full potential for growth and profit.
22. In conclusion, we should be slow to constrain market players unduly through legislation. The best way forward is to promote entrepreneurship and help our SMEs grow bigger and stronger which would improve their relative bargaining positions, individually and collectively.