Rationale for New Pre-court Action Protocol for Business-to-business Debt Claims

18 Mr Lim Biow Chuan asked the Minister for Law what is the rationale for the new pre-court action protocol for business-to-business debt claims and whether the Government has consulted businesses prior to introducing the new court protocol.

The Senior Minister of State for Law (Mr Edwin Tong Chun Fai) (for the Minister for Law): Speaker, the new Pre-Court Action Protocol for Business-to-Business Debt Claims is an initiative by the State Courts. It was implemented in August 2019 by an amendment to the State Courts Practice Directions. These Practice Directions (PDs) are issued by the Court to regulate its practice and procedure, and are updated from time to time. The new Protocol applies to all business-to-business debt claims that are commenced in the State Courts from 1 October 2019 onwards.

The new Protocol seeks to encourage businesses to resolve their debt claims early, before the commencement of proceedings. The State Courts see about 1,000 business-to-business debt claims each year. Approximately 75% of those claims, however, are eventually withdrawn, discontinued or have judgments entered in default. Based on the State Courts' experience, this is because such claims are frequently brought even though the debt is not disputed. Rather, the claims may be brought because there is poor documentation, wrong calculation of interest, or the debtor was simply seeking a breakdown of the debt or a repayment plan. As a result, costs incurred for the legal proceedings are very often disproportionate to the claimed sums and Court resources are also being utilised.

The new Protocol was therefore introduced with the objectives of:

(a) helping parties to identify the quantum of the claim, including interest, the relevant documents which may support the substantiation of the claim, and identifying the issues in dispute;

(b) encouraging early communications between parties, active exploration of Alternative Dispute Resolution options, and the upfront exchange of documents and information; and

(c) where legal proceedings cannot be avoided, the new Protocol will facilitate the drafting of proper pleadings and ensure that documentation is in order, as well as help to narrow the issues in dispute. This will focus the parties and also reduce the length of court proceedings.

Under the new Protocol, a Letter of Claim is sent prior to commencing legal proceedings. The Letter must contain details of the claim such as the amount of debt and applicable interest, as well as the underlying agreement giving rise to the claim. The debtor is then required to send a Response to the Letter of Claim within 28 days, or such shorter timeframe as may be appropriate depending on the circumstances of each case.

The Court has the discretion to impose cost sanctions on a party who does not comply with the new Protocol – whether the creditor or debtor – if the defaulting party is unable to show good reasons for the non-compliance.

The new Protocol does not bar any creditor from bringing legal proceedings on an outstanding debt claim at any point in time.

The State Courts hold regular engagements with Law Society and the members of the Bar on a variety of civil matters, including proposed changes to civil procedure. The State Courts previously discussed the new Protocol with the Law Society’s Civil Practice Committee, whose members represent both creditors and debtors – the business-to-business aspect to which the Protocol applies. Since implementation, the State Courts further engaged the Law Society earlier this year on 14 January 2020 and solicited their written feedback on the Protocol as well. The Law Society provided its feedback in writing to the State Courts on 28 January 2020. The State Courts will be studying this feedback with a view to fine-tuning the Protocol, as may be appropriate.

Mr Speaker: Mr Lim.

Mr Lim Biow Chuan (Mountbatten): Thank you, Sir. Sir, if I may declare my interest as a practising lawyer on this matter. Sir, I want to say that I support the efforts of the Court to encourage parties to try to resolve disputes amicably before litigating the dispute. I am sure the Senior Minister of State is fully aware that most lawyers already issue demand letters with at least seven days' notice. In this case, the Protocol specifies a notice period of 28 days. May I ask the Senior Minister of State, how does the Court balance the interest of the creditors who themselves may be liquidity-strapped because they would need to give the debtors 28 days' notice? And how does the Court then balance the fact that some debtors do drag their feet and refuse to pay until they are sued in Court? So, how does the Court then consider the interest of creditors who are in that situation?

Mr Edwin Tong Chun Fai: Mr Speaker, the 28 days in the Protocol is not immutable. There are a variety of factors which come into play when the Court assess ultimately whether there should be cost sanctions against one or the other party, should there be non-compliance with the Protocol. So, if the creditor forms the assessment that this debtor has been dragging his feet, or is facing a series of claims which might cause the debtor to go into bankruptcy, thereby, triggering a series of other consequences, then, on those cases, the creditor may proceed, even without 28 days' notice.

The only question is, at the time of reckoning, which I think Mr Lim would be aware, is actually on different from the position today. Even as we assess the conduct of parties, it is to asses whether or not the action has been reasonable or otherwise. And in doing so, the Court will consider a series of circumstances, including those that I have outlined. That is how the Courts will then strike a balance between ensuring that the creditor has sufficient time to make known the nature of the claim, make known the details to support the claim so that the debtor can decide if he wants to enter into ADR, for instance, or maybe he decides to then seek upfront, the repayment plan from the creditor.

In most cases, as Mr Lim would be aware, 28 days would probably be far shorter than if the matter had to be engaged in Court altogether. And bearing in mind that 75% of the thousand cases end up in some form or another resolved without having gone to Court, the State Court's Protocol seeks to try to address the vast majority of these cases with upfront information, with details to facilitate as far as possible the parties' resolution by themselves. But as I had mentioned and I would like to go back to it, the 28 days is not written in stone. And if the party is able to justify a departure from it, the Court will consider that and not impose sanctions.