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Force Majeure Clauses: “Disruption” Clauses vs. “Prohibition” Clauses.

9 January, 2012

 

Legal News & Analysis – Asia Pacific – Singapore Dispute Resolution

 

Holcim (Singapore) Pte Ltd v. Precise Development Pte Ltd and another application [2011] SGCA 1
 
A supplier of sand recently managed to invoke a force majeure clause as a defence for its failure to perform its obligations under a contract entered into before the Indonesian government announced a ban on sand.
 
The Force Majeure Clause
 
The force majeure clause in question provided that "The Purchaser must provide sufficient advance notice in confirming each order. The Supplier shall be under no obligation to supply the concrete if the said supply has been disrupted by virtue of inclement weather, strikes, labour disputes, machinery breakdowns, riots, and shortage of material, Acts of God or any other factors arising through circumstances beyond the control of the Supplier."
 
The Court of Appeal held that in order to come within the ambit of this clause, the supplier had to show that the supply of concrete had been "disrupted" by the shortage of sand, and that it had taken all reasonable steps to avoid the force majeure effects of the sand ban.
 
A "disruption" clause
 
In interpreting this clause, the Court held that the word "disrupt", like the word "hinder", connotes a lower degree of negativity compared to the word "prevent" (which has been used in other force majeure clauses).
 
Events that did not prevent the literal performance of the contract but would cause the continued performance of a contract to be commercially impracticable would generally constitute a "disruption" or "hindrance" within the meaning of the force majeure clause in question.
 
It is interesting to note, however, that the Court found that the contract had been disrupted not because the prices of the sand had gone up, but because of the difficulties faced by the supplier in this case. To state a few examples, the supplier had no access to Building & Construction Authority (“BCA”) stockpile of sand, and its own suppliers had stopped supplying sand to it. The BCA's directions to provide sand only to main contractors also meant that these main contractors (including the buyer) were put in a "monopolistic" position and that the supplier would have been subject to whatever exorbitant prices that the buyer elected to charge it for obtaining the sand.
 
All these considerations led the Court to conclude that the supplier was placed in a commercially impracticable situation.
 
Mere increase in price is not "disruption", "hindrance" or "prevention"
 
On this note, the Court took pains to clarify that a mere increase in price is generally  insufficient in itself to constitute a "hindrance" or "prevention", although it left open the question as to what would be the legal effect of an astronomical increase in price. It did, however, hint that local case law seems to suggest that such an astronomical increase in price may amount to a frustrating event to the contract.
 
What is "beyond the control" of parties?
 
The Court held that where the clause in question relates to events that are beyond the control of one or more of the parties, then the party concerned ought to take reasonable steps to avoid the events stipulated in the clause. If the party does not take such reasonable steps, then it cannot be said that the event was beyond the control of the party concerned.
 
The Court, however, pointed out that it was not a blanket requirement for every party relying on a force majeure clause to show that it had taken all reasonable steps to avoid the event. Whether or not this obligation arises depends on the precise language of the clause.
 
Lessons to be taken from this case
 
This case recognises the difference between an absolute force majeure clause under which the party relying on the same must show that performance is impossible, and a slightly less restrictive “disruption” or “hinderance” force majeure clause whereby the party relying on the same has simply to show that it would be commercially impracticable for him to continue to fulfil his obligations under the contract.
 
Ultimately, the parties' obligations pursuant to the clause will depend on the wording of the clause. It is therefore important, at the early stages of the contract, to consider and accurately set out the obligations and rights of the parties in the event of a force majeure event.
 
 
For further information, please contact:
 
John Howes, Joint Head of Office – Singapore, Pinsent Masons MPillay
jon.howes@pinsentmasons.com
 
Mohan Pillay, Joint Head of Office – Singapore, Pinsent Masons MPillay
mohan.pillay@pinsentmasons.com
 
 
 

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