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Indonesia – Court of Appeal Rules On Frustration Of Supply Contract In Indonesian Sand Ban Case.

19 June, 2014

 

Legal News & Analysis – Asia Pacific – Indonesia – Dispute Resolution

 

Introduction

 
The Indonesian sand ban of 2007 led to a great deal of upheaval in many construction and supply agreements, particularly in Singapore, where the active construction industry relied almost entirely on Indonesia as its source of sand. Since then, much judicial ink has been spilt over the resulting collapsed contractual relationships. The cases have afforded the Court the opportunity to make important pronouncements on contract law, and the latest case in this vein is the Court of Appeal decision of Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35.

 
The case involved a series of contracts for the supply of ready-mixed concrete (“RMC”) which was interrupted by the Indonesian sand ban. The contracts eventually fell through, with both supplier and contractor commencing legal claims against the other. The supplier sought to establish that the sand ban caused the contracts to be discharged by frustration, while the contractor argued that the supplier was in repudiatory breach of the agreements.

 
The High Court found in favour of the contractor, but upon appeal, the Court of Appeal overturned the High Court’s decision. It held that the sand ban did in fact constitute an act of frustration, and that the contractor had not shown repudiatory breach on the part of the supplier.

 
Brief Facts

 
In January 2007, the Appellant (the “Supplier”) and the Respondent (the “Contractor”) enter into a series of agreements (the “Contracts”) for the supply of RMC. However, soon after, the Indonesian government announced a ban on the export of concreting sand, which is one of the main ingredients for the production of RMC.

 

To alleviate the shortfall, the Building and Construction Authority allowed main contractors such as the Contractor to draw on its stockpile. The Contractor was able to provide sand to the Supplier from this stockpile, but at a higher cost.

 
However, the relationship soon began to fall through. There was a shortfall in the amount of sand required by the Supplier, and the parties began to argue whether this was caused by the Supplier failing to take the sand or the Contractor failing to properly deliver the sand. The supply of RMC was also interrupted when the parties disagreed as to whether to raise the price of the RMC supplied in light of the cost consequences of the sand ban.

 
Eventually, the relationship between the parties came to a halt. The Supplier commenced legal proceedings against the Contractor for the price of RMC supplied, while the Contractor claimed against the Supplier for the failure to supply RMC.

 
Holding Of The High Court

 
The High Court had to consider, inter alia:

 
(i) Whether the Contracts were frustrated by the sand ban; and

 
(ii) Whether the Supplier was in repudiatory breach of the Contracts by refusing to supply RMC at the prices fixed under the Contracts.

 
The High Court decided in favour of the Contractor on both issues. It held that the Contracts had not been frustrated, and that the Supplier was in repudiatory breach of the Contracts.

 
Holding Of The Court of Appeal

 
The Court of Appeal reversed the decision of the High Court on both counts, finding that the sand ban did frustrate the Contracts, and that the Supplier was not in repudiatory breach.

 
Frustration

 
The Court first examined the doctrine of frustration, which automatically discharges both parties from a contract because a supervening event has rendered the contractual obligation fundamentally or radically different from what has been agreed.

 

In particular, the Court looked at the situation in which the basis for frustration is the unavailability of a particular source from which the subject-matter of the contract is derived. Whether or not this constitutes frustration depends on whether the parties intended or contemplated that particular source. There are three possible permutations:

 
(i) Scenario A: The source is expressly referred to in the contract;

 
(ii) Scenario B: Only one party intended an unspecified source; and

 
(iii) Scenario C: Both parties contemplated an unspecified source.

 
It is generally agreed that, upon the failure of the source, the doctrine of frustration will serve to discharge the contract in Scenario A, but not in Scenario B. However, there is no conclusive authority on whether or not frustration operates in Scenario C.

 
Nonetheless, after examining the applicable principles, the Court of Appeal determined that frustration may serve to discharge the contract in Scenario C as well, since it would result in a radical change in the obligation.

 
Applying this to the facts of the case, the Court held that the Contracts were in fact frustrated by the sand ban.

 
(i) The sand ban was an unforeseen supervening event that left the parties without a viable alternative for sand.

 
(ii) Both parties contemplated that Indonesian sand would be used for the RMC, bringing the facts within Scenario C above.

 
(iii) The Supplier had not acted unreasonably in failing to take delivery of the stockpile sand from the Contractor.

 
The Court thus held that the Contracts were discharged by frustration, and that the operative date of frustration was 6 February 2007, when the Indonesian government’s imposed grace period ended and the sand ban took its full effect in Singapore.

 
Repudiatory Breach

 
The Court was left to consider whether there was any breach of the Contracts on the part of the Supplier before the 6 February 2007 date of frustration. After considering the evidence before it, the Court found that the Contractor had failed to prove such breach.

 
It was held that the evidence presented no clear indication that the Supplier wished to breach the Contracts. Although the Supplier had attempted to obtain a higher price for the RMC, and eventually ceased the supply of RMC, the Court viewed it more as part of negotiations towards a definitive resolution rather than an intention to repudiate. The Supplier was trying to obtain a price variation, which the Contractor refused. Although a resolution was not realised, it did not change the nature of the negotiations into one of breach.

 
The Court also rejected the Contractor’s allegation that the Supplier had breached the Contracts by failing to deliver RMC despite the Contractor’s orders. The Court found that the Contractor had not adduced sufficient evidence to prove its case.

 
Therefore, having shown that the Contracts were frustrated, and that it had not breached the Contracts, the Supplier successfully secured the overrule of the High Court’s decision.

 
Concluding Words

 
The Indonesian sand ban of 2007 led to a deluge of cases before the Singapore courts, and the topic of frustration was prominent amongst the decisions. As can be seen, the litigious effects of the sand ban have continued to be felt even now, more than 7 years after the implementation of the sand ban.

 
This judgment clarifies the basis of the doctrine of frustration, particularly in instances where the frustration arises as a result of the failure of a source. Where both parties have contemplated a particular source, but the source is not specified in the agreement, the failure of the source may still frustrate the contract. Nonetheless, it may be more prudent of parties to specify the named source in the provisions of the agreement, particularly if the identity of the source is important enough to constitute a fundamental element of the arrangement between the parties.

 

Rajah & Tann

 

For further information, please contact:

 

Francis Xavier, Partner, Rajah & Tann

francis.xavier@rajahtann.com

 

Winston Kwek, Partner, Rajah & Tann

winston.kwek@rajahtann.com


Avinash Pradhan, Partner, Rajah & Tann
avinash.pradhan@rajahtann.com

 
Istyana Ibrahim, Rajah & Tann
istyana.ibrahim@rajahtann.com

 
Tng Sheng Rong, Rajah & Tann
sheng.rong.tng@rajahtann.com

 

Muthu Arusu, Rajah & Tann
muthu.arusu@rajahtann.com

 
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