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Singapore – That Sinking Feeling: Are Contracts Frustrated When Raw Materials Become Scarce?

5 August, 2014

 

Legal News & Analysis – Asia Pacific – Singapore –  Construction & Real Estate

 

As people head for their summer breaks at the beach, this article appropriately features a case involving sand. This decision is a rare example of a court finding that a contract is frustrated due to raw materials becoming unavailable.

 

The Sands Of Time Run Out


In Alliance Concrete Singapore Pte Ltd v Sato Kogyo Pte Ltd [2014] SGCA 35, the Singapore Court of Appeal considered the doctrine of frustration following a total disruption in the supply of sand from Indonesia into Singapore and the effect of a subsequent repudiatory breach.

 

In 2006, Alliance entered into a fixed-price contract with Sato Kogyo to supply ready-mixed concrete, of which sand is a key ingredient. In Singapore, sand is almost exclusively sourced from neighbouring countries and mainly from Indonesia. However, in January 2007, Indonesia banned the export of all sand. To help blunt the impact of the ban, the Singapore government released its own sand reserves for use on projects in Singapore but limited availability to contractors with on-going projects. To overcome this limitation, Sato Kogyo took the initiative to obtain sand from the government stockpile and to deliver it to Alliance. Alliance would then process and deliver the concrete to Sato Kogyo.

 

Despite both companies’ efforts, neither company’s infrastructure could support this new production model. Further, Sato Kogyo wanted Alliance to absorb or at least share the associated increase in costs. Alliance refused to absorb the costs and commenced legal proceedings against Sato Kogyo.


A Concrete Decision…

 

In the High Court, Sato Kogyo disputed Alliance’s claim for damages stemming from the lost profits under the contract and counterclaimed for losses incurred due to Alliance’s failure to supply concrete at the agreed price. The judge held that sand sourced from Indonesia was not fundamental to the contract and Alliance’s refusal to supply concrete constituted a repudiatory breach. The court found that Sato Kogyo was entitled to obtain concrete from other sources and Alliance was liable for any difference in price.


…Are You Shore?

 

On appeal, Alliance argued that the contract was fundamentally frustrated by the sand ban. As a result, under the legal doctrine of frustration, both parties would be discharged from their obligations. Sato Kogyo, on the other hand, argued that the source of sand was not fundamental to the contract and Alliance had breached its obligations by refusing to provide concrete at the price agreed prior to the sand ban.


In its decision, the Court of Appeal held that the parties had expressly contemplated that the sand would be sourced from Indonesia and therefore the contract had been fundamentally frustrated. At the time of contracting, Indonesia was the primary, if not the sole, source of sandfor the concrete used in Singapore. Sourcing other sand, even at increased prices, did not become possible for months. Since the parties were discharged of their obligations at the time the sand ban took effect, the Court did not take into account Sato Kogyo’s argument regarding Alliance’s refusal to use sand from the Singapore government stockpile.


The Court analysed Alliance’s argument through Lord Radcliffe’s “radical change in obligation” test as embodied in Davis Contractors v Fareham Urban District Council [1956] AC 696, decided by the House of Lords in England. The Court noted that the doctrine of frustration is premised on the rationale of fairness since both parties are discharged from their contractual obligations at the time of a supervening event if their obligations have been rendered “radically or fundamentally different” from what had been agreed upon.


The Court also made two further observations about the doctrine of frustration. Firstly, literal impossibility is not required for a contractual obligation to be rendered radically or fundamentally different. Secondly, in cases where the unavailability of a particular source may operate to frustrate the contract, the courts may distinguish between when a source is expressly referred to in a contract and when it is not – the latter scenario being one in which it would be much more difficult to demonstrate a fundamental frustration of the contract.


How Good Drafting Can Alleviate Future Frustration


In order to increase certainty and save potentially lengthy litigation in an uncertain area of law, this case, which, as an appeal decision, is likely to have persuasive effect in other common law jurisdictions, shows how important it is for both purchasers and suppliers of construction services to highlight the location of any materials in a fixed-price contract if the source is limited to a specific country or company. It is also a reminder of how a well drafted force majeure clause in a contract can provide a clear mechanism for resolving disputes when unexpected events occur. Here, Alliance had included a force majeure clause in its quotations, but failed to insert the provision in the final contract.

 

Hogan Lovells

 

Paul Teo, Partner, Hogan Lovells

paul.teo@hoganlovells.com

 

Adam Mickley, Hogan Lovells

adam.mickley@hoganlovells.com

 

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