Beware – unavailability of source from which subject matter of contract is to be derived may frustrate contract

In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd the Singapore court looked at the issue of frustration in relation to a construction contract.

Sato Kogyo (S) Pte Ltd (Sato) was the main contractor for three construction projects. Alliance Concrete Singapore Pte Ltd (Alliance), a supplier of readymade concrete (RMC), entered into three contacts (one for each project) with Sato (the Contracts) under which it agreed to supply Sato with RMC for the projects. Subsequently, however, the Indonesian Government announced a ban on the export to Singapore of concreting sand (the Sand Ban), which had repercussions for the construction industry because sand is a major component of RMC.

Alliance argued that the Sand Ban frustrated the Contracts i.e. was an unforeseen, supervening event after formation of a contract, which rendered a contractual obligation radically or fundamentally different from what was agreed, without any fault of either of the parties and thereby discharging the parties from their obligations under the Contracts.

The Singapore High Court held that the Contracts were not frustrated by the Sand Ban, but that decision was reversed by the Singapore Court of Appeal, which held that the Contracts were discharged by frustration because the Sand Ban was a supervening event that was not within the reasonable control of the parties and was neither foreseen nor reasonably foreseeable by the parties at the time the Contracts were made.

The Court of Appeal held that after the Sand Ban, supplies of sand dwindled and Alliance did not have a viable alternative. The Contracts were discharged, the Court said, on 6 February 2007 when the Sand Ban took full effect because that resulted in the actual curtailment (and consequent dwindling of availability) of the Indonesian sand. Prior to that date, Alliance attempted to negotiate for the best (and highest) price it could obtain for its supply of RMC to Sato, but it did not evince a clear intention to breach the Contracts, the Court said.

The judgment looked at the situation where the unavailability of a particular source from which the subject matter of a contract is to be derived may frustrate a contract, which is particularly relevant to construction contracts. The Court of Appeal referred to three possible scenarios, namely:

1. Where the source is specifically referred to in the contract, in which case if the source fails, through no fault of the parties, the contract is generally discharged by the doctrine of frustration.
2. Where only one of the contracting parties intended for a particular source, such that the source was not provided for in the contract, in which case the contract will not be discharged if that source fails.
3. Where both parties contemplated or could have reasonably contemplated a source which was not specified in the contract, in which case the unavailability of that source may operate to frustrate the contract. The Court found this scenario applied in this case i.e. both parties had contemplated that Indonesian sand would be used in Alliance’s preparation of the RMC, despite the absence of any reference to such in the Contracts.

In 2007, there was also a ban of construction sand from Mainland China to Hong Kong for a short period of time. A contractor seeking to argue frustration of the contract due to such ban, would be faced with a number of hurdles, namely that (1) contracts do not usually specify that the source of sand must be Mainland China; and (2) the ban may only last for a limited period of time. The first hurdle could be overcome by paragraph iii. above i.e. by showing that both parties contemplated or could have reasonably contemplated that the sand would be imported from Mainland China. As regards the second hurdle, the Court of Appeal in the Singapore judgment ruled that the contract was discharged on the first date when the ban was in full effect (on 6 February 2007), without any reasonable time having to elapse since the ban. For termination of a contract on the ground of force majeure (i.e. an extraordinary event beyond the parties’ control which prevents one or both of them fulfilling their contractual obligations), it is common to provide in the force majeure clause in the contract that such event must last for a certain period of time, say 90 days. It seems that the Singapore judgment was not concerned about how long the ban lasted, although we understand that the ban is in fact still in effect to this day.