The Interpretation of Force Majeure Clauses and Frustration in Singapore

In the recent case of Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, [2013] SGHC 127, the Singapore High Court examined the issues of frustration and the interpretation of force majeure clauses in relation to the so-called “Sand Ban” which affected the construction contract between parties.

While the judgment involves a number of decisions involving issues of repudiation, fresh agreements, implied terms etc., this post will focus on the Singapore High Court’s holdings on the doctrine of frustration and the interpretation of force majeure clauses (including the so-called “battle of the forms“). In particular, we note the High Court’s observation that whether an event falls within a force majeure clause depends heavily on the clause in questions and the specific difficulties faced by the party seeking to rely on the clause.

As we explained in our previous post on the interpretation of force majeure clauses,

After a contract has been concluded, circumstances may arise which render the contract unworkable or even impossible to perform. A force majeure clause will stipulate what happens to the parties’ contractual obligations in the event of specified events or events beyond the control of either or both parties. It can operate to terminate the contract in its entirety and excuse performance of a party’s obligation in whole or in part. Essentially, it operates as an express risk allocation mechanism between parties in situations that are beyond the parties’ control e.g. outbreak of war, strikes and so-called Acts of God.

The doctrines of force majeure and frustration are similar to the extent that successful recourse to either doctrine determines the contract and no further performance is required from the parties to the contract. The historical and classic example is that of the destruction of a concert hall just prior to when a performance was to have been held.

Unlike a force majeure clause though, frustration does not require an explicit provision in the contract. In fact, where parties have applied their mind to the frustrating event, this will generally preclude reliance on the doctrine. This is because frustration is concerned with the incidence of risk for unforeseen, supervening events that have occurred without default of either party such that the nature of the contract has become so radically differently that the performance of the contractual obligation would be fundamentally different from the obligations initially contemplated and undertaken. As a result, the court considers that it would be unjust to hold the parties to their initial contractual obligations. Because of the rather draconian effect of the doctrine, the mere fact that the contractual obligations have become more onerous to perform is insufficient grounds to amount to frustration.

Facts

The plaintiff, Alliance Concrete Singapore Pte Ltd (“Alliance“) was a manufacturer of ready-mixed concrete. In 2006, Alliance entered into three supply agreements with the defendant, Sato Kogyo (S) Pte Ltd (“Sato“) for the supply of concrete to Sato (the “Supply Agreements“). Alliance sued Sato for monies due for the supply of concrete. Sato disputed the amounts owed and counterclaimed for losses that it had incurred by reason of Alliance’s failure to supply it with concrete.

However, on 23 January 2007, the Indonesian authorities announced a ban on the export of sand to Singapore (“the Sand Ban”) as from 5 February 2007. This had repercussions on the construction industry because sand was an essential component in the manufacture of ready-mixed concrete. Nonetheless, the Building and Construction Authority of Singapore (“BCA“) took measures to mitigate any adverse effects.

First, the BCA decided to release sand from its stockpile to stabilise the price over a few months to give the construction industry time to make the necessary adjustments. Next, it also stated that government agencies would assist with any price rises thereafter by absorbing 75% of the increase in the cost of the sand. The remaining 25% of the cost increase was to be shared between the main contractor and the concrete supplier by agreement of the two parties. The BCA also urged the private sector to adopt this cost-sharing arrangement (see paragraph [6]).

At that time, Sato had three on-going construction projects (the “Projects”) and Alliance was supposed to deliver concrete to them pursuant to the Supply Agreementa. However, on 29 January 2013, Alliance asserted that it was no longer bound by the Supply Agreement as a result of the Sand Ban. In this respect, Alliance sought to renegotiate new supply agreements. Sato refused to sign up to the new supply agreements but sought the enforcement of the Supply Agreements subject to the cost-sharing arrangement for any increase in the cost of sand (see paragraph [10]).

In the course of February 2007, Sato exchanged correspondence with Alliance. Alliance asserted that it was no longer bound by the Supply Agreements, but Sato insisted that the agreements were still in force and requesting that Alliance furnish a proposal for sharing the increased cost of sand (see paragraph [12]). Sometime in late February, after having made intermittent supplies, Alliance stopped supplying concrete to Sato altogether.

Senior management of both parties met on three occasions between March 2007 and May 2007. but failed to resolve the deadlock. Finally, on 4 June 2007, Sato forwarded to Alliance its proposal for sharing the increased cost of sand and a list tabulating its alleged loss as a result of Alliance’s alleged breach of contract in failing to supply concrete for the Projects. On 21 June 2007, Alliance denied any liability to compensate Sato. The next day, it sued Sato for failing to pay for concrete already supplied under the Contracts. In its counterclaim, Sato alleged that Alliance had breached and/or repudiated the Contracts by failing to supply concrete for the Projects after the Sand Ban.

Parties’ arguments

Alliance sought to argue that the Sand Ban had frustrated the Supply Agreements and that it was therefore not bound to supply the concrete for the Projects pursuant to the Supply Agreements due to the Sand Ban frustrating the contract. Furthermore, in the case of two of Sato’s construction projects, the force majeure clause applied to relieve them of any performance obligation under the relevant agreement (see paragraph [18] and [19]).

Sato argued that the increased price of sand as a result of the Sand Ban did not constitute frustration. It also argued that the two relevant supply agreements did not contain any force majeure clause and that even if the agreements did, the clauses had not been triggered by the Sand Ban.

The Singapore position on frustration

The High Court cited the Singapore Court of Appeal case of Glahe International Expo AG v ACS Computer Pte Ltd and another appeal [1999] 1 SLR(R) 945 (“Glahe”) in which the Court of Appeal had explained at [26]:

“… The law on frustration is well settled. A contract is considered frustrated when a supervening event (which has not been expressly provided for in the contract) takes place, the consequence of which is that the nature of the parties’ (or one party’s) obligations is so fundamentally or radically altered that the contract can no longer justly be said to be the same as that which was originally entered into by the parties.”

The Court of Appeal in Glahe also approved of the following statement by Lord Simon of Glaisdale in National Carriers Ltd v Panalpina (Northern) Ltd, [1981] 1 AC 675 at 700:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

Accordingly, even if the Sand Ban were unforeseen, “what matters is whether or not the Sand Ban radically altered the nature of Alliance’s obligations under the Contracts or merely made it more expensive or onerous for it to fulfil its obligations to SK” (see paragraph [31]).

In this respect, the High Court found that Alliance had not been rendered incapable of performing its obligations under the Contracts at the material time and nothing had occurred that radically altered the obligations undertaken by it under the Contracts (see paragraph [40]).

First, even if it would have been more expensive for Alliance to supply the concrete, the legal position is “that a party who agrees to supply goods or services for a fixed price would, in the absence of terms to the contrary, be deemed to have taken the risk of any increase in the costs of supplying those goods or services“. As such, “increased costs of performing contractual obligations do not, without more, frustrate a contract” (see paragraph [40]).

Second, Alliance’s concern about pricing itself showed that it was not impossible for Alliance to supply the concrete to Sato, albeit at an increased cost to itself (see paragraph [41]). The High Court held that “it is only when the unavailability of sand radically alters the obligations undertaken by Alliance under the Contracts that the question of frustration will arise” (see paragraph [43]).

Third, the justice of the case actually favoured Sato (see paragraph [45]). The learned judge noted that while Alliance was happy enough to adopt BCA’s suggested price for the concrete post Sand Ban, “it, unlike [Sato], was unwilling to follow the BCA’s cost-sharing arrangement to cope with the increased price of sand“. And crucially, Alliance sought to impose a surcharge on the sand which was six times more than the actual increase of the price of sand (see paragraph [46]).

What was particularly damning that despite Alliance’s protest that it was doing “national service” by selling its concrete below cost, the learned judge pointed out that in 2007, Alliance had in fact made a relatively huge profit of $22.49m after three straight loss making years in the millions (see paragraph [48]).

Fourth, the two Singapore cases which Alliance relied on in seeking to justify its refusal to perform the Supply Agreements were “easily distinguishable from the present case” (see paragraph [50]). Interestingly enough, those two cases similarly involved the same Sand Ban affecting Alliance and Sato and in those cases, frustration was either successfully pleaded or would have been successful if pleaded (see paragraph [51] to [52]).

Force Majeure

Threshold not met – no force majeure clauses applicable between parties

The threshold issue in this case was whether there were any force majeure clause(s) applicable in the first place.

As is common in businesses which rely on standard form contracts, both Alliance and Sato asserted that their standard form contracts governed the relationship in respect of the Supply Agreements. Alliance asserted that there were force majeure clauses in the contracts that it had sent to Sato (see paragraph [59]). In turn, Sato argued that it had found the terms in those contracts to be unacceptable, had not signed those, and had instead made a counter-offer by way of their own purchase orders. These purchase orders, which were signed by both parties, did not include any force majeure clauses and were signed by both parties.

The High Court considered that in such circumstances, Sato had fired the “last shot” such that its purchase orders would govern the relationship between the parties. On that basis, no force majeure clause applied.

Sand Ban was not a force majeure event in this instance

Nonetheless, the High Court proceeded to hold that even if the force majeure clauses were applicable, the Sand Ban in and of itself would not have come within those clauses so as to relieve Alliance from having to perform the Supply Agreements.

The High Court followed the Court of Appeal’s decision in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR(R) 413 (“RDC Concrete”).

First, the Court of Appeal in RDC Concrete found that there is a distinction between force majeure and frustration (see RDC Concrete at [56]):

“Conceptually, it is true that a force majeure clause operates differently from the doctrine of frustration. Whereas a force majeure clause is an agreement as to how outstanding obligations should be resolved upon the onset of a foreseeable event, the doctrine of frustration concerns the treatment of contractual obligations from the onset of an unforeseeable event…”

Second, the effect of a force majeure clause “depend[s] on its precise language” (see paragraph [64]). The Court of Appeal in RDC Concrete held that,

“54 The most important principle with respect to force majeure clauses entails, simultaneously, a rather specific factual inquiry: the precise construction of the clause is paramount as it would define the precise scope and ambit of the clause itself. The court is, in accordance with the principle of freedom of contract, to give full effect to the intention of the parties in so far as such a clause is concerned.

58 Everything depends, in the final analysis, on the precise language and actual facts of the case at hand (as pointed out both in the quotation above as well as at [54] above). …”

The two force majeure clauses in this Alliance case were as follows:

“We shall be under no obligation to supply the ready-mixed concrete if the products have been disrupted by virtue of inclement weather, strikes, labour disputes, machinery breakdowns, riots, shortage of materials, acts of god or any other factors that could have arisen through circumstances beyond our control.” (the “NTU FM Clause“)

and,

“In the event of any circumstance constituting Force Majeure, which is defined as act of God, or due to any cause beyond ACS’ control, such as market raw material shortages, unforeseen plant breakdown or labour dispute, the affected party to perform its obligations shall be suspended or limited until such circumstance ceases.” (the “Habourfront FM Clause“)

The High Court noted the similarity between the NTU FM Clause and the force majeure clause considered by the Court of Appeal in Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd and another application [2011] 2 SLR 106.

Critically, the Court of Appeal in Precise held that,

“[the] words “disrupt” and “hinder” connote a lower degree of negativity compared to the word “prevent” and the word “disrupt” suggests a datum measure of difficulty that interfered with the successful completion of the transaction concerned and unlike a situation involving “prevention”, a “disruption” does not render further performance by one party, or by both, impossible.” (see paragraph [68])

Furthermore, where the subject matter of the underlying agreement is a commercial transaction, the Singapore court is required to consider issues of commercial practicability, which includes an examination of the broader trade industry in question:

“where a commercial transaction is involved, the process of ascertaining whether or not a particular set of circumstances constitutes a ‘disruption’ or ‘hindrance’ within the meaning of the force majeure clause concerned ought to be informed by considerations of commercial practicality (bearing in mind, of course, the particular context in which the contract had been entered into (including any commercial practice in the trade and/or resultant dislocation in the trade)”.” (see Precise at [68])

Finally, whether a party is required to take all reasonable steps before it is entitled to rely on the force majeure clause depends on the wording of the clause in question. However, in this instance, the phrase “beyond our control” meant that Alliance had to. In Precise, the Court of Appeal held at paragraph [69] that “the party relying on a force majeure clause ought to show that it has taken all reasonable steps to avoid the event or events concerned if there is the requirement that the event or events must be beyond the control of that particular party” (see paragraph [69]).

Alliance, unlike the concrete supplier in Precise, was unable to rely on the NTU FM Clause (see paragraph [70 to [73]]. This was because a mere increase in the price of the sand was insufficient to constitute a disruption. Furthermore, Alliance had not taken all reasonable steps to mitigate the disruption caused by the Sand Ban by e.g. refusing to take up sand offered by Sato and also in that Alliance had alternative suppliers willing and able to supply it with sand.

The High Court criticised the Habourfront FM Clause as “awkwardly drafted and difficult to understand” and iterated its criticism that every force majeure clause depended on “the precise wording of the clause in question and the specific difficulties that the particular supplier faced” (see paragraph [74] and [75]).  In contrast to the NTU FM Clause, the key differences between the two clauses were:

(i)                   the Harbourfront FM Clause used the phrase “the affected party” instead of “supply has been disrupted”; and

(ii)                 the Harbourfront FM Clause specifies that Alliance’s obligations are only suspended or limited until the event constituting force majeure ceases.

Importantly, the High Court held that even though the “word “affected” instead of “disrupted” might suggest an even lower threshold of hindrance” for the trigger of the Habourfront FM Clause, this could not have been the parties’ intent commercially. The High Court therefore interpreted “affected” as having the same hindrance level as “disrupted” (see paragraph [77]). Accordingly, since the NTU FM Clause was not triggered, neither would the Habourfront FM Clause.

Conclusion

Force majeure clauses are often adopted into commercial agreements as boilerplate clauses. In most circumstances, boilerplate clauses can be transposed into another contract with no issue or difficulty. However, the Singapore court’s decision in Alliance serves as an important reminder that force majeure clauses will be scrutinised on their wording, with consideration to the difficulties faced by the affected parties and in a commercial light.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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One Response to The Interpretation of Force Majeure Clauses and Frustration in Singapore

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