Case Update: Unavailability of a particular source may operate to frustrate contracts

[Thanks to Daniel Jung, Associate, Olswang Asia LLP for a summary of the case and the first draft of this post]

We previously discussed  the case of Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, [2013] SGHC 127 (see our previous post: “The Interpretation of Force Majeure Clauses and Frustration in Singapore”) in which 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 (the “Supply Agreements”).

On the facts of that case, the High Court found that the plaintiff appellant, Alliance, had not been rendered incapable of performing its obligations under the Supply Agreements at the material time and furthermore, nothing had occurred that radically altered the obligations undertaken by Alliance under the Supply Agreements. The High Court, therefore, held that the Supply Agreements were not frustrated by the Sand Ban and, therefore, Alliance should not be discharged from its contractual obligation to supply concrete to Sato by way of the doctrine of frustration. Alliance appealed.

In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, [2014] SGCA 35, the Singapore Court of Appeal reversed the decision of the High Court.  The main issues in the appeal were whether Alliance was discharged from its contractual obligation to supply concrete to Sato by way of the doctrine of frustration and whether Alliance was in breach of the relevant contracts.

This post will only focus on the Court of Appeal’s holding on frustration.

The doctrine of frustration

The High Court below had 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 which approved 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.”

The Court of Appeal reaffirmed the “radical change in obligation” test as the Singapore position on frustration.  Furthermore, the Court of Appeal emphasized the importance of the precise factual matrix in order for the courts to justify and apply the doctrine of frustration. The Court of Appeal noted that the Singapore courts had been “careful to apply the doctrine [of frustration] strictly” and ensured that it would only be applied in exceptional circumstances (see paragraph [39] and [40]).

The Court of Appeal also explaining the underlying rationale of the doctrine of frustration as embodied in the “radical change in obligation” test (see paragraph [47]).

“…This “radical change in obligation” test (embodied in the words of Lord Radcliffe in Davis Contractors, quoted above at [34]) is premised on the rationale of fairness. The underlying idea is a simple one: No party should be held liable for not being able to perform a contractual obligation which is radically different owing to an event which is not its fault and which originated wholly from an external source which was never in the contemplation of the parties. …”

Discharge by frustration – Unavailability of a particular source

The Court of Appeal considered a scenario where frustration would operate to release parties form their contractual obligations i.e. “a situation of supervening impossibility…[where] circumstances have arisen such as to render the performance of a contract impossible (even though literal impossibility is usually not required”.

The unavailability of a particular source from which the subject-matter of the contract is derived may operate to frustrate the contract. This depends on whether one or both of the contracting parties intended or contemplated that particular source. The Court referred to three groups of cases that were distinguished by Prof Treitel in his book: (a) where the source is expressly referred to in the contract; (b) where only one party intended an unspecified source; and (c) where both parties contemplated an unspecified source (see paragraph [48]; citing Sir Guenter Treitel, Frustration and Force Majeure (Sweet & Maxwell, 3rd Ed, 2014) at paras 4-051–4-059).

The Court of Appeal expressed its view that the present case fell under Scenario (c), and the unavailability of the particular source from which the subject-matter of the contract was derived operated to frustrate the contract where both parties contemplated or could reasonably have contemplated that unspecified source (see paragraph [55]).

The Court of Appeal held that this position was consistent with the “radical change in obligation” test and explained it as follows,

“…Where both parties contemplate that a source was to be used, and the source fails, that would generally result in a radical change in the obligation of the obligor because it would have to have recourse to another source which was not contemplated by both parties in order to perform the strict obligation in the contract. Even though that source is not specified as a term in the contract, and strict performance of the contract is technically still possible, the contract can no longer justly be said to be the same as that which was originally entered into by the parties.”

Decision of the Court of Appeal on frustration

The Court of Appeal held that the Supply Agreements were frustrated by the Sand Ban.

(1)   Effect of the Sand Ban

The Court of Appeal found that the Sand Ban was a supervening event that was not within the reasonable control of the parties. It was also neither foreseen nor reasonably foreseeable at the time the Supply Agreements were entered into (see paragraph [62]). Subsequently, sand supplies were dwindling and it eventually became impossible for Alliance to obtain sand on the open market. Moreover, there was a shortfall of sand that Sato was itself required to deliver to Alliance (see paragraph [65]).

Sato sought to argue that Alliance did not state in its quotations that it would not be able to supply concrete if insufficient sand was supplied by Sato. Instead, Alliance stated that the purchaser would reimburse Alliance the “cost difference”. Sato argued that this showed that obtaining sand was merely a matter of the right price being paid. However, the Court of Appeal noted that Alliance had expressly stated in those quotations that the quotations were based on Sato’s undertaking to supply sand to Alliance. Therefore, although Alliance reserved the right to explore the option of procuring sand from other sources if Sato failed to supply sufficient sand, it could not be inferred that Alliance was of the view that it could obtain sand from other sources and that price was the only concern (See paragraph [66] and [67]).

Sato further argued that sand was available to Alliance because, by 20 April 2007, Alliance no longer needed Sato to deliver sand to Alliance in order for Alliance to supply Sato with concrete. Sato pointed out that Alliance’s quotation dated 20 April 2007 no longer contained the “Special conditions”; specifically, it no longer contained the condition that Sato was to supply sand to Alliance. The Court rejected this argument and found that Alliance did not have other sources of sand which would enable them to supply Sato with concrete. The Court of Appeal noted the following contrary documentary evidence and facts (see paragraph [68] and [69]):

  • Alliance wrote to Sato on 8 May 2007 to inform Sato that Alliance had not received sand from Sato and was drawing on other contractors’ sand to fulfill concrete orders.
  • Alliance’s quotation dated 20 April 2007 did state that concrete delivered was “subjected (sic) to availability of raw materials”, which was consistent with the arrangement between the parties that Sato was to supply Alliance with sand in order for Alliance (in turn) to supply concrete to Sato.

Therefore, the Court found that Alliance did not have other sources of sand to supply concrete to Sato.

(2)   Both parties had contemplated the use of Indonesian sand

The Court of Appeal held that the facts of the case suggested that both parties contemplated that Indonesian sand was to be used in the preparation of the concrete by Alliance for the following reasons.

First, Alliance’s operations director gave evidence that the whole market knew that Indonesia was the only source of sand. Sato did not seem to be challenging this, but merely argued that sand from Indonesia was not “fundamental to the fulfilment of the [Supply Agreements]…because what mattered was whether the sand met the requisite technical specifications”. The Court of Appeal referred to the previous cases decided by the Singapore courts which dealt with the Sand Ban, all of which found that at the relevant time, Indonesia was the primary, if not the sole, source of concreting sand used in Singapore (See paragraph [73]).

Secondly, Sato’s own project manager acknowledged that Sato’s client for one of the affected projects preferred that Indonesian sand was to be used for concrete. In his cross-examination, the project manager believed that the main contract between Sato and LTA specified that Indonesian sand should be used for concrete (see paragraphs [74] to [76]).

The third reason is that the source of the sand used to produce the concrete was important (see paragraph [77]). The evidence given by Sato’s project manager was that various tests would have to be performed in order to satisfy the authorities as to a change in the source of sand for the concrete and this would result in significant delay (see paragraph [78] to [80]).

(3) There was no self-induced frustration by Alliance to defeat operation of the doctrine

Sato’s argued was that the Supply Agreements were not frustrated since Sato could have provided Alliance with sufficient sand from the Building and Construction Authority’s stockpile of sand. In this respect, Sato argued that Alliance had unreasonably refused to take delivery of the sand from Sato. It was argued that Alliance’s conduct amounted to self-induced frustration. Since the doctrine of frustration only operated where neither party was in default, if Alliance failed to act reasonably in relation to the release of sand from the Stockpile, that would amount to self-induced frustration such that Alliance would not be entitled to rely on the doctrine of frustration (See generally the  House of Lords decision of Bank Line Ltd v Arthur Capel & Co [1919] AC 435 at 452). The burden of proving self-induced frustration fell on Sato since it was the party who asserted that this was the case, see Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154

The Court of Appeal held that it was not strictly necessary for the court to determine this issue of self-induced frustration because it arose only after the operative date of frustration. Nonetheless, the Court of Appeal decided to examine this issue for completeness. The Court of Appeal opined that Sato had not discharged the burden of showing that Alliance acted unreasonably since Alliance’s inability to accept Sato’s delivery of sand was due to the logistical problems that arose from the Sand Ban itself. The evidence given by Sato was insufficient to show that Alliance was unwilling to collect sand from the Stockpile, and moreover, the facts suggested that Alliance did act reasonably. Therefore, Alliance was not prevented from relying on the doctrine of frustration (see paragraphs [85] to [95]).

Conclusion and Takeaways

Some useful takeaways for commercial parties include:

  1. The doctrine of frustration is heavily fact dependent and will be subject to a high level of scrutiny by the Singapore courts. Notably, while the test of “radical change in obligation” was applied in both the High Court and the Court of Appeal, the judges there came to different views.
  2. The threshold for establishing frustration does not necessarily require absolute or literal impossibility (see paragraph [100]).
  3. The Court of Appeal further highlighted that while a mere increase in cost will not result in a frustrating event, it might if the increase is astronomical. This marks a shift from the Court of Appeal’s earlier decision in Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd and another application [2011] 2 SLR 106 at [53], in which the court left open this very legal issue. This also appears to be a departure from the English position (see the discussion in Holcim at [53]).

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
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