Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35

In the case of Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, the Singapore Court of Appeal discussed the doctrine of frustration in detail and clarified important aspects of this doctrine.

Facts of the case

The appellant, Alliance Concrete Singapore Pte Ltd ("ACS"), was a supplier of ready- mixed concrete ("RMC"). The respondent, Sato Kogyo (S) Pte Ltd ("SK"), was a contractor in the construction industry.

SK was the main contractor for certain construction projects. ACS agreed to supply RMC to SK for those projects pursuant to three contracts between ACS and SK (collectively, the "Contracts").

On 23 January 2007, the Indonesian government announced a ban on the export of sand to Singapore (the "Sand Ban"). However, the Indonesian government provided a grace period up to 5 February 2007 for sand exporters to honour existing sand export contracts.

Sand is a key ingredient in the production of RMC. To alleviate the sand shortage arising from the Sand Ban, the Singapore Building and Construction Authority (the "BCA") announced on 31 January 2007 that sand from its stockpile (the "BCA Stockpile") would be released from 1 February 2007. However, only main contractors with on-going projects (such as SK) could draw on the BCA Stockpile, but not RMC suppliers (like ACS).

SK initially drew sand from the BCA Stockpile and passed it on to ACS to produce RMC. However, by end-February 2007, there was a significant shortfall between the amount of sand required by ACS to meet SK's orders and the sand supplied by SK from the BCA Stockpile. The parties differed on the reasons for this shortfall.

SK alleged that ACS had failed to take delivery of the sand which it had drawn from the BCA Stockpile. On the other hand, ACS argued that SK had failed to deliver the sand in a reasonable manner.

Eventually, ACS commenced the present proceedings against SK for the price or value of the RMC that it had supplied and delivered to SK. SK disputed ACS's claim and counterclaimed for the losses incurred because of ACS's alleged failure to supply all the RMC under the Contracts.

ACS argued that the Contracts were frustrated by the Sand Ban because it was fundamental to the parties' agreements that Indonesian sand would be used to manufacture RMC. The Sand Ban radically altered the nature of ACS's obligations. SK argued that the Contracts were not frustrated because it was not fundamental to the Contracts that Indonesian sand be used. There was no radical change of obligations because sand could have been obtained from other countries, or SK could have provided ACS with sufficient sand from the BCA Stockpile.

The issues

The issues before the Court of Appeal were:

  • Whether the Contracts were discharged by frustration; and
  • If not, whether ACS was in repudiatory breach of the Contracts.

Doctrine of frustration - Unavailability of unspecified source

The court highlighted that the doctrine of frustration is not fault-based. It discharges both parties automatically by operation of law because a supervening event (involving no wrongdoing on either of the parties) has occurred after the formation of the contract, which renders a contractual obligation radically or fundamentally different from what has been agreed in the contract.

As the doctrine of frustration is an exception to the general principle of sanctity of contract, the courts apply it strictly. A mere increase in cost will not result in a frustrating event, although it might if that increase is astronomical.

One instance of when a contractual obligation will be rendered radically or fundamentally different from what has been agreed in the contract is a situation of supervening impossibility. In such a situation, circumstances have arisen such as to render the performance of a contract impossible (even though literal impossibility is usually not required). In the present case, the court had to consider whether the unavailability of a particular source from which the subject-matter of the contract is derived may operate to frustrate the contract.

The Court of Appeal held that whether unavailability of source operates as frustration depends on whether one, or both, of the contracting parties intended or contemplated that particular source which had become unavailable.

The Court of Appeal was of the view that where a particular source which both parties contemplated or could reasonably have contemplated had become unavailable, the contract could be frustrated. This position was consistent with the "radical change in obligation" test. 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 the parties would have to resort to another source which was not contemplated by both parties in order to perform the contract. Even though that particular source may not be specified as a term in the contract, and strict performance of the contract from other sources 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.

Effect of the Sand Ban

Applying the doctrine of frustration to the specific facts of the present case, the Court of Appeal held that the Contracts were discharged by frustration. It was clear that the Sand Ban was a supervening event that was not within the reasonable control of the parties. It was neither foreseen nor reasonably foreseeable at the time the Contracts were entered into.

Even if ACS did have some surplus sand to act as a buffer, that did not detract from the fact that sand supplies were dwindling up to 16 February 2007. Eventually, it became impossible to obtain sand on the open market. The court was satisfied that there did not seem to be an alternative source of sand from 16 February 2007 until end April 2007. It was only in May 2007 that alternative sources of sand became available, but even then, those alternative sources were not price competitive.

Hence, on the evidence, the Court of Appeal found that ACS did not have other sources of sand to produce RMC for SK.

Both parties contemplated the use of Indonesian sand

The Court of Appeal found that both parties contemplated that Indonesian sand would be used in the preparation of RMC by ACS. This was because Indonesia was the primary, if not the sole, source of concreting sand used in Singapore. Further, in relation to one of the Contracts, SK's client preferred Indonesian sand to be used for the RMC, and it was specified in SK's contract with that client that sand for the RMC had to come from Indonesia.

The evidence also showed that the precise source of the sand used to produce RMC had to be consistent because it would affect the design of the mix and in turn, whether the mix would be approved for supply.

Thus, the Court of Appeal was satisfied that both parties contemplated that Indonesian sand would be used in the preparation of RMC by ACS, and that the Sand Ban was a supervening event which cut off ACS's direct access to Indonesian sand. This resulted in ACS not being able to produce and supply RMC to SK.

Parties' conduct in relation to the BCA Stockpile

SK argued that the Contracts were not frustrated since SK could have provided ACS with sufficient sand from the BCA Stockpile.

According to SK, the BCA approved SK's applications for the release of sand from the BCA Stockpile from 5 February 2007 onwards. However, ACS unreasonably refused to take delivery of the sand from SK. SK's argument was essentially that ACS's conduct amounted to self-induced frustration.

On the other hand, ACS argued that it was SK which failed to deliver sand reasonably, and later failed to deliver any sand at all.

After considering the evidence, the Court of Appeal held that SK had not shown that ACS was at fault for not accepting SK's delivery of sand from the BCA Stockpile. It appeared that ACS's inability to accept SK's delivery of sand was due to the logistical problems that arose from the Sand Ban itself. ACS was hence not prevented from relying on the doctrine of frustration.

Court of Appeal finds contracts frustrated

For the above reasons, the Court of Appeal found that the Contracts were discharged by frustration.

The court next had to determine the operative date of frustration. This was important as ACS might still have been liable to SK for a breach of the Contracts if SK could show that such breach took place before the point in time when the Contracts were frustrated. Further, the operative date of frustration would have an impact on the quantum of relief claimed by ACS, given that the original contract prices would apply up to the date of frustration for any RMC supplied by ACS.

Considering that the Indonesian government furnished a grace period up to 5 February 2007, the court held that the appropriate point in time when the Contracts were discharged was on 6 February 2007 when the Sand Ban took its full effect. That resulted in the actual curtailment (and consequent dwindling availability) of Indonesian sand in Singapore as ACS's sand suppliers could not procure sand from Indonesia.

The court also found that SK had not sufficiently proven that ACS had breached the contracts prior to the date of frustration, 6 February 2007.