The Supreme Court of Queensland refused to find that changes in the law which affected a company’s ability to engage a contractor or changes to the contractor’s permit which reduced the scope of the services it could supply, amounted to frustration of the contact by supervening illegality. In particular, the Court pointed to the fact that the company had not taken all possible steps to make the engagement of the contractor legal and there were specific contractual provisions which can be used to address changes to the scope of the services. This case demonstrates that Courts will take a relatively hard line on claims that a contract has been frustrated by supervening illegality and may be reluctant to find frustration unless all possible steps, and all possible contractual solutions, have first been exhausted.
PT Thiess Contractors Indonesia (Thiess) provided services to a mine operated by PT Arutmin Indonesia (Arutmin) under a contract governed by the law of Queensland (Contract). Changes to Indonesian law obliged Arutmin to engage mining services companies considered ‘local’ or ‘national’ through a tender process. Other companies could only be subsequently engaged if there were no suitable local or national companies available.
Thiess was not a local or national mining services company. However, the Indonesian government issued written clarification stating that Arutmin could continue to engage Thiess under the Contract but that any subsequent engagements would require compliance with the new laws. The Indonesian government also amended Thiess’s mining permit to no longer permit it to carry out coal extraction or processing. Arutmin then sought to argue that the Contract had been frustrated by reason of supervening illegality.
In rejecting Arutmin’s frustration claim in relation to Thiess not being a local or national company, Jackson J in the Supreme Court of Queensland held that:
- an obligation on Arutmin under the Contract to obtain and maintain all authorisations required for the project to be lawfully carried on or for the services to be lawfully provided amounted to a promise by Arutmin to act so as to enable Thiess to obtain the right to lawfully provide the services;
- it was possible under the new laws for Thiess to continue to provide these services if, following the tender process, there were no suitable local or national service providers; and
- following from the principle that a contract is not frustrated if the state of facts (which causes the alleged frustration) is brought about by the default of the party relying on frustration, Arutmin was required to exhaust the possibility by actually finding an alternative local or national service provider by tender.
Jackson J then referred to a clause in the Contract which provided that if any change to an authorisation necessitates a change to the services to be carried out by Thiess, any additional cost or saving to Thiess was to valued and paid for in accordance with a procedure, in the Contract for varying the services. On the facts, his Honour found that the change to Thiess’s mining permit to prevent it from supplying coal extraction or processing services constituted a change to an authorisation that necessitated a change to the services and that the omission of coal extraction or processing services would create an additional cost or saving to Thiess. As the Contract expressly regulated how such a change would be dealt with, Arutmin could not rely on that change as having frustrated the Contract.
See the case.