The doctrine of frustration discharges parties from further performance of a contract if a supervening event occurs after the contract has been entered. The event must not be contemplated by the contract, or be the fault of either party, and it must fundamentally change the nature of the contract obligation so further performance is impossible.
The doctrine of frustration is an exception to the norm of sanctity of contract and only applied in exceptional circumstances, where there has been a radical change in obligation. In the context of construction contracts, the successful application of the doctrine is unusual. This is because the risk of supervening events is normally expressly allocated, so that it cannot be described as unforeseen and performance (although more onerous and costly) has not become impossible.
The doctrine was however recently applied in a Singaporean construction case. In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd1 the appellant, Alliance, was a ready-mix concrete (RMC) supplier. The respondent, Sato, was a contractor. Alliance entered into three contracts with Sato for the supply of RMC for three Singaporean projects.
Shortly after entering the supply contracts, the Indonesian government implemented a ban on the export of sand to Singapore (the Sand Ban). To reduce the Sand Ban’s impact, the Singaporean government agreed to provide sand from its own stockpile to contractors with ongoing Singaporean projects.
Sato initially drew sand from the stockpile, but a shortfall in the sand provided to Alliance soon developed. The parties disagreed over the cause. The underlying issue, however, was the increased cost of RMC production which Alliance was unwilling to bear.
The dispute came before the Singaporean courts. Sato said that the original RMC contract prices applied. Alliance, on the other hand, said that the contract had been frustrated and insisted on new prices.
The key issue for the court was whether the Sand Ban constituted a supervening event, such that the contracts had been frustrated. This depended on whether the parties had both contemplated that Indonesian sand would be used for the RMC.
The judge at first instance was not persuaded that the Sand Ban was a supervening event, and therefore found that the contracts had not been frustrated. This was because it was not a term of the contracts that sand had to come from Indonesia, Alliance could have sourced sand from other countries. He found that Alliance could have continued to supply RMC, but was unwilling to do so unless Sato agreed to the higher price for the RMC.
On appeal, the Court of Appeal held that the contracts had been frustrated. On the facts the court was persuaded that both parties contemplated Indonesian sand would be used, even though it wasn’t stated in the contracts. The Sand Ban was a supervening event not within the parties’ reasonable control.
It reached this decision even though technical performance of the contracts was possible. It reasoned that the “contracts can no longer justly be said to be the same as that which was originally entered into by the parties”. The idea of justice and fairness as it relates to frustration is not a general concept. It only applies if an external event has rendered further performance so “radically or fundamentally different”from that originally contemplated.
The mere increase in cost will not constitute a frustrating event – even though a party may consider it unjust or unfair. An astronomical increase in cost might be sufficient, but such considerations are usually academic for construction contracts that usually allocate the risk of price fluctuations.