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Focus: Commercial impracticability as a force majeure event in Singapore

2 February 2011

In brief: A recent decision of the Singapore Court of Appeal held that a force majeure clause contained in a contract between a concrete manufacturer and a building contractor was triggered when the supply of sand used in manufacturing concrete was affected by the 2007 Indonesian ban on sand exports. Partner Matthew Skinner and Lawyer Robert Merriam report on a case that looks at the issue of commercial impracticability as a force majeure defence.

How does it affect you?

  • As a rule, judicial decisions concerning force majeure events tend to turn on their own facts. This is largely because the decision will depend upon the wording of the particular force majeure clause.
  • However, the decision in Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd & Anor does set out some general principles to which a court in Singapore may refer when considering whether a sudden change in the supply of raw materials constitutes a force majeure event.
  • In the Precise Development case, it was held that an increase in supply costs did not constitute a 'disruption' for the purpose of the force majeure clause, but the development of a commercially impracticable situation did.
  • Where the relevant clause requires that in order to constitute a force majeure event, that event must be beyond the control of one or more of the parties, then the party claiming force majeure must take reasonable steps to avoid the force majeure effects of the event in question.

Background

Holcim (Singapore ) Pte Ltd (the appellant) and Precise Development Pte Ltd (the respondent) entered into a contract, before the Indonesian sand ban of 2007 (the Sand ban) came into effect, by which the appellant would supply ready-mixed concrete (RMC) to the respondent. The contract contained a force majeure clause which provided:

...The Supplier shall be under no obligation to supply concrete if the said supply has been disrupted by virtue of ... shortage of material ... arising through circumstances beyond the control of the Supplier.

 

The Sand ban created a shortage of sand and aggregates required for the manufacture of concrete in Singapore. The Singapore Building & Construction Authority (the BCA) responded by selling a limited amount of sand from its stockpiles, but only to main contractors such as the respondent. The appellant had no access to these stockpiles. The appellant's existing sand suppliers ceased to supply sand to the appellant, purporting to justify their respective cessations of supply on the basis of force majeure clauses in their supply contracts. No evidence was adduced that the appellant had alternative supplies of sand once the Sand ban was in effect.

The appellant informed the respondent that it could not supply RMC at pre-Sand ban prices. The respondent argued that the appellant was in breach of its contract. The appellant argued that the force majeure clause provided a defence to the respondent's claim.

The question

The issue for the court to consider was whether the force majeure clause provided the appellant with a defence. This raised two sub-issues:

  • whether any of the events contained in the force majeure clause had 'disrupted' the supply of concrete; and
  • if so, was the event concerned 'beyond the control' of the appellant.

The decision

The court emphasised that in interpreting a force majeure clause, both the particular facts and the precise wording of the clause will be paramount. The following 'clause-specific' comments were also made by the court in its reasons.

Meaning of 'disrupted'

The court said that unlike 'prevention', a 'disruption' need not render continued performance impossible. While a mere increase in price is unlikely to constitute a 'disruption', the court left open the question of whether an 'astronomical' increase in price would suffice. Beyond this broad principle, the court suggested that where a commercial contract is involved, consideration of whether a 'disruption' exists is to be informed by consideration of commercial practicability.1

Was there a disruption?

The court noted the difficulties (set out above) which the appellant faced in accessing sand. These difficulties effectively left the appellant with two choices, either to:

  • cease to perform its obligations under the contract; or
  • buy sand from the respondent at whatever price the respondent set.2

The court found that compliance with the contract would give rise to a commercially impracticable situation, which constituted a 'disruption' within the meaning of the force majeure clause.3 The court emphasised that this conclusion was not based upon a change in the price of sand. Whether the respondent did in fact seek exorbitant prices was irrelevant. What was relevant was the commercially impracticable situation of the appellant being unable to negotiate a price with the respondent.4

Reasonable steps

The court proposed a general principle that, at least where the force majeure event must be 'beyond the control' of one or more of the parties, then the party seeking to rely on force majeure must take all reasonable steps to avoid recourse to the force majeure clause. If reasonable steps are not taken, then it cannot be said that the event is truly 'beyond the control' of the party concerned.5 The court observed that the majority of force majeure clauses might incorporate (either expressly or implicitly) the requirement that the triggering event be beyond the control of the parties.6

Once it is established that the relevant clause requires the event to be 'beyond the control' of one or more of the parties, then it must be considered whether the party relying on the clause took reasonable steps to avoid recourse to the force majeure clause.7

The court found that in this case the appellant had taken all reasonable steps.8 In reaching this conclusion, the court noted the appellant's offer to buy sand from the respondent at more than the price for which the respondent could obtain the sand from the BCA. Further, the price at which the appellant proposed to sell RMC to the respondent was below its cost price.9 These were financially-undesirable steps which the appellant was prepared to take in order to satisfy its contractual obligations. The court said that the respondent's unwillingness to assist the appellant in accessing sand was also relevant to its consideration of whether the appellant had taken reasonable steps.10

Implications

From this decision, it is apparent that where a commercially impracticable situation arises in the context of a contract, the subject of the contract may become 'disrupted' (even if it is not 'impossible') for the purposes of a force majeure clause.

In terms of its broader implications, the Precise Development case is an authority for the proposition that, where the parties have agreed that an event must be beyond the control of one or more of the parties in order to qualify as a force majeure event, then the party seeking to rely on force majeure must take reasonable steps to avoid recourse to the force majeure clause.11

It is also significant that, in considering whether the party claiming force majeure has taken reasonable steps, the court in Precise Development looked to the other party's willingness to assist in avoiding the effect of the force majeure.12

As the court suggests in its conclusion,13 contracting parties should take care to define precisely the terms contained in a force majeure clause.

Footnotes
  1. Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd & Anor [2011] SGCA 1, at [56].
  2. [62].
  3. [62].
  4. [62].
  5. [66].
  6. [70].
  7. [72].
  8. [72].
  9. [81].
  10. [79].
  11. [66].
  12. [79].
  13. [101].

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