Force Majeure Clause Triggered By Indonesian Sand Ban

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1 Force Majeure Clause Triggered By Indonesian Sand Ban Introduction Following the Indonesian sand ban of 2007, parties to a number of construction and supply agreements found the status of their concrete supply obligations up in the air. Unsurprisingly, this led to a plethora of disputes, many centering on the effect of the sand ban on contracts and the issue of force majeure. Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd [2011] SGCA 1 was a closely watched decision of the Singapore Court of Appeal dealing with these very issues, and is widely regarded by the construction industry as a test case. The Appellant supplier entered into a contract for the supply of ready-mixed concrete to the Respondent contractor. As a result of the subsequent sand ban, raw materials for concrete, such as sand and aggregates, ran into short supply. Although the Respondent had access to the Building and Construction Authority s sand stockpiles, the Appellant did not. Subsequently, the parties attempts to achieve a co-operative arrangement to obtain sand from the Building and Construction Authority fell through. The Court of Appeal thus had to decide whether the Appellant was entitled to rely on a force majeure clause in its agreement with the Respondent. Much of the decision rested on the interpretation of the force majeure clause, which released the Appellant from its obligations in the event of supply disruption arising from circumstances out of its control. The Court held that although it was possible to supply the concrete, the Appellant was not obliged to do so as it was commercially impractical. Further, the Appellant had taken reasonable steps to obtain the sand, and these efforts had not been supported by the Respondent. This landmark decision clarifies the law with regard to the interpretation of force majeure clauses, providing a reasoned guide to the applicable principles. It also highlights the importance of clear and precise drafting, particularly in key provisions like force majeure clauses, as subtle changes in wording can lead to great differences in the resultant burden on the parties. The Appellant was successfully represented by Francis Xavier S.C., Mohammed Reza, Low Yi Yang and Jared Kok from the Commercial Litigation Practice of Rajah & Tann LLP. Brief Facts (1) The Appellant concrete supplier entered into an agreement with the Respondent contractor for the provision of ready-mixed concrete ( RMC ), for which sand and aggregates are constituent materials. 1 Rajah & Tann LLP

2 (2) On 23 January 2007, the Indonesian government announced that it would impose a sand ban on 6 February In response, the Building and Construction Authority ( BCA ) made the following announcements: a. The BCA would release sand from its stockpiles at $25 per tonne. However, it would only supply the sand to main contractors, such as the Respondent, for onward delivery to suppliers. RMC suppliers, such as the Appellant, had no access to the stockpiles. b. The price of sand from the stockpile was later increased to $60 per tonne, and it was further announced that there was a fixed limit on the amount of sand to be released. There was a weekly quota, and sand would be released on a first come first serve basis. (3) The Appellant and Respondent attempted unsuccessfully to reach an arrangement regarding the supply of sand and the price of the RMC. a. On 1 February, the Appellant informed the Respondent that it would have to raise its prices due to the effects of the sand ban. The Respondent did not agree, and insisted that the Appellant was still obliged to supply RMC at the original prices. b. By a letter dated 9 February, the Appellant informed the Respondent that it had no access to BCA s sand stockpiles, reiterating that the mechanism implemented did not permit them to order any sand directly. The Respondent did not reply to this letter. c. On 1 March, the Appellant wrote to the Respondent, offering to credit back to the Respondent the cost incurred for procuring sand and aggregates from the BCA, and quoting new rates for supply of RMC. d. On 20 March, the Respondent replied stating that the Appellant was bound to the contracted price and that it would accept the new prices under protest. e. The Appellant sent another quotation to the Respondent on 2 April. The Respondent issued a letter dated 26 April stating that the Appellant should supply sand at the contracted prices and that, unless the Appellant agreed to do so, it would hold the Appellant liable for all damages suffered. Accordingly, the parties failed to reach an agreement over the price of concreting sand and RMC. (4) The Respondent claimed against the Appellant for breach of contract, and the Appellant in Issue turn raised, inter alia, the defence of a force majeure clause in its contract with the Respondent. The central issue in this appeal was whether the Appellant was in fact entitled to raise the force majeure clause in the circumstances. The clause states that: 2 Rajah & Tann LLP

3 The Supplier shall be under no obligation to supply the concrete if the said supply has been disrupted by virtue of shortage of material or any other factors arising through circumstances beyond the control of the Supplier. The Court thus had to determine: Whether the onset of the sand ban had indeed disrupted the supply of concrete; and Whether the events were beyond the control of the Appellant, and whether the Appellant was required to take all reasonable steps to avoid the operation of the force majeure clause. Holding Of The Court Of Appeal It was held that the sand ban had in fact disrupted the supply of concrete, rendering it commercially impractical. Further, the disruption was beyond the Appellant s control as it had taken reasonable steps to avoid the operation of the force majeure clause. Therefore, the Appellant was allowed to invoke the force majeure clause. Disruption of supply To ascertain the meaning of the term disrupted, the Court considered prior cases interpreting similar words used in the context of force majeure clauses, such as hindrance and prevention. Terms like disruption and hindrance connote a difficulty that interferes with successful completion, but unlike prevention, they do not require impossibility of performance. For disruption and hindrance, it is sufficient that in the context of a force majeure clause events have rendered continued performance commercially impractical in light of the context of the contract, such as any relevant commercial practice in the trade. Difficulty in the form of an increase of costs is in itself insufficient to constitute disruption or hindrance. After assessing the facts, the Court found that the circumstances did in fact present sufficient difficulty to constitute a disruption within the meaning of the force majeure clause. The BCA system of distributing sand gave the Appellant no access to the stockpiles. 3 Rajah & Tann LLP

4 When the sand ban came into effect, the Appellant s own sand suppliers stopped supplying sand to the Appellant, relying on the force majeure clauses in their own respective contracts. Even if the Respondent were to help procure sand from the BCA, there was no guarantee of supply as there was a fixed limit on the amount of sand that would be released on a first come first serve basis. (iv) As the BCA only granted access of sand supplies to main contractors (such as the Respondent), these contractors were placed in a monopolistic position. This left the Appellant in an unsatisfactory position in which the Respondent could insist that the Appellant supply RMC at pre-sand prices while it charged exorbitant prices for the sand. Such a commercially impractical situation constituted a disruption within the meaning of the force majeure clause. Beyond the Appellant s control To determine this issue, the Court first had to consider whether there was a general principle inherent in all force majeure clauses to the effect that the affected party must have taken all reasonable steps to avoid the force majeure effects of the events in question. Where the force majeure clause is drafted such that it is triggered by events which must be beyond the control of the parties, reasonable steps must be taken to avoid such events from arising. However, where there is no such specification in the clause, there is no blanket requirement of reasonable steps; it would depend on the precise language of the clause itself. The duty to take reasonable steps is not absolute, and its fulfillment is a question of fact. The force majeure clause here stipulated the Appellant would only be entitled to rely on the clause if the shortage of sand arose through circumstances beyond the control of the [Appellant]. Accordingly, the Appellant had to show that it had taken reasonable steps to avoid the shortage. On the facts, the Court found that the Appellant had taken reasonable steps and was instead hindered by the Respondent s lack of cooperation. One question was whether the Respondent was willing to assist the Appellant to procure sand from the BCA, since the Appellant could not do so. The Appellant had taken the effort to inform the Respondent that it had no access to the BCA s stockpile on 9 February, but the Respondent did not reply, indicating a lack of willingness to assist in procuring sand. 4 Rajah & Tann LLP

5 The Appellant had offered to credit to the Respondent the cost of the sand at a higher price than the BCA was offering. This demonstrated the lengths to which the Appellant was willing to go to continue manufacturing RMC, but went ignored by the Respondent. (iv) Before the BCA announcement, the Appellant had met other concrete suppliers and the BCA to discuss alternative supplies of sand. After the announcement, it continued to source for supplies of sand and aggregates. The Court thus found that the events surrounding the sand ban had in fact disrupted the supply of sand, and that the events were beyond the control of the Appellant. Therefore, they were entitled to invoke the force majeure clause, and were released from their obligation to supply RMC to the Respondent. Concluding Words Although force majeure clauses are to be interpreted according to their specific wording and the context of their contractual background, this judgment provides a useful guide to the general principles that may be applied to similar or analogous phrases in other force majeure clauses. It highlights the fact that force majeure clauses are not easily invoked; the underlying events usually require a degree of difficulty above mere financial burden, and the relying party may sometimes be required to show that it has taken reasonable steps to avoid the events. The case also demonstrates the importance of drafting contracts with dexterity and clarity. Force majeure clauses often take the form of standard boilerplate clauses, robbing them of effectiveness in specific situations. The Court pointed that the force majeure clause in this case had been phrased too generally and that the dispute could have been efficaciously resolved if the terms of the force majeure clause had been more clearly defined. 5 Rajah & Tann LLP

6 Contacts Francis Xavier, SC Head, Disputes Practice D (65) F (65) francis.xavier@rajahtann.com Mohammed Reza Partner D (65) F (65) mohammed.reza@rajahtann.com Jared Kok Associate D (65) F (65) jared.kok@rajahtann.com Alina Chia Associate D (65) F (65) alina.chia@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai and Vientiane, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 6 Rajah & Tann LLP