Doctrine of Frustration
Many firms have found it challenging to fulfill their contractual responsibilities in the wake of the COVID-19 outbreak, especially in the absence of force majeure clauses. In similar circumstances, it is not uncommon for parties to make an effort to rely on the common law notion of frustration in order to escape fulfilling their contractual commitments.
The common law doctrine of frustration, in particular, operates to release parties from further contractual obligations when, after the conclusion of the contract, an unforeseen event occurs without fault on the part of either party, rendering the contractual obligations of parties impossible to perform or significantly different from what had been contractually agreed.
The threshold for demonstrating frustration is high. Therefore, it was unclear if the doctrine of frustration could be applied to the COVID-19 pandemic-related occurrences (such as circuit breaker measures). These possibilities are now acknowledged by Singaporean courts.
In Dathena, the High Court determined that a leasing agreement was frustrated as a result of the COVID-19 pandemic-related occurrences. More recently, in Lachman, the High Court rejected an application for summary judgment against a defendant for the ostensible breach of a lease agreement on the grounds that the defendant had a legitimate defense of exasperation brought on by the COVID-19 outbreak.
- A lease agreement was signed between cybersecurity firm Dathena Science Pte Ltd ("Dathena") and JustCo (Singapore) Pte Ltd ("JustCo").
- JustCo was unable to provide the lease premises for occupation on the commencement date because of the circuit breaker precautions. The delivery of the premises was significantly delayed by four months, and during that time JustCo was unable to offer substitute, equivalent premises.
- Dathena demanded a refund of the advance payment provided, among other things, claiming that the leasing agreement had been violated.
- The High Court determined that the deployment of the circuit breaker procedures frustrated the leasing agreement. The alternative premises supplied (which were not equivalent in terms of size, location, and exclusivity) and the drastically postponed commencement dates specifically made JustCo's contractual obligation materially and fundamentally different from what was agreed to.
- Kang Tien Kuan (doing business as Lookers Music Café, a sole proprietorship) and Lachman's Emporium Pte Ltd (collectively, "Lachman" and "Kang") have a leasing agreement for a specific period of time. Lachman filed a summary judgment request against Kang on the grounds that Kang had no defense and had, at the very least, breached the terms of the tenancy agreement by failing to pay the rent.
- Kang argued in his defense that the COVID-19 outbreak rendered the tenancy agreement invalid because it was impossible to continue using the property for its intended function.
- The High Court determined that there was a good chance that the defense was legitimate because the tenancy agreement's duties might be drastically or fundamentally altered from what was originally agreed (i.e. premises could no longer be used as a music lounge, as intended by both parties).
Contract Law Implications
These rulings show that the COVID-19 epidemic and its effects can be taken into account when applying the law of frustration. The specifics of each situation will determine whether the contract is frustrated. To determine if the COVID-19 epidemic and its effects rendered the contractual responsibilities of parties impossible to perform, or radically or fundamentally different from what had been contractually agreed, the context and wording of each contract must be carefully reviewed.
When it comes to lease agreements, it is simpler to show that a lock down and the tenant's ensuing inability to use the space as intended make it impossible for the parties to fulfill their contractual responsibilities. For construction contracts, it is more difficult to do so. Even though the COVID-19 epidemic has increased building project delays and expenses, this is not enough to satisfy frustration levels on its own. In most cases, a simple inconvenience or expense increase in carrying out a contract won't qualify as a frustrating event. It makes the contract more difficult to fulfill, but still manageable.
This raises the question of when, exactly, the COVID-19 pandemic and its effects might prove to be frustrating for building contracts. The 2007 "Sand Ban" imposed by the Indonesian government on the export of sand to Singapore can serve as precedent. Sand costs significantly increased as a result of the building sector disruption.
In the case Alliance Concrete Singapore Pte Ltd v. Sato Kogyo (S) Pte Ltd  SGCA 35 (referred to as "Alliance Concrete"), the supplier (i.e. Alliance Concrete) claimed that its contracts with a building contractor (i.e. Sato Kogyo) to supply ready-mixed concrete ("RMC") had been discharged by frustration as a result of the Sand Band and the rise in sand prices. The use of Indonesian sand to prepare RMC was contemplated by the parties; the Sand Ban was an unanticipated supervening event; and (iii) as a result of the Sand Ban, it was impossible to obtain sand on the open market; even after alternative sources of sand became available, they were not cost-competitive. As a result, the contracts were deemed to be frustrated.
The Court of Appeal further stated:
- whereas a cost increase in and of itself wouldn't cause a frustrating event, one that was astronomically high may;
- if both parties contemplated or might have reasonably contemplated the source from which the subject matter of the contract was drawn (for example, that Indonesian sand was to be used to create RMC), then the contract may be frustrated without a requirement for literal impossibility; and
- when using the concepts of frustration, it is crucial to first take into account the specific details of the issue.
It often depends on whether the parties' specified or contemplated performance of the contract was rendered radically or fundamentally different from what had been contractually agreed, rather than on the literal impossibility of performance, to determine whether construction contracts are discharged by frustration due to the COVID-19 pandemic and its consequences.
Reviewing the sources of goods and labor that are listed or considered in the contract is typically part of this activity. If, as a result of the COVID-19 epidemic, the products or labor stated or anticipated from a specific supplier under the contract are no longer available or have been severely restricted indefinitely, the affected party may have a valid argument for dissatisfaction. Another factor to take into account is the length of the delay. For instance, if the works agreed upon in the contract were to be finished in a week, a delay of one year (as opposed to ten days) due to COVID-19 occurrences could drastically alter or completely change the obligations.
In the end, each case depends on its own facts when it comes to frustration, as the Court in Alliance Concrete emphasized and the different Singapore cases on the Sand Ban show. The COVID-19 pandemic and its effects are thus recognized as a legitimate reason for invoking the doctrine of frustration in the decisions in Dathena and Lachman, but the extent to which contractors and subcontractors will be able to successfully rely on frustration will depend on the context and terms of each contract.
It will be more difficult to argue that any future pandemics or epidemics brought on by variations of the same virus are unforeseeable supervening catastrophes in light of the occurrence of the COVID-19 pandemic and the regularity of restrictions applied to curb the spread of the virus and its variants. Insofar as it is practical, parties to new contracts are encouraged to address and allocate these risks in their agreements. For instance:
- By crafting concise force majeure clauses and broadening the criteria of force majeure to incorporate pandemics or epidemics;
- By specifically allowing an extension of time and allocating costs and expenses for disruptions caused by pandemics or epidemics; and/or
- By identifying materials vulnerable to volatility in the current environment, using indices / indicators of volatile pricing to establish any cost escalation, and including appropriate price escalation clauses.