Frustration of contracts – what recent Singapore court decisions mean for the construction industry

A frequent issue of discussion since the COVID-19 pandemic began, is whether parties’ contracts have been discharged by frustration. The Singapore Courts, in their recent decisions of Dathena Science Pte Ltd v JustCo (Singapore) Pte [2021] SGHC 219 (“Dathena”) and Lachman’s Emporium Pte Ltd v Kang Tien Kuan (trading as Lookers Music Café, a sole proprietorship) [2022] SGHC 19 (“Lachman”), recognise COVID-19 pandemic as a reason for a contract to be discharged on account of it being frustrated. This comes as a welcomed development for some businesses hard pressed to fulfil their contractual obligations because of the COVID-19 pandemic. It remains to be seen however whether these decisions will affect contracts in the construction industry to the same extent.

Doctrine of frustration and recent cases

The COVID-19 pandemic has made it difficult for many businesses to meet their contractual obligations, particularly in the absence of force majeure clauses. It is not uncommon for parties in those instances to attempt to rely on the common law doctrine of frustration to avoid meeting their contractual obligations.

Specifically, the common law doctrine of frustration operates to discharge parties from further contractual obligations where, following the conclusion of the contract, an unforeseen event occurs through no fault of either party, rendering the contractual obligations of parties impossible to perform, or radically or fundamentally different from what had been contractually agreed.

The bar for proving frustration is a high. It was uncertain therefore whether events related to the COVID-19 pandemic (e.g. circuit breaker measures) were sufficient to invoke the doctrine of frustration. The Singapore courts now recognise this possibility.

In Dathena, the High Court held that a lease agreement was discharged by frustration, as a result of events related to the COVID-19 pandemic. More recently, in Lachman, the High Court dismissed a summary judgement application against a defendant for the prima facie breach of a lease agreement, on the basis that the defendant had a bona fide defence of frustration due to the COVID-19 pandemic.

In Dathena:

1. Dathena Science Pte Ltd (“Dathena”), a cybersecurity company, entered into a lease agreement with JustCo (Singapore) Pte Ltd (“JustCo”).
2. Due to the circuit breaker measures, JustCo was unable to deliver the lease premises for occupation on the commencement date. There was a significant four-month delay in delivering the premises and JustCo was unable to provide alternative comparable premises during that period.
3. Dathena argued inter alia that the lease agreement had been frustrated and sought the refund of the advance payment made. 
4. The High Court held that the lease agreement was frustrated by the implementation of the circuit breaker measures. Specifically, the significantly delayed commencement dates and the alternative premises offered (which were not comparable in terms of size, location and exclusivity) rendered JustCo’s contractual obligation radically and fundamentally different from what was agreed to.

In Lachman:

1. Lachman’s Emporium Pte Ltd (“Lachman”), the landlord, entered into a tenancy agreement with Kang Tien Kuan (trading as Lookers Music Café, a sole proprietorship) (“Kang”) to lease premises for a fixed term. Lachman claimed against Kang for its prima facie breach of the tenancy agreement by failing to pay rent, and applied for summary judgment on the basis that Kang had no defence.
2. Kang’s defence was that the tenancy agreement was frustrated by the COVID-19 pandemic, as it was impossible for it to continue with the use of the premises for the intended purpose.
3. The High Court held that a reasonable probability of a bona fide defence was raised, as the contractual obligations under the tenancy agreement may be rendered radically or fundamentally different from what was agreed (i.e. premises could no longer be used as a music lounge, as intended by both parties).

Implications on construction contracts

These decisions demonstrate the COVID-19 pandemic and its consequences can be a legitimate consideration for invoking doctrine of frustration. Whether the contract is frustrated is dependent on the facts of each individual case. The context and terms of each contract have to be carefully examined to ascertain whether the COVID-19 pandemic and its consequences, rendered the contractual obligations of parties impossible to perform, or radically or fundamentally different from what had been contractually agreed.

In the case of lease agreements, it is easier to demonstrate that a lock down and the tenant’s consequent inability to use the premises as planned, renders the contractual obligations of parties impossible to perform. It is harder to do so for construction contracts. Inasmuch as the COVID-19 pandemic has led to increase in delays and costs of construction projects, this by itself is insufficient to meet the requirements of frustration. Generally, mere hardship or increased cost in contractual performance will not constitute a frustrating event. It renders the contract more onerous, but not impossible, to perform.

This begs the question: under what exceptional circumstances, might the COVID-19 pandemic and its consequences amount to a frustrating event for construction contracts? Guidance may be drawn from earlier cases, relating to the Indonesian authorities’ ban in 2007 on the export of sand (“Sand Ban”) to Singapore. This disrupted the construction industry and resulted in a substantial increase in sand prices.

In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35 (“Alliance Concrete”), the supplier (i.e. Alliance Concrete) argued that its contracts with a building contractor (i.e. Sato Kogyo) to supply ready-mixed concrete (“RMC”) had been discharged by frustration due to the Sand Band and the increase in costs of sand. The contracts were held to be frustrated, as (i) parties had contemplated the use of Indonesian sand to prepare RMC; (ii) the Sand Ban was an unforeseen supervening event; (iii) due to the Sand Ban, it became impossible to obtain sand on the open market – even after alternative sources of sand became available, they were not price competitive.

The Court of Appeal also opined that:

1. while an increase in cost per se would not result in a frustrating event, an astronomical increase might;
2. literal impossibility is not required – the unavailability of a particular source from which the subject matter of the contract was derived could frustrate the contract if both parties contemplated or could have reasonably contemplated that source (e.g. that Indonesian sand was to be used to prepare RMC); and
3. it is of first importance to consider the precise facts of the case, in applying the principles of frustration.

In determining whether construction contracts are discharged by frustration due to the COVID-19 pandemic and its consequences therefore, the issue often turns on whether 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.

More often than not, this exercise involves reviewing the sources of materials and labour specified or contemplated under the contract. Where the materials or labour specified or contemplated from a particular source under the contract are no longer available or have become severely restricted indefinitely as a result of the COVID-19 pandemic, the affected party may have a basis to argue frustration. The length of the delay caused may be another possible consideration.[1] For example a delay of 1 year (as compared to 10 days) as a result of COVID-19 events, may possibly render an obligation radically or fundamentally different if the contractually agreed works were to be completed within 1 week.

Ultimately, as the Court in Alliance Concrete emphasised, and the various Singapore cases on the Sand Ban demonstrates, when it comes to frustration, each case turns on its own facts. Accordingly, while the decisions in Dathena and Lachman recognise the COVID-19 pandemic and its consequences to be a legitimate consideration for invoking the doctrine of frustration, the extent to which contractors and subcontractors will be able to successfully rely on frustration will be dependent on the context and terms of each contract.

With the occurrence of the COVID-19 pandemic, and the frequency of restrictions imposed to limit the spread of the virus and its variants, it will be harder to claim that any future pandemics or epidemics caused by variants of the same virus are unforeseen supervening events. Parties entering into new contracts are encouraged insofar possible, to address and apportion these risks in their contracts, for example:

1. By drafting clear force majeure clauses and expanding force majeure definitions to include pandemics or epidemics;
2. By specifically providing for an extension of time and the allocation of costs and expenses for pandemic / epidemic related disruptions; and / or
3. By including appropriate price escalation clauses, identifying materials susceptible to volatility in the current climate and including indices / measures of volatile pricing to determine any escalation in cost.