Frustration and Force Majeure

By Marcus Lim

Introduction

The Covid-19 pandemic has caused unprecedented disruptions to most, if not all businesses around the world, including Singapore. Unsurprisingly, people are worried about the consequences of being unable to carry out their obligations under their contracts and how the Covid-19 pandemic would affect their obligations under such contracts.

In determining how one’s obligation(s) would be affected, and what consequences may follow, much would depend on the terms of the contract (whether there is any force majeure clauses involving any “epidemic” occurrences), the extent to which a party’s ability to perform his obligations under the contract due to the Covid-19 pandemic, and the type of contract in question.

In this discussion, we will examine briefly on the Force Majeure clauses, the common law doctrine of frustration and the recently enacted Covid-19 (Temporary Measures) Act (hereinafter referred to as Covid-19 Act). We also further emphasise that the effect on a party’s contractual obligations and its consequences will differ depending on which “avenue” is invoked.

For the benefit of audiences who may not be familiar with how contracts are formed, there are 4 main elements of a valid contract.

4 Main Elements of a Contract

• Offer
• Acceptance
• Considerations
• Intention to Create Legal Relations

Offer:

Contracts always start with an offer. An offer is an expression of a willingness to enter into a contract on certain terms. It is important to establish what is and is not an offer. Offers must be firm, not ambiguous, or vague. A person who is making the offer is called the offeror.

Invitation to Treat: Offers are different than an invitation to treat. An invitation to treat is not an offer. When you list your home for sale, you are not making an offer; you are making an offer to treat. You are inviting potential buyers to make an offer to you to buy your home. The same is true with most advertising. The stores are making an offer to treat. They are expressing their willingness to sell you something if you offer them their asking price. However, they are not bound to accept your offer. For example, you place an ad online to sell your car for a certain price. Someone makes an offer to buy the car from you at full price. Do you have to accept their offer? No. You are making an offer to treat, and you are not bound to accept their actual offer to buy your car.

Acceptance

Acceptance by the offeree (the person accepting an offer) is the unconditional agreement to all the terms of the offer. There must be what is called a “meeting of the minds” between the parties of the contract.

This means both parties to the contract understand what offer is being accepted. The acceptance must be absolute without any deviation, in other words, an acceptance in the “mirror image” of the offer.

The acceptance must be communicated to the person making the offer. Silence does not equal acceptance.

Postal Rule

The rule was established by a series of 19th century cases.

The posting rule applies only to acceptance. Other contractual letters (such as one revoking the offer) do not take effect until the letter is delivered. The implication of this is that it is possible for a letter of acceptance to be posted after a letter of revocation of the offer has been posted, but before it is delivered, and acceptance will be complete at the time that the letter of acceptance was posted—the offeror’s revocation would be inoperative.

Consideration

Consideration is the act of each party exchanging something of value to their detriment. A sells A’s car to B. A is exchanging and giving up A’s car while B is exchanging and giving up B’s cash. Both parties must provide consideration.

Past Consideration: Voluntarily doing something for someone is not consideration. A see’s B’s lawn needs to be cut so A voluntarily does so. B comes home from work and is so pleased that B gives A $30 for cutting the lawn.

The following week A cuts B’s lawn again without B asking A to do so. A now asks B for $30 for cutting the lawn and B refuses to do so. A claims they have a contract since A has provided consideration by mowing B’s lawn, even though it was voluntary. A is incorrect. B is not obligated to provide consideration to A.

There is no contract. However, if B had asked A to mow the lawn, but did not set the price, A would probably be able to enforce the contract after mowing the lawn because B requested he do so.

Intention to Create Legal Relations

The fourth required element of a valid contract is legality. The basic rule is that courts will not enforce an illegal bargain. Contracts are only enforceable when they are made with the intention that they legal, and that the parties intend to legally bind themselves to their agreement.

An agreement between family members to go out to dinner with one member covering the bill is legal but is not likely made with the intent to be a legally binding agreement.

Just as a contract to buy illegal drugs from a drug dealer is made with all the parties knowing that what they are doing is against the law and therefore not a contract that is enforceable in court.

Privity of Contract

A common law doctrine which prevents a person who is not a party to a contract from enforcing a term of that contract, even where the contract was made for the purpose of conferring a benefit on the third party. In Singapore, the Contracts (Rights of Third Parties) Act reformed the privity of contract rule and gives a person who is not a party to a contract a right to enforce a term of that contract in specified circumstances.

Terms of Contract

A term may be incorporated into the contract either expressly or impliedly. Express terms are those which have been explicitly communicated between the parties orally or in writing. The intention of the parties is clear and there is little discussion to be had of these.

Implied terms are those terms which fill the gaps in the contract. Terms can be implied in the following ways:

• Trade Usage
• Nature of Relationship
• Unexpressed intention of parties
• Operation of Statute

Terms implied by trade usage

The main 3 requirements are:

1. The term is clearly established and ‘notorious’ in that trade context
2. The term is not inconsistent with any of the express terms
3. Both parties must be involved in the trade context in such a way that they would be expected to be aware of the term being custom in that context

Terms implied by law

Terms in law can be implied irrespective of the intentions of the parties, they relate to legal obligations imposed either by the courts or by statute.

Terms implied by the courts

The basic requirements for a term to be implied by courts are:

1. The term is implied in all contracts of that type, as a policy matter
2. The term must be necessary
3. The term must be reasonable to imply

Terms implied by statute

Where it has been deemed necessary by the legislature, certain terms have been implied into contracts by statute. The most obvious example of this relates to the sale or supply of goods.  In Singapore, we have the Sale of Goods Act.

Now, let’s turn to the main topic of the day, Frustration of Contract

Terms of the Contract in Question

1. Force Majeure Clauses

On the assumption that a contract has been validly formed, the next consideration would be to turn to the terms of the contract in question, and in particular, the existence of any force majeure clauses.

Generally speaking, force majeure clauses are clauses which represents a bargained allocation of risks,[1] which may, for instance, excuse the non-performance of a contract or allow the party to delay the performance of his obligations in defined situations.

As a force majeure clause is an agreement as to how outstanding obligations should be resolved upon the onset of a foreseeable event,[2] much would depend on the contractual interpretation of the force majeure clause which the party seeks to invoke.

Accordingly, the issue of whether the covid-19 pandemic is a force majeure event and its potential relief that the party is entitled to, would depend entirely on the wording and interpretation of the force majeure clause in question.

Therefore, where the force majeure clause in question requires that the force majeure event (say for instance, any epidemic) to hinder and/or prevent the performance of the contract, the affected party intending to reply on that force majeure clause would need to first show that the covid-19 pandemic constitute a force majeure event within the meaning of that clause and that the occurrence of the covid-19 pandemic in fact caused hinderance or prevention.

One would then ask – what would happen if I successfully invoked a force majeure clause in the contract? Again, as discussed above, and unlike the common law doctrine of frustration, the recourse would entirely depend on the force majeure clause invoked – for instance, it may excuse the non-performance of a contract or “postpone” the obligations of the party to a later stipulated date.

Common Law Remedies – Frustration

• Common law Doctrine of Frustration

In the absence of any force majeure clauses in the contract in question, one should consider whether the common law doctrine of frustration applies. There are numerous ways as to how contracts may be discharged but for the purposes of our discussion, we will only focus on the discharge by frustration. Typically, contracts may be discharged when:

• Discharge by Performance – Parties to the contracts have completely performed all of their rights and obligations under that contract;
• Discharge by Breach – Where one party to the contract has breached a term of that contract, where the term breached is one which allows the innocent party to bring the contract to an end;

• Discharge by mutual agreement – where parties to the contract mutually agrees for the contract to come to an end; and

• Discharge by Frustration – where an event beyond the control of the parties and beyond their reasonable foresight occurs in circumstances for which neither party is at fault which renders impossible further performance of the contract.[3]

A contract may be said to be frustrated when something renders it physically or commercially impossible to be fulfilled, or transforms the obligation to perform into a radically different obligation.[4]

Depending on how the covid-19 pandemic has affected the party, he may wish to rely on the doctrine of frustration if the covid-19 pandemic has rendered it impossible for the contract to be fulfilled or that there is a radical change of his obligations. To be precise, what is “frustrated” is not the contract itself, but the contractually stipulated performance expected of the contracting party.[5]

It should be noted that the doctrine of frustration is not easily invoked and remains confined to exceptional circumstances. Based on our research, there has also yet been any Singapore cases deciding on the issue of frustration caused by pandemics similar to covid-19. Having said so, it is still possible to analyse the covid-19 pandemic in light of three broad categories, which will be discussed in turn below:

• Physically impossible;
• Legally impossible; and
• Futile – because it is now impossible to achieve the underlying common purpose of the parties in entering into the contract.

Physically Impossible

Essentially, physical impossibility refers to cases where performance has become impossible. The impossibility may be divided into four sub-categories:

• Cases where the subject matter of the contract has been destroyed;
• Cases where the contractual promisor has died or become physically incapacitated;
• Cases where the subject matter of the contract has become unavailable; and
• Cases where the source of supply of the subject matter of the contract has failed.[6]

The subject matter of the contract has been destroyed

This category is a straightforward one. Suppose you enter into a contract to hire from the other party a musical hall which was to be used for ‘grand concerts’ and fetes. However, before the performance that the musical hall was to be used for, there was a fire and the hall was destroyed. Neither party was at fault for the destruction.[7] In such scenario, it may be said that the subject matter of the contract has been destroyed and the destruction of the subject matter has rendered the performance of the contract impossible.

The Contractual Promisor has died or become physically incapacitated

Suppose that the contract in question is to be performed by a particular promisor personally, in the sense that its performance is not to be delegated to any other entity. Should that promisor be incapacitated in such a way as to render it impossible for the contractual performance to be carried out personally by that promisor, the contract may also be found to have been discharged by frustration.[8]

Another example would be where the contract of employment was frustrated by the death of the employee, and where the employer is a natural person, that contract may also be frustrated should the employer die.

Unavailability of subject matter

Suppose there is a contract for the sale of landed property. Prior to the completion of the contract, the Singapore government compulsorily acquired the property in question pursuant to section 5 of the Land Acquisition Act.[9] This may be an example where the subject matter is question becomes unavailable.

Failure of source of supply

In most instances, contracts for the sale or supply of goods or services do not specify precisely from where or by whom they are to be supplied. For instance, most purchasers who purchases goods like apples and rice are not particularly concerned as to their source so long as the apples or rice fit in the contract description.

In some cases, however, the source of the supply may be a critical part of the contract. For instance, in the case of Howell v Coupland,[10] Coupland had agreed to sell Howell “200 tonnes of regent potatoes grown on land belonging to Coupland.”.

In an ordinary growing season, there would have been an ample crop to satisfy the contract. However, a disease attacked the crop and caused it to fail and resulted in Coupland being able to only deliver 80 tonnes. The English Court of Appeal agreed to treat the contract as having been discharged by frustration.

Legal Impossibility

Legal impossibility occurs when circumstances have arisen so as to render the performance of the contract illegal. For example, a possible case involving legal impossibility could be that the performance of an obligation (for instance, holding of concerts) has been prohibited by law (the introduction of the Covid-19 Act) to give legal force to ensure that everyone stays at home and to ensure safe distancing.

Impossible to achieve the underlying common purpose of the parties

There are instances when the supervening event does not have as dramatic an effect. Sometimes, the occurrence of a supervening event may not render contractual performance to be strictly impossible, but nonetheless would be regarded by both contractual promisor and promise to be futile in light of the supervening event.

What happens when contract is “frustrated”?

At common law, once the court concludes that the supervening event (i.e. the covid-19 pandemic) is indeed a frustrating one, the contract is said to automatically come to an end and the parties are discharged from their obligations under the contract.[11] However, in some cases, the frustration of the contract may lead to an unfair outcome – for instance, where one party has incurred costs in his attempt to perform his obligations under the contract. One might therefore ask: what happens in such a scenario?

The Frustrated Contracts Act (“FCA”) was enacted to resolve any unfairness that may arise from the frustration of the contract. While it is not within the scope of this Webinar to discuss the FCA in full, we will want to highlight section 2 of the FCA. Briefly, the FCA permits:

1. The recovery of all sums paid prior to the frustration of the contact;
2. The Court to allow the payee to either retain or recover money for expenses incurred before the frustrating event, if the Court considers it just to do so; and
3. Party who has conferred a valuable non-monetary benefit on the other contracting party by virtue of his partial performance of the contract, to be awarded compensation.

It should be further noted that the FCA only applies if the contract is not excluded under section 3(5) of the FCA:

(5)  This Act shall not apply —

(a)	to any charterparty, except a time charterparty or a charterparty by way of demise, or to any contract (other than a charterparty) for the carriage of goods by sea;
(b)	to any contract of insurance, except as is provided by section 2(6); or
(c)	to any contract to which section 7 of the Sale of Goods Act (Cap. 393) (which avoids contracts for the sale of specific goods which perish before the risk has passed to the buyer) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.

Conclusion

Based on our discussion above, the effect on one’s contractual obligation and its potential consequences would differ from contract to contract. It is therefore important to analyse the contract in question and the relevant legal avenues that might apply. As discussed above, the terms of the contract, the type of contract in question and the extent to which a party’s ability to perform his obligations arising from the contract is impacted by the covid-19 pandemic will have a bearing on the legal analysis.

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[1] RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and Another Appeal [2007] SGCA 39 at [53].

[2] Ibid, at [55].

[3] See Andrew Phang Boon Leong, The Law of Contract in Singapore (Academy Publishing) at pg. 1137 – 1138.

[4] Adani Wilmar Ltd v Cooperatieve Centrale Raiffeisen-Borenleenbank BA [2002] 2 SLR(R) 216 at [44], per Kan Ting Chiu J.

[5] Above n 3, pg. 1338.

[6] Above n 3, pg. 1352.

[7] See Taylor v Caldwell [1863] 3 B&S 826.

[8] Above n 3, 1353.

[9] See Lim Kim Som v Sheriffa Taibah bte Abdul Rahman [1994] 1 SLR(R) 233.

[10] (1876) 1 QBD 258.

[11] Above n 3, pg. 1378.