It is not uncommon to find that an employer attempts to pass almost all risk in a contract to the contractor. However, such an approach may have unforeseen consequences when events later make completion of the works impossible. Here are considerations as to how and when a contractor might be released from further performance.
Recently, there has been a number of contracts where the contractor is passed the risk of: access to and possession of the site; errors in the information provided by the employer; and delays by authorities. In a number of such cases, relating to the construction of railways, the contractor has had to take on all risks relating to delays by authorities or bodies with jurisdiction over the Works. Often these contracts go on to state that the contractor waives any entitlement to additional time or adjustment to the contract price. In one example a further amendment was made to Clause 1.13 of the FIDIC Silver Book, whereby the employer’s obligation to obtain planning, zoning or other permissions had been deleted and the contractor was made expressly responsible for obtaining all “permits, licences and approvals of whatsoever nature”.
We've encountered projects where the planning and local authorities have together spent a year and a half deciding on the precise location and sizes of various buildings, making completion of the project impossible in terms of time, and uneconomical in terms of cost. In such cases, where the contractor has no entitlement to an extension of time, he may have to consider giving notice that the contract has become impossible to perform under FIDIC’s Clause 19.7.
Clause 19.7 – Release from Performance under the Law
It has been suggested that Clause 19.7 of FIDIC’s Silver Book (and the Red and Yellow Books) allows for discharge of a Party’s obligations in two situations; first, where there is an irresistible event preventing performance; and second, where the governing law so provides.[1] In particular Clause 19.7 provides that:
if any event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice by either Party to the other Party … the Parties shall be discharged from further performance …
It has been argued that whereas the force majeure provisions of the FIDIC contract do not apply to the payment obligations under the contract,[2] there is no such restriction under Clause 19.7. Therefore, the employer may be relieved from performance of its obligations to pay the contractor if the two conditions of Clause 19.7 are fulfilled.[3]
Robert Knutson has described Clause 19.7 as “a rather interestingly worded clause.”[4] He states that the doctrine of frustration under English law would have been there to protect the parties in any event and that the purpose of Clause 19.7 is therefore to expand the definition of frustrating events and regulate certain consequences of frustration. Frustration is discussed in detail below. However, Knutson’s point raises an interesting question: What is the role of ‘frustration’ where the parties have agreed a force majeure provision?
The authors of Chitty[5] have stated, in relation to force majeure provisions, that their effect is to “reduce the practical significance of the doctrine of frustration because, where the express provision has been made in the contract itself for the event which has actually occurred, then the contract is not frustrated.” This reasoning accords with the dicta from the House of Lord in Davis Contractors v Fareham UDC[6] where the test for frustration under English law is given (see below). In Singapore, however, the courts have held that there can still be frustration, notwithstanding that there is an applicable force majeure provision.[7]
Frustration
So what is frustration? It may be described as a “radical change in obligation”.[8] The classic statement of frustration is that it:
“occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”[9]
In Satyabrata Ghose vs Mugneeram Bangur & Co[10] the Singapore court held that the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality. It is trite law that “a subsequent change in the law or in the legal position affecting a contract is a well-recognised head of frustration”.[11] The fact that the parties might have foreseen that a change in legislation was a possibility but made no provision for it in their contract does not prevent the doctrine of frustration applying: San Amos Mumba v Zambia Fisheries and Fish Marketing Corp Ltd.[12]
In a number of recent cases the Singapore courts have had to consider the application of the frustration doctrine.[13] The cases arose out of a ban by the Indonesian Government of the export of sand.[14] The conclusions reached were that in cases where there was term in the contract that the sand would be sourced from Indonesia, then the ban would amount to a frustrating event. The courts further held that where the source of the sand was not specified, then the ban would not amount to a frustrating event. There was, however, an exception. In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd[15] the Court of Appeal stated that[16] “the unavailability of a particular source from which the subject matter of the contract is derived may operate to frustrate the contract where both parties contemplated or could reasonably have contemplated the unspecified source…” So where both parties contemplated that the sand would be sourced from Indonesia but this was not specified, then the ban would be a frustrating event.
In Rumdel Cape and Ors v South African National Roads Agency Soc Ltd[17] the court considered Clause 19.7 of the FIDIC forms of contract. In this case the contractor asserted that the works had stopped because the labour force which it was required to use was militant, unproductive and prone to acts of violence and intimidation with high levels of absenteeism and sick leave. The labour force was dismissed by the contractor which resulted in riots and the death of a security guard. The court held that the force majeure provisions of the contract did not apply because the labour force was employed by one of the parties. The court thereafter held that the contractor had failed to prove that it was either impossible or unlawful for it to fulfil its contractual obligations and therefore there was no question of the provisions of Clause 19.7 being applicable.[18]
Although frustration will occur where the performance of the contract becomes impossible or illegal, it may also happen when a supervening event, without default by either party and for which the contract makes no sufficient provision, changes the nature of the outstanding contractual obligations.[19] It is not enough for the supervening event simply to make the contractual obligations more expensive of burdensome. If, in such circumstances, it would be unjust to hold the parties to their contractual obligations, then the law will discharge them both from further performance.[20]
English law has held that a delay which is sufficiently long to undermine the commercial adventure of the parties can amount to an event of frustration. In the case of Pioneer Shipping Ltd v B.T.P Tioxide Ltd (The Nema)[21] Lord Roskill stated:
“But, as has often been said, business men must not be required to await events too long. They are entitled to know where they stand. Whether or not the delay is such as to bring about frustration must be a question to be determined by an informed judgment based upon all evidence of what has occurred and what is likely thereafter to occur.”
The case of Codelfa Construction Pty Limited v SRA of New South Wales[22] illustrates how a supervening event that results in delay can frustrate a contract. Codelfa contracted with the rail authority to carry out works to track and stations in Australia. Time was made of the essence and around the clock working was required. Local authorities and residents obtained injunctions against the contractor which meant that works could only be carried out between 6am and 10pm. The court held that the contract had been frustrated. It found that the working periods foreseen by the contractor and rail authority had fundamentally changed from those contemplated at the time the contract was executed. The supervening event, the injunctions, therefore made performance of the contract impossible.
To frustrate a contract the delay must be abnormal in its cause and in its effect so that it could not reasonably be contemplated at the time of contracting. Therefore, a significant delay beyond the contractual period may not be a frustrating event if the delay could be foreseen.[23] Equally, if there is an extension of time mechanism in the contract for dealing with the delaying event, then the contract makes sufficient provision for dealing with that event.
The problem arises where the employer deletes the relevant extension of time provisions – such as those for delays by authorities as referred to above – and seeks to pass the risk to contractors. In such circumstances where the contract does not permit the contractor to claim an extension of time or costs for unforeseeable delays caused by local authorities, then the only remedy that he may have is to give notice of impossibility under FIDIC Clause 19.7 and “walk away” from the contract.
Uncertainty
A contract can be void for uncertainty. This could arise where an employer seeks to pass to the contractor without compensation the risk of all variations or changes to the design which are imposed by local authorities. The principle that contracts must be certain exists both under the common law and in many civil law countries. In relation to Shari’a law it has been stated that:
“The prohibition of unjust enrichment in Shari’a law precludes any element of uncertainty (Gharar) which could lead to one party to a contract taking advantage of the other. Parties should therefore be fully aware at the time when they enter into the contract of the extent of their obligations. For example, an obligation imposing on a contractor an unquantifiable or uncertain risk relating to the condition of the site may amount to Gharar and may not be enforceable.”[24]
In the recent Canadian case of Seong Yun Ko v Hillview Homes Ltd.,[25] the Alberta Court of Appeal considered the law surrounding the issue of certainty in contracts. The facts were that the claimant was a licensed realtor and the defendant was a contractor. The defendant sold the claimant a plot of land and agreed to build a house on it for the price of $1.2 million. The contract contained an entire agreement clause. It was not clear regarding the size and construction of the house. At first instance the court held there was a valid contract. However, the Court of Appeal held that there was no contract because of the uncertainty as to what the defendant was to build. The Court held that the principles of contract law are a seamless web in which each principle is connected to another. There has to be an offer and acceptance, consideration and intention to make a contract. Each of these principles remains an essential thread in a valid contract. The Court stated that the parties may have considered that they had entered into a contract but this intention to do so did not overcome the need for reasonably certainty as to what had to be delivered.
Exceptional Circumstances
In some civil law countries the substantive law of the contract may allow a party to be completely relieved of liability where exceptional circumstances occur. The UAE Civil Code, for example, states that: “If there occurs an excuse that prevents the performance of the contract or completion of its execution, either party to the contract may request its termination or rescission, as the case may be.”[26]
In some countries the law may permit a court or arbitrator to reduce the effects of the exceptional circumstances. In Egypt, for example, Article 147/2 of the Egyptian Civil Code provides that where an exceptional or unpredictable event occurs which makes the performance of contractual obligations exceptionally onerous (but not impossible) in such a way as to threaten the debtor with exorbitant loss, the judge may, after taking account of the interest of both parties, reduce to reasonable limits the obligation that has become excessive.[27]
A similar provision exists under other laws which allows the courts or arbitrators to vary contracts if unforeseen events occur. This is known as the principle of rebus sic stantibus. The following criteria must, however, be met if the arbitral tribunal is to exercise this power. First, there must be new circumstances; second, there must be an absence of fault or negligence on the part of the requesting party; third, the new circumstances must have been unforeseeable; and fourth the new circumstances must reach an exceptional degree of gravity.[28]
Therefore, whilst full discharge from performance may not be available to such a contractor, the employer may nevertheless still find that his original bargain is substantially re-written.
Conclusion
In summary, although employers often want to pass all the risk to contractors, there can be problems with adopting such a course of action. If too much risk is passed to the contractor, then the law may assist by excusing the contractor from performance if an event occurs which makes it impossible to complete the works. Impossibility applies not only to the contractor’s ability physically to construct the works; but, as shown in the recent Singapore sand supply frustration cases, it also applies to the ability of the contractor to carry out the works in accordance with the terms of the contract.
[1] Glover, Thomas and Hughes; Understanding the New FIDIC Red Book: A Clause-by-Clause Commentary (2006), Sweet & Maxwell at pp. 371-372.
[2] Clause 19.2 final paragraph
[3] Samuelsson and Iwar, FIDIC an analysis of international contracts (2005) Kluwer International Law at pp. 298-299. This accords with the recent Singapore cases on sand supply frustration.
[4] Knutson R., FIDIC an analysis of international contracts (2005) Kluwer International Law at p. 73.
[5] Chitty on Contracts 31st Edition at 23-003.
[6] [1956] AC 696.
[7] Holcin (Singapore) Pte Ltd v Precise Development Pte Ltd [2011] 2 SLR 106 (CA).
[8] Chitty on Contracts, 31st Edition at 23-012.
[9] Davis Contractors v Fareham UDC [1956] AC 696, 729 per Lord Radcliffe. See also National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675; and Pioneer Shipping Ltd v B.T.P. Tioxide Ltd (The Nema) [1982] AC 724.
[10] (1954) AIR 44, (1954) SCR 310.
[11] Chitty on Contracts, 24th edn at para 1417.
[12] (1980) Z.R. 135.
[13] Holcin (Singapore) Pte Ltd v Kwan Yong Construction Pte Ltd [2009] 2 SLR (R) 193; Holcin (Singapore) Pte Ltd v Precise Development Pte Ltd [2011] 2 SLR 106 (CA); and Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] 3 SLR 857 (CA).
[14] For a detailed commentary on the cases see Chen Han Toh, Correspondent Report [2015] ICLR 348.
[15] [2014] 3 SLR 857 (CA).
[16] Ibid at para 55
[17] (7312/2014) [2014] ZAKZDHC 68.
[18] Para 41.
[19] See Davis Contractors v Fareham UDC [1956] AC 696
[20] See National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, 700.
[21] [1982] AC 724 at 752
[22] (1982) 149 CLR 337
[23] The “Sea Angel” [2007] EWCA Civ 547.
[24] Mayer Brown Legal Update, Issue 57, Construction and Engineering
[25] 2012 ABCA 245
[26] Article 893 of the UAE Civil Code
[27] See also Article 658/4 ECC
[28] R Briner, International Handbook of Commercial Arbitration, Switzerland, Supp 9 (1988).
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