The Hormuz crisis has impacted multiple businesses worldwide, including those in Singapore, disrupting supply chains, causing shipping and logistics delays, and inflating operational costs. In these circumstances, many companies are actively reviewing legal options to seek relief from performing their contractual obligations or respond to similar claims.
In Singapore, the general routes to claim contractual relief include force majeure and frustration of contract. Below, we compare force majeure vs frustration of contract and explain what to do if your business is impacted by the Hormuz crisis.
Key Takeaways
- Generally, businesses can seek relief for failure to perform contracts in cases that may qualify as force majeure or frustration of contract.
- In Singapore, force majeure can only exist if it is clearly defined in the contract.
- Frustration of contracts can occur where there is a sudden change in circumstances that makes fulfilment of the contract impossible or radically different from what was originally agreed.
Force Majeure and Contractual Relief in Singapore
Similar to other common law jurisdictions, Singapore does not recognise force majeure as a standalone doctrine. Instead, the parties who want to use force majeure clauses in Singapore to seek relief for failure to perform their contractual obligations need to define respective terms in their agreement.
What a Force Majeure Clause Must Include to Excuse Businesses from Performing Contracts?
When businesses want to define аn excuse from performing their obligations, they need to include:
- a clear definition of the events qualifying as force majeure,
- a causal relationship between the event and a failure to perform contractual obligations,
- the duration for which the excuse from performance applies,
- notice obligations for both parties.
Does Hormuz Crisis Qualify as Force Majeure?
The Hormuz crisis may disrupt suppliers in multiple ways, causing shipping and logistics delays, an inability to procure materials or inventory, and rising operational costs. At the same time, the event and its consequences can only qualify as force majeure if they are clearly defined in the contract.
For example, if the contract defines force majeure as an event beyond the control of the parties, such as war and armed conflicts, blockade, or major disruption to transportation, a supplier may use such clause to excuse non-performance due to the Hormuz crisis. If the other party does not agree to such qualification and cannot resolve the dispute through negotiations, the matter may ultimately be decided in court or tribunal.
Application of Frustration of Contract Instead of Force Majeure
If your agreement does not include a force majeure clause, frustration of contract is a common law remedy available to excuse a party for failure to perform contractual obligations.
How Does Frustration of Contract Work in Singapore?
In Singapore, the concept of frustration is defined in the Frustrated Contracts Act 1959, which discharges the parties from performing the contract where performance becomes impossible or is otherwise frustrated. However, the nature of frustration implies that the parties can claim it only in very exceptional circumstances that have a fundamental impact on their ability to perform the contract.
For example, in Holcim (Singapore) v Precise Development [2011] 2 SLR 106 at [53], the position of the Singapore Court of Appeal was that a mere price increase is generally insufficient to constitute hindrance or prevention. The court held that only an extreme change in circumstances, for example, an “astronomical” price increase, might qualify as frustration.
Can the Hormuz Crisis Frustrate a Contract?
Accordingly, the Hormuz crisis may frustrate a contract only if the blockade would lead to an extreme change of circumstances.
However, even a full closure of Hormuz in itself may not qualify as frustration due to the existence of alternative routes. Likewise, rising operational costs and shipping and logistics delays resulting from the Hormuz crisis are generally unlikely to meet the frustration threshold.
What Can Businesses Experiencing Supply Chain Disruptions Do?
Whether you represent a supplier whose operations are affected by the Hormuz crisis or a company impacted by shipping and logistics delays, your most important mitigation steps may include:
- assessing whether the situation can fall under a force majeure or frustration of contract,
- reviewing all contracts for force majeure clauses and analysing whether the contract wording covers the Hormuz crisis,
- documenting any disruptions, for example, rising operational costs, or inability to procure materials or inventory,
- notifying the other party in writing according to the contractual notice requirements,
- taking mitigating steps, such as exploring alternatives, which can help you both maintain operations and demonstrate to the court that you took reasonable steps to mitigate the disruption.
When to Seek Legal Advice?
Generally, you can benefit from legal advice in most cases when you experience failures to perform contractual obligations, business disruptions, or events that may have a significant impact on your operations. An experienced business lawyer in Singapore can review your contracts, assess whether force majeure or frustration of contract may apply to your situation, and advise on your legal options.
In case of disputes with the other party, a lawyer can represent you during negotiations, mediation, or court proceedings. If you are interested in learning more about whether the Hormuz crisis can qualify as force majeure or frustration in Singapore or need legal assistance, please contact IRB Law corporate and commercial lawyers for a consultation.
FAQs
What is the difference between a force majeure clause and frustration of contract under Singapore law?
In Singapore, force majeure provisions can only exist if they are clearly defined in the contract. In turn, frustration of contract is a common law doctrine and may be applied in situations where an unforeseen event renders performance impossible or radically different from what was originally agreed.
What should I do if I receive a force majeure notice from my supplier claiming the Hormuz crisis?
As a first step, you can check if the force majeure notice was served according to the notice requirements. It is also generally advisable to consult with a lawyer to check if the Hormuz crisis falls within the qualifying events for force majeure as defined in your contract.
Can I claim force majeure due to the Hormuz crisis?
Your ability to claim force majeure due to the Hormuz situation depends on the wording in your contract. If the force majeure section covers such events as blockade, military operations, or major disruptions to shipping routes, you may have valid grounds to invoke it. However, it is recommended to seek legal advice to assess whether your specific circumstances meet the required threshold.
How can a lawyer help my business if I’m facing a dispute in Singapore due to failure to perform contract?
If you face a business dispute, a Singapore lawyer can help you assess whether force majeure or frustration applies to your situation and advise you on your options. A lawyer can represent you during negotiations and mediation, as well as to protect your interests in court.
