Generally, Singapore law and the courts hold that the party who agrees to supply goods or services for a fixed price is deemed to take the risk of any increase in the cost of supply. That said, there are specific circumstances where specific events associated with rising costs or shipping prices may excuse non-performance. Below, we explore when rising costs or shipping prices can be associated with force majeure and frustration of contract in Singapore and if they can excuse supplier non-performance.
Key Takeaways
- Generally, according to Singapore law and court practice, a party that agrees to supply goods or services for a fixed price is deemed to take the risk of any increase in the costs of supply.
- Parties can include force majeure clauses relieving them of their contractual obligations in specific cases, such as supply chain disruptions.
- In exceptional circumstances, the parties can be relieved from their obligations due to frustration of contract. However, a mere rise in the costs of supply generally does not in itself amount to frustration.
When Can Supply Agreement Non-Performance Be Excused under Singapore Law?
Generally, supplier non-performance in Singapore may be excused only in limited circumstances, including force majeure and frustration of contract.
Force Majeure
Although there is no legislation for force majeure in Singapore, the parties to a supplier agreement can agree upon special clauses that excuse non-performance in specific cases. These cases can generally include various circumstances beyond the control of the parties, for example, disruption of the supply chain or shortages of material, that typically lead to an increase in prices or shipping costs.
Frustration of Contracts
The doctrine of frustration, whose consequences are governed by the Frustrated Contracts Act 1959, applies where performance has been radically altered by the occurrence of events beyond the control of the parties.
Do Rising Costs or Shipping Prices Qualify as Force Majeure?
In deciding whether rising costs or shipping prices qualify as force majeure, Singapore courts have referred to the position taken in the English case of Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495 (Tennants). In Tennants, the court held that a great rise in price alone does not hinder or prevent delivery.
Although prices may point to an underlying shortage, they are only one form of evidence among many. According to the court, a party that seeks to succeed under a force majeure clause needs to show a genuine supply disruption or other qualifying event, not simply that performance has become more expensive.
Can Rising Costs Frustrate a Contract Under Singapore Law?
In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2013] SGHC 127, the High Court of Singapore held that the key test was whether the occurrence radically altered the nature of supplier obligations or merely made it more expensive or onerous for it to fulfil its obligations and found no frustration. Although the decision of the High Court was then overturned by the Court of Appeal on the specific facts, the position of both courts is that an increase in prices generally does not frustrate a contract.
Meanwhile, in another landmark case, Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd, the courts left it as a possibility that where the increase in prices was so extreme as to be “astronomical,” the increased costs might constitute a frustration. In doing so, the court referred to observations in an English case that if the price increase was one hundred times as much as the contract price, then that would be a fundamentally different situation amounting to hindrance or prevention.
How to Limit Risks in Supplier Agreements
Both companies and their suppliers can minimise disputes over rising costs or shipping prices by having a legal review of their contracts and using clear contractual language for liabilities and force majeure clauses.
For Customers
Companies aiming to protect their operations from supply chain disruptions and price volatility can secure their legal position by:
- Having a clearly drafted force majeure clause listing specific qualifying events in clear language and avoiding ambiguity,
- Defining the scope when using general terms such as “disruption” in the text of their agreements,
- Setting a shorter notice period for suppliers experiencing delays or shortages,
- Retaining the right to source from alternative suppliers in cases of significant delays.
For Suppliers
In turn, suppliers can reduce their exposure to the risk of increased costs of performing their contractual obligations by:
- Including comprehensive force majeure clauses in clear language,
- Setting thresholds for renegotiation in cases of rising costs or shipping prices,
- Collecting documentary evidence of any supply chain disruptions,
- Seeking legal advice before any suspension of performance.
How a Corporate and Commercial Lawyer Can Help Limit Contract Disputes Over Rising Costs
Businesses wishing to minimise the chances of disputes over rising costs or shipping prices can benefit from engaging lawyers for legal review of their supplier agreements. A business lawyer in Singapore can assist by using clear language and wording of the liabilities and force majeure clauses and helping avoid ambiguity in contract terms. For more information or legal review of supplier agreements, please don’t hesitate to contact IRB Law’s corporate and commercial lawyers in Singapore for an initial consultation.
FAQs
Can a supplier refuse to perform a contract because the costs or shipping prices have increased?
Generally, no. Singapore courts generally deem that suppliers who agreed to supply goods or services for a fixed price have taken the risk of any increase in the costs of supplying such goods or services.
What is the difference between force majeure and frustration of contract under Singapore law?
In Singapore, there is no legislation that defines force majeure, which is a term describing clauses in the agreement that excuse parties from performing their contractual obligations. Meanwhile, frustration of contract is a legal doctrine that relieves the parties of their obligations in exceptional circumstances.
Can supply chain disruption frustrate a contract in Singapore?
A supply chain disruption can frustrate a contract in Singapore under very exceptional circumstances. These include occurrences that radically alter the nature of supplier obligations or when specific contracted supplies become commercially unobtainable.
What happens if a supplier refuses to fulfil the agreement due to rising prices?
If a supplier refuses to perform the agreement without a valid force majeure clause in the agreement or in the absence of circumstances amounting to frustration, they expose themselves to a claim for damages.
How to reduce the risks of disputes over rising shipping costs or supply chain disruptions?
Companies can reduce risks of disputes regarding rising shipping costs or supply chain disruptions by negotiating clear force majeure clauses, notice obligations, and price review mechanisms. Having a legal review of the agreements, especially before invoking force majeure, can also help limit exposure to wrongful contract termination claims.
