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Out-Law Analysis 1 min. read

Singapore sand ruling could send construction costs soaring, warns expert

FOCUS: Construction companies in Singapore could face rising costs and the collapse of sub-contractor agreements after a supplier was allowed to back out of a contract because of the unavailability of Indonesian sand.

Singapore's extensive land reclamation and construction projects require vast quantities of sand which is imported from overseas, so a recent Singapore Court of Appeal decision that allowed a supplier to avoid contractual liabilities because of a ban on the export of sand from Indonesia could have a major impact on construction firms in Singapore and surrounding countries.

Alliance Concrete Singapore (ACS) had a contract to supply sand to construction firm Sato Kogyo. But when Indonesia banned the export of sand in 2007 ACS had to consider sourcing the sand from elsewhere. This was more difficult and would increase costs.

ACS claimed that it should not have to fulfill its contractual obligations because the contract was based on the understanding that the sand was to be sourced from Indonesia, which was now impossible. The Court of Appeal has agreed (51-page / 288KB PDF), finding that the Indonesian ban on the export of sand 'frustrated' the contract despite it not explicitly saying that the sand was to come from Indonesia. This means that both parties were discharged from their obligations under the contract and sets a new precedent which could lead to other suppliers taking a similar approach.

Following bans and restrictions on the export of sand from countries including not only Indonesia, but also Malaysia and Vietnam, Singapore is now dependent on sand from other sources, including Myanmar, Philippines and Bangladesh. That can mean increased costs, which could lead other companies to seek to escape contractual obligations in the event of supply difficulties or the failure of a source.

The Court of Appeal ruling gives them a way to do just that. Now suppliers don't have to have explicitly said in their contracts that the prices agreed were dependent on successfully importing sand from a specific source – they may be able to claim that there was an 'unwritten assumption' in the contract that a particular source would be used and if that source fails, the contract is frustrated and should not bind them.

This may strengthen suppliers' negotiating hand with construction companies which could, in turn, mean that construction companies will have to pay more to complete projects.

In a construction environment where the supply of sand is already controversial for environmental as well as economic reasons, this Court of Appeal decision could have far reaching consequences on contracts for the supply of sand and disputes that arise, stirring up difficulties for many more companies than the two involved in the case itself.

Sean Hardy is a construction expert at Pinsent Masons, the law firm behind Out-Law.com

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