On 11 March 2011, an earthquake with magnitude 9.0 hit the northern part of Japan unleashing a powerful tsunami along the east coast. Images of the disaster on television and the internet shook the whole world. Many have shed tears and prayed as the news revealed the devastation of the impact. As of 13 April 2011, more than 13,000 lives were lost, 15,000 people are still missing, and 140,000 people are still living in shelters. Financial losses from destruction to infrastructure, residential buildings and offices in Japan are estimated to cost the country between S$240 billion and S$375 billion. Whilst Japan is picking up the pieces, they are facing another potentially larger disaster from the radiation fallout at the Fukushima nuclear plant. The full extent of the economic and socio damage from the triple tragedy have yet to be ascertained, as losses are mounting by the day.
This article shall proceed with a discussion of the impact and effect s of the disasters on businesses in Singapore.
Disruption of supplies
Food Products
Since late March, Singapore has suspended the import of milk, milk products, fruits and vegetables, seafood and meat originating from various prefectures in Japan, as a result of, and in precaution against radiation contamination.
While these import bans may have caused inconveniences to certain niche-market grocers and Japanese restaurants serving the many Japanese expatriates in Singapore (some of whom having fled Japan since the Earthquake struck), the general impact to these businesses appears to be tolerable. This is because supply of these products is readily substitutable from other countries. Furthermore, only a very small percentage of Singapore's food imports are derived from Japan. In a similar vein, businesses at Japanese restaurant chains does not appear to been severely affected, partly due to public confidence in the Agri-Food and Veterinary Authority of Singapore (AVA), which monitors food safety in the city state.
Electronics Industry
The affected area in northern Japan supplies a large portion of the world's electronics industry with components. For instance, Japan is a key supplier of components such as LCD (liquid crystal display) panels used in flat-screen televisions. As a result of the catastrophe, major Japanese players in the electronics industry, such as Sony and Toshiba, have brought some of their production operations to a standstill.
This disruption of production in Japan will cause some shift in inventory or capacity requirements and also diversification in the supply chain. Companies are already identifying the possible relocation of certain component manufacturing, and sourcing for secondary or alternative supplies.
Automobile Industry
Equally affected is the automobile industry which has several plants affected by the power outages. It was reported that several major automobile companies halted production and could only resume business after many weeks.
Free from Obligation: Force Majeure Clauses
Japanese supplier s in certain affected industries, are frantically examining their legal rights for failing to deliver the orders. A force majeure clause in their contracts may enable these suppliers to do so.
A force majeure clause is a common clause in contracts that essentially frees both parties from performing their obligations or provides for modifications to their respective obligations, when an extraordinary event or circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract. The prevalent practice of incorporating force majeure clauses into commercial contracts today serves to avoid the uncertainty of continuing obligations if the event or circumstance defining the force majeure is clearly spelt out.
In the recent Court of Appeal case of RDC Concrete Pte Ltd v Sato Kogyo (s) Pte Ltd [2007] 4 SLR(R) 413, the court reaffirmed the principle that the precise construction of the force majeure clause is paramount as it would define the precise scope and ambit of the clause itself. The court is, in accordance with the principle of freedom of contract, to give full effect to the intention of the parties in so far as such a clause is concerned. Consequently, whether a force majeure situation arises, and, when it does arise, the rights and obligations that follow, would all depend on what the parties in their contract have provided. In addition, the court also noted that a party who relied on a force majeure clause had the burden of showing not only that it had brought itself squarely within the clause, but also that it had taken all reasonable steps to avoid its operation, or mitigate its results.
Briefly, the facts of the RDC Concrete case are as follows. Sato Kogyo (S) Pte Ltd ("Sato Kogyo") contracted to purchase concrete from RDC Concrete Pte L td ("RDC" ) which subsequently failed to supply on at least 42 occasions. RDC cited reasons of: (a) shortages of raw materials, i.e. aggregates and cement; and (b) plant breakdowns. Consequently, Sato Kogyo had to purchase concrete from alternative suppliers at higher rates. Pursuant to its contract with RDC, Sato Kogyo deducted all the cost differentials incur red from the outstanding amounts due to RDC, which RDC maintained it was not liable for by invoking the contractual clauses relating to force majeure. At first instance, the trial judge found that the force majeure clauses only exempted RDC from liability arising due to shortage of raw materials. On appeal, the Court of Appeal held that RDC could not invoke the force majeure clauses because it had not pleaded force majeure in its defence. In any case, the force majeure clauses would not have exempted RDC from liability for the non or short supply as RDC could not prove that the shortage of raw materials or plant breakdowns were beyond its control. As such RDC was liable to Sato Kogyo for the cost differentials.
In essence, it is evident that the operation and scope of force majeure clauses is principally a matter of construction. Earthquakes and tsunamis would fall squarely under what is commonly known as an "Act of God" within a force majeure clause. However, radiation leakage which resulted in wide spread evacuation and the consequential disruption of production in Japan, is not an "Act of God" and must be specifically provided for in the force majeure clause.
Supposing then that the clause covers such events, the rights and obligations which follow may, for instance, provide for an extension of time to be granted to the party in default, or there may be a cancellation of the contract at the option of one party, or the defaulting party's duty to perform the contract may be suspended.
Common Law Doctrine of Frustration
Parties may also turn to the common law doctrine of frustration when considering their contractual rights and obligations. Notably, the doctrine of frustration operates differently from a force majeure clause. Whereas a force majeure clause is an agreement as to how outstanding obligations are resolved upon the onset of a foreseeable event, the doctrine of frustration concerns the treatment of contractual obligations upon the onset of an unforeseeable event.
A contract is considered frustrated when a supervening event which has not been expressly provided for in the contract, takes place. The consequence of this supervening event must be such that the nature of the parties' (or one party's) obligations is so fundamentally or radically altered that the contract can no longer justly be said to be the same as that which was originally entered into by the parties.
Conclusion
There i s no doubt that this disaster has far - reaching consequences . Lives were forcefully disrupted. Businesses were suddenly halted. Although such events are usually taken into account in almost every major cross border transactions, businesses and lawyers will from now on be paying more attention, and probably introducing further provisions, to deal with such calamity in their contracts.
If you wish to have further information on this update or wish to discuss how it may potentially have an impact on your business, please feel free to contact the authors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
