Frustration without fault
FRUSTRATION is a broad legal concept that pervades the field of charter parties. It is different from demurrage calculations, performance claims, cargo loss and damage and similar matters which are reviewed after the fact.
Frustration is often an immediate, high-level matter because one party has said, or intends to say, to the other that it cannot or will not perform its future contractual obligations, leaving the other party in the lurch and possibly causing severe financial harm. Alternatives must be considered on the spot, and prompt action taken, often with great uncertainty as to the actual relevant facts, and with little understanding of the law. Words like "frustration", "impossibility", "material breach", "force majeure", "mitigation" "alternative employment" and the like appear in messages.
The frustration doctrine has evolved into two distinct branches. The first is where an unexpected event occurs which is not covered by the wording of the charter party, which renders performance impossible or commercially impracticable. The charter is cancelled without liability one side or the other. The second is where one party breaches its obligation and the other claims that the breach is so substantial as to go to the heart of the bargain, and the charter is therefore frustrated. The innocent party almost always seeks damages from the breaching party.
Frustration without fault
"Frustration of a charter party is a change of conditions so radical that accomplishment of the commercial object of the charter is made impossible." (Gilmore & Black, "The Law of Admiralty" (2d Ed) at p 224). This doctrine was developed to ameliorate the harsh common law doctrine that contracts would be strictly enforced without any legal significance being given to changed circumstances.
"In general, supervening impossibility is not an excuse for the non-performance of a contract. Parties may bind themselves and become liable on a contract that is impossible to perform." (NY Jurisprudence 2d, Contracts 384, Vol 22 p50).
As might be expected, the leading case in maritime law which gave relief from the harsh common law doctrine arose out of the unexpected requisition of a merchant ship by a government for use in its war efforts.
The case was Texas Company v Hogarth Shipping Corp (256 US 619, 41 S Ct 612, 65 L Ed 1123 (1921). There, the Texas Company entered into a voyage charter with Hogarth to carry a cargo of case oil from Texas to South Africa. Hogarth nominated the Baron Ogilvy as the performing vessel. The ship was to tender at the load port between April 15 and May 15, 1915. If it was not there, the charterer had the option to cancel or maintaining the charter. (This is a typical provision in voyage charters.)
On April 10, 1915, the vessel was in British waters and requisitioned by the British government. On April 12, 1915, Hogarth notified Texas of this requisition and that it would therefore be unable to perform the charter. Texas then chartered another vessel to perform the voyage. This second charter was performed but at a higher freight rate. Texas sued Hogarth to recover the difference in the freight rates.
The US district court found for Hogarth and dismissed the suit. This decision was affirmed by the court of appeals. Texas argued in the Supreme Court that, under established principles of law, Hogarth had an absolute obligation to perform the voyage. Texas, the charterer, argued that, "The so-called doctrine of frustration is really new in name rather than in nature. Nearly all the cases are simply instances of the well-recognised types of impossibility. No case has ever held that [requisition] alone is enough to establish frustration."
After reviewing the facts in some detail, and dismissing other issues, the court came to the heart of the matter. It affirmed the lower courts and held:
"In this particular case, even though the vessel continued to exist, it was beyond the control of Hogarth. This was enough to put an end to the charter."
The court, without using the word, considered the contract of charter "frustrated" by the intervening act of the British government.
The traditional definition of a maritime frustration has been restated in the case of Hilton Oil Transport v Oil Transport Co (659 So, 2d 1141 (CA Fla 1995), in which commercial frustration in the maritime context was characterised as, "When an unexpected event completely deprives the parties to a charter of an essential precondition to their performance, the charter may be declared dissolved and the parties relieved from further performing it. Such an event is typically a permanent loss of use or destruction of the vessel.
"Three elements are normally necessary for application of the doctrine of frustration or commercial impracticability: first, the event giving rise to the claim must be totally unexpected and unforeseeable; second, the risk of the event must not be provided for, either by the language of the charter party or by custom; and third, the performance of the contract must be impossible or commercially impracticable."
Hilton was a complex case and presented two different aspects of maritime frustration. The first dealt with government action, the second with storms.
Hilton Oil owned the barge Hilton. It chartered the barge to Rio Energy to carry asphalt from Venezuela to Honduras for two voyages. Rio Energy had a subcharter with Comision Admininstradora Del Petroler (CAP), an agency of the Honduran government. Hilton Oil then chartered the tug Elizabeth from Oil Transport for the purpose of towing the Hilton on the two voyages. The asphalt was loaded without incident and the barge and tug arrived safely in Honduras. Difficulties were encountered in discharging the asphalt.
A dispute arose over where the fault lay and who was responsible for it. The port authorities detained the barge and tug, on direction from CAP. While the vessels were under arrest, a storm arose which destroyed the barge but not the tug. Eventually the tug was released from arrest. In all, Oil Transport was without the use of its tug for a period of sixteen months. Oil Transport brought suit in the state court and sought damages for that period at the charter party rate. The trial court awarded that sum and Hilton appealed.
The appellate court was faced with two events which Hilton, as the charterer, claimed were "frustrating" events. The first was the arrest of the tug by the Honduran authorities. The second was the storm which destroyed the barge but not the tug. The tug remained under arrest for a considerable period thereafter. Thus, the court had to determine when the charter ended and, with that, the termination of the obligation of Hilton to pay daily hire. The earliest date was the arrest, the next was the storm which destroyed the barge, and the last was when the tug was returned to the effective control of Oil Transport. The trial court chose the last date.
The court rejected the date of arrest and held, "Our research has simply failed to disclose any legal authority (and Hilton Oil has cited none) to support Hilton Oil's argument that the government's seizure of a charter vessel as a result of a commercial dispute during non-war times will constitute frustration of the charter hire as a matter of law. Indeed, the defence of frustration as a result of a governmental seizure of a vessel has generally only been successful when the seizure occurred during times of war or in anticipation of war."
The court then turned to the date the barge was destroyed by the storm, finding, "that the charter was frustrated and thereby terminated by the subsequent destruction of the barge by the storm. When an unexpected event such as the permanent loss of use or destruction of the vessel completely deprives the parties to a charter of an essential precondition to their performance, it is well settled that the charter may be declared dissolved and the parties relieved from further performance of it.
"In summation, we find the charter party was not terminated by the governmental seizure of the barge and tug, but was effectively terminated by the subsequent destruction of the barge. Thus, Hilton Oil was obligated to pay charter hire to OTC up to the date of the destruction of the barge, and it was error for the trial court to award OTC its daily charter hire rate for the entire sixteen months that it was without the use of its tug."
It is not every unforeseen event that frustrates the commercial purpose of the charter. Most courts and arbitration panels put a heavy burden on the party asserting the defence to prove that the claimed event truly prevents, or excuses, its performance under the contract.
In Transatlantic Financing Corporation v United States (363 F 2d 312 ( 2d Cir 1966), the shipowner sought additional compensation in the nature of quantum meruit for performing a longer voyage around the Cape of Good Hope when the Suez Canal was blocked by order of the Egyptian government. The court denied the claim because increased cost and difficulty of performance does not form a basis for commercial impracticality or frustration.
In reaching this conclusion, the court cited with approval two English cases which reached the same result but had dealt with the issues in terms of "frustration" (Ocean Tramp Tankers Corp v V/O Sonracht (The Eugenia), [1964] 2QB and Tsakiroglow & Co Ltd v Noblee Thorl, GMBH [1960] 2QB 348).
Similarly, many arbitration panels have found that the closure of a named loading port, within a loading range, does not excuse the charterer's performance where there are other cargoes being lifted or available within the range, even though the charterer would suffer substantial losses in taking those cargoes. (Amoco Texas City, Amoco Transport Co v Golden Eagle Liberia Ltd. (SMA 1153, 1977); Energy Explorer, Great Beluga Shipping Co v Bay Oil Trading Co (SMA 1993)
In cases involving wars, trade embargoes, guerilla action, closing of ports, destruction of facilities, natural disasters and the like, no party is at fault, but some party must bear the financial consequences. With this in mind, the law and commercial practice place a heavy burden on the party claiming that the event excuses future performance.
- In volume 7 of the Maritime Advocate, to be published in April 1999, Pat Martin deals with an entirely different concept of frustration in which one party alleges that the other has breached the charter in a fundamental manner going to the heart of the deal, and where the non-breaching party seeks to terminate the charter and recover damages. Whereas in the former instance frustration is used as a shield, in the latter it used as a sword.
Pat Martin practises maritime law in New York and New Jersey and is a retired member of Hill Rivkins & Hayden. He is presently chairman of the Maritime Arbitration Committee of the Maritime Law Association of the United States.