Frustration arising out of fault

THIS branch of the doctrine of maritime frustration is completely different to the three-part test associated with an unexpected event not covered by the wording of the charter party which renders performance impossible or commercially impracticable. The words are the same, but are used in a different context.

The leading case is Hong Kong Fir Shipping Co Ltd v Kawasaki Kesen Kaisha, 1962, 1QB 26). There the vessel was let on time charter for a period of twenty-four months. The vessel was delivered at Liverpool and ordered to Japan. At delivery, the engineroom staff was undermanned and the engines very old. The inevitable happened. The engines broke down and the vessel went off hire for a period of five weeks. It eventually arrived at Osaka. It was surveyed and a determination made that extensive repairs were needed which would take an estimated fifteen weeks to accomplish. The repairs were effected and the vessel was seaworthy as of September 15, 1957. Thus it was offhire for four months in the first seven months of the twenty-four-month charter.

In June and September, the charterer wrote to the owner repudiating the charter. The court also noted that there had been a sharp drop in charter rates. Although not stressed in the speeches by the judges, there was a strong incentive for a charterer to repudiate a long-term charter in a falling market.

The practical commercial question is how bad is bad enough. In other words, if the vessel cannot perform to charter party standards, at some point in time, the charterer is entitled to declare the charter frustrated, thereby terminating its obligation to pay further hire and to seek damages. The charterer is not seeking a declaration that the charter is ended without fault.

Justice Sellers held that,"The charterer may rightfully terminate the engagement if the delay in remedying any breach is so long in fact, or likely to be so long in reasonable anticipation, that the commercial purpose of the charter is frustrated." He concluded that the maintenance clause was a "warranty", the breach of which gave rise to damages. It was not a "condition" the breach of which would allow the other party to cancel.

Specifically, the charterer was wrong to repudiate. Its proper remedy was to seek damages for breach. A similar result was reached in the Hermosa (Chilean Nitrate Sales Corporation v Marine Transportation Co, 1982, 1LLR 570). There the vessel was in a poor condition that would take an extended period of time to repair. The precise issue was whether the sub-time-charterer, Nitrate, was entitled to repudiate when there was considerable uncertainty about the owner's intention to repair in the event that the repairs were carried out after Nitrate's repudiation.

The court held that Nitrate was at fault for striking too soon. It said, "In other words, what Nitrate was faced with was the threat of serious delay. The owner and MTC by their conduct were announcing that the vessel would not be ready for perhaps two or three months. Such conduct could amount to a renunciatory breach if the contemplated delay was sufficient, in a commercial sense, to deprive Nitrate of the benefit of the remainder of the charter, but this was not alleged.

"We sympathise with Nitrate's sense of anger and frustration, in the non-legal sense of the word ... But ... repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal to perform obligations. Nitrate should have continued to press for definite information as to the owners' and MTC's intentions. They struck too soon ..."

Thus, we see one again that the principle of frustration is easy to argue but difficult to prove.

The charterer was successful on this point in the Aegean Dolphin (Dolphin Hellas Shipping SA v Intemsflot Ltd, 1992, 2 LLR 178). There the charterer had taken on the vessel to perform cruises in Australia. The vessel had to be capable of meeting a strict cruise schedule of three ports in seven days. It could not, and the charterer repudiated. The dispute was submitted to arbitrators, who found that the vessel could not make its speed or the intended schedule. They concluded that the charterer had the right to consider the charter repudiated. The court concluded that the arbitrators had applied the correct legal standard to an essentially factual situation. A similar result was reached in the Strider Juno and Strider Isis (Promotora de Navegacion SA v Turbana Corporation (SMA 3293, 1997).

The difficulty in applying precise rules of legal reasoning for essentially commercial disputes is often encountered by arbitrators. An arbitration in point is the Arhon (Yuma Shipping Corporation v Oswego Operations I Corporation, SMA 1844, 1983). The dispute arose under a Mobiltime charter of the Liberian-flag Arhon for a period of about 27 months to commence about August 1981, with redelivery on or about October 30, 1983. The vessel was time-chartered by Oswego Operations I Corporation, a subsidiary of Marine Transport Lines, from Yuma Shipping Corporation as owner.

In late December 1981, the Arhon sailed from Algeria with a cargo of No 6 fuel oil for New York. During this passage the vessel encountered a major North Atlantic storm with rough seas and winds up to Beaufort scale force 9-10. On January 8, the vessel's rudder became locked in the port position and was later carried away. The storm caused heavy weather damage to the deck steam lines, requiring a cessation of cargo heating. The engineers also reported damage to the main engine and boilers. The vessel was subsequently taken in tow, arriving in Halifax on January 28.

After discharging its cargo to another vessel, the Arhon was ultimately directed to Falmouth for permanent repairs, arriving there on June 2, 1982. Its stay there lasted about six months, after which the vessel tendered on November 24, 1982, as being ready, willing and able, to redeliver under the MTL charter party. It was MTL's position at arbitration that the vessel went off-hire on January 8, 1982, and retendered some 300 days later, after undergoing what it considers to have been minimal repairs at Falmouth. Since the vessel was out of its service for about half the period remaining under the charter, MTL submitted that the extensive repair period in and by itself was a frustrating event permitting it to cancel.

The charterer further asserted that the owner was, and continued to be, in breach of the charter in its failure to execute reasonably prompt repairs after the casualty and in deliberately misleading the charterer as to the extent of the vessel's damages and its intention to repair. MTL contended that it was entitled to cancel the charter and consider its performance obligations at an end. The owner maintained that MTL had wrongfully repudiated the charter in refusing to accept the vessel's redelivery on November 24. As of that date, over eleven months still remained of the charter term.
The pertinent question came down to whether MTL had carried its heavy burden of establishing contract frustration. The panel noted that the phrase 'frustration of the commercial purpose of the adventure', as it relates to charter parties, is no more than a particular application of the more general principle that contracts may become impossible or impractical to perform by reason of supervening and unforeseen circumstances, arising without the fault of either party. Whether the supervening obstacle or material breaches underlying the frustration question are sufficient depends on the facts of each case. The issue was whether the owner's conduct and its material breaches of the charter party rendered MTL's future performance impossible or commercially impractical. And would MTL's further performance be a 'radically different thing'?

Drastic remedy

The panel agreed that frustration had to be regarded as a drastic remedy and that mere extra expense, onerousness of performance, and inconvenience were clearly insufficient to relieve parties from performance. Pointing out that it was not aware of any case in which a party opposing a defence of frustration had itself deliberately created the situation complained of, the panel unanimously granted MTL's defence of frustration.

Although this arbitration award is now fifteen years old, it neatly summarises the law and commercial reality. There is a heavy emphasis on the burden of proof and the quality of the evidence presented to the panel. The central issue of who wins and who loses in frustration cases is often decided by the extent to which a party devotes time, effort and money to what at times is a frustrating endeavour.

The doctrine of maritime frustration has sometimes been lost in a fog of imprecise thinking and run-on citations in cases and awards. When faced with the immediate issue, a party should:

• (i) Read the contract - Many contracts, including the referenced terms and conditions of another document, have clauses which have a strong bearing on the legal position.
• (ii) Gather all information about the event quickly. If necessary, send someone to the scene to investigate and report back. Collect all information in a central location where it can be accessed.
• (iii) Keep good notes as events occur, particularly where there is a duty to mitigate, which efforts are likely to be challenged later.
• (iv) Develop a strategy, including the anticipated costs of various alternatives
• (v) Consider the alternatives - both yours and the other side's
• (vi) Be prepared to negotiate, and be flexible and reasonable
• (vii) Consult your attorneys and solicitors, your underwriters and clubs, the sooner the better, but don't let them take over your responsibilities to minimise the ultimate loss in terms of cost, time and effort.
• (viii) Face the fact that it is your problem to deal with and hopefully solve, even when the other side may be at fault.
• (ix) Lastly, keep in mind that what constitutes a "frustrating" event may often be in the mind of the beholder. This could be three arbitrators, three years later, trying to assess all the evidence after a long and difficult set of arbitration hearings.