Defence Guides Frustration and force majeure

Frustration The fact that the event was Financial loss contemplated by the parties at the Frustration occurs when, without Whilst a frustrating event would time the contract was entered into default of either party, the inevitably cause financial loss of a is relevant and is likely to (though performance of a contract is rendered party if the charter was continued, not automatically) negate a claim for impossible or changes the party’s financial loss does not in itself cause frustration of the contract. principal purpose for entering into the the charter to be frustrated. “The fact contract so as to render it “radically that it has become more onerous or Causation: fault, election different” (Davis Contractors V. more expensive for one party than and negligence Fareham UDC [1956] A.C. 696). he thought is not sufficient to bring A frustrating event cannot be self- about a frustration. It must be more What makes a contract “radically induced. If the alleged frustrating event than merely more onerous or more different” is a question of fact and will is due to the deliberate act or choice expensive. It must be positively depend on a wide range of factors. of one of the parties, they will not be unjust to hold the parties bound” The situation in which frustration can allowed to rely upon the doctrine of (The Eugenia [1963] 2 Lloyd’s Rep be invoked is tightly controlled by frustration. A party to the charter will 381 ). For example, the fact that the courts and the mere incidence not be able to rely upon the doctrine contemplated route is not available of expense, delay or onerousness of frustration if an event which makes will not generally frustrate the charter. is not sufficient. further performance impossible has Among the factors which have to been caused by their breach of the be considered are the terms of the charter or their own negligence. contract, the contemplation of the parties (in particular as to risk at the time of contract,) the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances (The Sea Angel (2007) 2 LLR 517). Defence Guides

An exception for commercial Delay The same event may frustrate loss: damage to vessel A charter may be frustrated if a voyage charter but not a time However, a line of older cases the performance of the charter is charter suggests an exception to this rule, sufficiently delayed. The main factor War, ice or strikes for example may which arises where a vessel sustains is whether the interruption will be, (or not necessarily render the charter damage on voyage and the costs of likely to be) substantial in relation to frustrated depending on the terms of repairing her to the extent necessary the remainder of the charter period. the charter. A war or a general strike to enable her to complete the The length and effect of the may frustrate a voyage charter whilst voyage (and the repair could thus be interruption must be assessed at these may not have any effect on a temporary) would exceed her repaired the time that the cause of the delay time charter with a wider trading limit. value, such that no reasonable owner operates and without the benefit It does not matter for example that a would incur that cost. In that case the of hindsight. If at the outset of an time charterer intended to trade the situation is treated in the same way as event, the delay appears likely to be ship between the UAE and Yemen (a if a repair was physically impossible of short duration, the contract will country now at war); if the charter and is considered now to be a species be frustrated when subsequently permits the ship to trade between of frustration (The Kyla [2012] EWHC it appears that the delay will be other places then the charter will 3522 (Comm).). The exception will inordinately lengthy. not be frustrated even though the not apply however where the charter charterer may find it hard to find contains an obligation on owners The type of delaying events capable employment for the ship. to maintain a certain level of hull of causing frustration are: insurance coverage, from the proceeds Requisition Events covered in the charter of which the cost of repair could be funded; in that case owners cannot War As seen above, strikes, ice and wars claim that they could not reasonably Strikes may lead the charter to be frustrated. be expected to fund the repair cost, so What is the position where the charter long as that cost is within the agreed Ice already regulates these situations? sum insured (The Kyla). Can the charter still be frustrated or the fact that the contract already deals with these events bars one party from claiming frustration? The established view is that it is relevant but not conclusive. Unless a clause specifically excludes the doctrine of frustration from operation and is a complete provision, a party will be able to claim frustration if the contract is rendered “radically different”. As put in the case Fibrosa v. Fairbairn ([1943] AC 32 ): “where supervening events, render the performance of the contract indefinitely impossible and there is no undertaking to be bound in any event, frustration ensues even though the parties may have provided for the case of a limited interruption”. Defence Guides

Damage, delay in obtaining Because force majeure is not a This was recently illustrated in a case the cargo common law concept, parties will try Classic Maritime Inc v. Limbungan to recreate it contractually and set Makmur SDN BHD [2019] EWCA Civ A charterer owes an absolute and non- out in advance a list of events where 1102 . The charterers had long term delegable duty to provide cargo for force majeure can be invoked. Most supply contracts in place with two loading (The Nikmary [2003] EWCA voyage charters will contain force Brazilian mining companies, Samarco Civ. 1715 ) and if they are able to do majeure clauses such as: “Strikes or and Vale. Under the COA, charterers so because of their chosen supplier lockouts of men, or any accidents or had the option to either ship from fails to supply a cargo, that event will stoppages on Railway and/or Canal, the port where Samarco exported, or rarely amount to a frustrating event and/or River by ice or frost, or any another port where Vale exported. or an event beyond the control of the other force majeure causes including Following a dam burst, production charterer (The Mary Nour [2008] 2 Government interferences, occurring at the mine operated by Samarco Lloyd’s Rep. 526). beyond the control of the Shippers, stopped and as a result charterers If the intended cargo is damaged or Consignees, which may prevent or were unable to procure any cargo before shipment, the contract will delay the loading and discharging of from this supplier. Charterers could not be frustrated unless it related to the vessel, always excepted” (Sugar not procure cargo from Vale. The a specific cargo. Charterers will have charter party 1969). court held that all charterers had to do was to make all reasonable to find another source of cargo. The Force majeure under English law only efforts to ship out of the other port same goes if charters are delayed shares two of the three elements of instead. If charterers took reasonable in obtaining the intended source of the civil law concept. cargo. However, if there are no other steps to provide cargo but still failed, then force majeure was the cause of alternative cargo, the contract may Externality be frustrated. charterers’ failure to perform and in A force majeure clause can only be that event the force majeure clause Force Majeure invoked if the event occurs without would have given charterers a defence the intervention of any other parties. to owners claim for damages for Force majeure is a civil law concept A party relying on force majeure failure to provide a cargo, such that which does not exist at common law. must show that the non-performance owners had no claim for an award It is very similar to frustration but has was due to circumstances beyond of substantial damages. a wider scope. Under civil law a force it’s control. majeure event will bring the contract Unpredictability and narrow to an end and parties will be released Irresistibility and party’s obligation interpretation by the courts from their obligations. Three factors to take reasonable steps to of such clauses must be show in order to establish overcome the hinderance force majeure: This where English law defers from A party relying on force majeure must civil law. Force majeure will only Externality show that there were no reasonable be invoked if the event is listed Irresistibility measures that it could have taken to in the force majeure clause i.e. a avoid or mitigate the circumstances foreseeable event. Force majeure Unpredictability or its consequences and must use clauses will be construed against the reasonable means to overcome the party claiming the benefit under the hindrance, whether or not this causes charter and will be strictly construed. a loss on the party relying on the force Any ambiguous clause will offer no majeure clause. For example, if the protection. Broadly speaking they port authority orders the suspension will be interpreted like any exception of loading at a berth but there is clauses in a voyage charter. another berth where the cargo can be loaded, albeit to do so would be at extra time and expense to the charterer, then the clause will not be of any protection. Defence Guides

About the Author

Julien Rabeaux Senior Claims Manager Effect of a force majeure event unable to do so as charterers had T +65 6416 4894 previously defaulted on its obligations E [email protected] Unlike the doctrine of frustration under the COA due to a weak market. where the contract will come The Court therefore concluded that Julien is a Senior Claims Manager in automatically to an end, the effects charterers could not rely on the clause West of England’s Singapore Office. He of force majeure will depend on the to excuse its failure to ship cargoes. studied law in France and England and wording of the clause. The clause may subsequently qualified as a solicitor in a for example suspend the contractual London shipping law firm. Julien was Damages – obligations until the event ceases or based in West of England’s Hong Kong Compensatory principle Office for 5 years, before moving to give the parties an option to cancel Singapore when the Club launched its the contract. In the event that the defaulting party office there. Prior to joining the Club, is unsuccessful in fulfilling the “but for Julien worked for another IG Club in Force majeure as an exception test”, damages will be calculated in the London for 7 years. clause and the “but for” test basis of the compensatory principle. Get in touch A lot of force majeure clauses are The compensatory principle is a West of England Insurance Services drafted as an exceptions clause (as fundamental concept in contract (Luxembourg) S.A. opposed to a frustration clause where law. It provides that parties claiming causation does not have to be proven). compensation for breach of contract Singapore Office 77 Robinson Road This will be a matter of construction. can only recover their actual loss and Level 15-01, Robinson 77 The distinction is important as, in requires parties to take into account Singapore 068896 order to rely on an exceptions clause, events occurring after termination T +65 6416 4890 the party relying on the clause has in assessing damages where those to show that, but for the event, events might affect the loss actually London Office suffered (Bunge SA v Nidera BV [2015] performance would have occurred One Creechurch Place (i.e. causation). If the force majeure UKSC 43). Creechurch Lane clause is drafted as a frustration London EC3A 5AF As of the date of this Guide, the clause, then the relying party can “Classic Maritime” case did not follow T +44 20 7716 6000 invoke the clause without needing this approach on appeal. The Court E [email protected] to show it could have otherwise W www.westpandi.com of Appeal distinguished this case performed its side of the bargain. from the Bunge SA v Nidera BV case,

This was recently illustrated in the which was concerned with assessing © West of England Insurance Services. “Classic Maritime” case described damages for an anticipatory breach. All rights reserved. The opinions expressed above. The force majeure clause was By contrast, the “Classic Maritime” in this publication are those of the authors. held to be drafted as an exception case was concerned with an actual This note is intended for general guidance clause and as such charterers were breach. This is arguably a new only and should not be relied upon as legal required to show that, if the dam had development, though the decision is advice. Should you require specific advice on a situation please contact us. not burst, it would have performed subject to appeal. its obligations under the COA. It was

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