9.1 As Lord Atkinson said in Larrinaga Steamship Co v Société Franco-Américaine:1
The phrase “frustration of a contract” is an incorrect phrase. It is the performance of the contract which is frustrated, with the result that the contract itself is thereby dissolved.
9.2 Whether or not a charter is frustrated is a question of law. The date, however, on which it became frustrated, if in dispute, is a question of fact and therefore to be determined by the arbitrators or other fact-finding tribunal.
9.3 In Tsakiroglou & Co v Noblee Thorl GmbH,2 the House of Lords had to consider a dispute that arose out of the closing of the Suez Canal, as a result of which the sellers of a cargo of Sudanese groundnuts refused to ship them, claiming the contract was frustrated. An appeal board upheld an award by an umpire in arbitration proceedings, who had found that shipping the cargo around the Cape of Good Hope,3 instead of through the Suez Canal, was not commercially or fundamentally different. However, the House of Lords refused to accept this as a finding of fact, since it involved a question of law, although apparently accepting that the finding had evidential value.
9.4 In later years, however, there appears to have been a change of emphasis. Thus, in Pioneer Shipping v BTP Tioxide, Lord Roskill said:4
My Lords, when it is shown on the face of a reasoned award that the appointed tribunal has applied the right legal test, the Court should in my view only interfere if on the facts found as applied to that right legal test, no reasonable person could have reached that conclusion. It ought not to interfere merely because the Court thinks that upon those facts and applying that test, it would not or might not itself have reached the same conclusion, for to do that would be for the Court to usurp what is the sole function of the tribunal of fact.
9.5 Lord Roskill then went on5 to suggest that in some of the reported cases the court had erred in imposing its own view and that, in future, the court should be more reluctant to interfere unless the wrong test had been used, or the conclusion was one that no reasonable person could have reached on the facts found.
9.6 In The Evia,6 the House of Lords also refused to decide when a particular charter had become frustrated, although in several similar disputes arising out of the same circumstances, different dates had been chosen by different arbitrators. On this occasion, Lord Roskill commented:7
The discharge of cargo may have been completed on a different date. The several masters, officers and crew may have left their ships on different dates. A host of differing factors may have arisen, and in common with all your Lordships I resolutely decline to investigate the facts found in other cases to see which choice of date is to be preferred. The choice of date in this case, as in the others, was for the umpire or arbitrator concerned and is not a matter for your Lordships’ House.
9.7 In a voyage charter, laytime, and demurrage thereafter, will normally run until loading or discharging, as the case may be, has been completed or until the contract becomes frustrated. It is, of course, with this latter possibility that this section is concerned.
9.8 In broad terms, there are three types of event that may prevent further performance:
- destruction of the ship or cargo;
- inordinate delay;
9.9 Before discussing these in more detail, it may be useful to say something about the basis of the doctrine of frustration, since there appears to have been a change of judicial thinking. Up to about 1940, many of the cases proceeded on the basis of an implied term. In Tamplin Steamship Co v Anglo Mexican Petroleum Co, having said that a court has no power to change a contract, Earl Loreburn continued:8
… a court can and ought to examine the contract and the circumstances in which it was made, not of course to vary it, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract.
In a similar vein, Lord Sumner said in Bank Line Ltd v Arthur Capel & Co:9
The theory of dissolution of a contract by the frustration of its commercial object rests on an implication, which arises from the presumed common intention of the parties.
No one who reads the reported cases can ignore how inveterate is this theory or explanation in English law. I do not see any objection to this mode of expression so long as it is understood that what is implied is what the court thinks the parties ought to have agreed on the basis of what is fair and reasonable, not what as individuals they would or might have agreed.
9.11 In Denny, Mott & Dickson Ltd v Jas B Fraser & Co, Lord Wright again took up the same theme, saying:11
To my mind, the theory of the implied condition is not really consistent with the true theory of frustration. It has never been acted on by the court as a ground of decision, but is merely stated as a theoretical explanation …
In The Eugenia, Lord Denning MR said, with characteristic directness:12
But the theory of an implied term has now been discarded by everyone, or nearly everyone, for the simple reason that it does not represent the truth.
9.12 More recently, the basis of the doctrine of frustration has been considered by the House of Lords in a non-maritime case, National Carriers Ltd v Panalpina Ltd.13 In his speech,14 Lord Hailsham LC suggested that at least five theories had been put forward at various times. Lord Simon of Glaisdale said, more simply:15
… a number of theories have been advanced to clothe the doctrine of frustration in juristic respectability, the two most in favour being the “implied term theory” (which was potent in the development of the doctrine and which still provides a satisfactory explanation of many cases) and the “theory of a radical change in obligation” or “construction theory” (which appears to be the one most generally accepted today).
9.13 It seems likely that no one theory can explain all the reported cases, although the “construction theory” explains most. This view was first put forward in Davis Contractors Ltd v Fareham Urban District Council, where Lord Radcliffe said:16
… frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni – It was not this that I promised to do.
It should therefore be unnecessary in future cases, where issues of frustration of contracts arise, to search back among the many earlier decisions in this branch of the law when the doctrine was in its comparative infancy. The question in these cases is not whether one case resembles another, but whether, applying Lord Radcliffe’s enunciation of the doctrine, the facts of the particular case under consideration do or do not justify the invocation of the doctrine, always remembering that the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains.
9.15 In D/S A/S Gulnes v ICI Ltd,19 the Gulnes was chartered by ICI to carry ore from Spain to Manchester. A marginal clause provided:
If Steamer is detained at San Juan by any cause arising from the civil war in Spain, riots, strikes &c., charterers agree to pay demurrage and/or dead freight.
After arrival at the load berth, the vessel was hit by a bomb, before loading commenced and suffered such extensive damage that she was eventually towed to Gibraltar to be scrapped. Rejecting the owners’ claim for deadfreight, demurrage and/or damages for detention, Goddard J said:20
I think we have here a case which brings it within the ambit of the line of cases of which Taylor v Caldwell21 is a leading example. Here you have a frustration by the destruction of the subject-matter which the parties must have contemplated would always remain in existence. I do not think this clause makes provision for the destruction or damaging of the ship to such an extent that it no longer remains a cargo-carrying ship.
9.16 In Imperial Smelting Corporation Ltd v Joseph Constantine Steamship Line Ltd,22 the charterers claimed damages for a failure by a vessel called the King-swood to load their cargo. On arrival at the load port, prior to the vessel becoming an Arrived ship, there was a major explosion in the vicinity of the auxiliary boiler, which caused such damage that she could not perform the charterparty, which the owners claimed was frustrated. The cause of the explosion was uncertain and the main issue between the parties was whether the onus lay on the owners to show that it happened without their fault. The House of Lords were in no doubt that the onus lay on the party who asserted there was fault. Viscount Simon LC said:23
In this connection it is well to emphasize that when “frustration” in the legal sense occurs, it does not merely provide one party with a defence in an action brought by the other: it kills the contract itself and discharges both parties automatically. The plaintiff sues for breach at a past date and the defendant pleads that at that date no contract existed. In this situation the plaintiff could only succeed if it were shown that the determination of the contract was due to the defendant’s “default”, and it would be a strange result if the party alleging this were not the party required to prove it.
9.17 However since the previous case was decided, the law relating to what extent a vessel must be damaged before the charter becomes frustrated, has moved on. In The Kyla,24 the ship in question was seriously damaged by another vessel whilst berthed alongside a loading terminal, three months in to a charter for a minimum of 12 months. The cost of repairs was put at US$ 9m, but the ship was insured for US$ 16m. The charter required the vessel to be kept in a thoroughly efficient state. The vessel was not repaired but sold for scrap. The owners said there was a general principle, peculiar to charterparties, that a charter would usually be frustrated where the cost of repairs exceeded the value of the vessel, in this case US$ 5.75m. The charterers said the owners were required to repair the vessel up to the insured value of the vessel. The arbitrator found in favour of the owners.
9.18 On appeal, it was held by the High Court that the principles of the modern law of frustration were set out in cases such as Lauritzen AS v Wijsmuller BV (The Super Servant Two)25 and Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel).26 Frustration occurred whenever the law recognised that without default of either party a contractual, the obligation had become incapable of being performed because the circumstances in which performance was called for would render it a thing radically different from that which was undertaken by the contract.
The earlier cases relied on by the owners did not establish any general rule or principle in charterparty cases that a charterparty would usually be discharged where the vessel was damaged to such an extent that the cost of repair exceeded the value of the vessel. They were all distinguishable.27 In the court’s judgment, the earlier cases were capable of being subsumed within the modern doctrine of frustration. They were not to be treated as establishing some inflexible rule that where the cost of repairs exceeded the value of the vessel, the charterparty would be frustrated, but rather as applications of a principle that if a vessel was a “commercial loss”, the charterparty would generally be frustrated, just as it would be if it was physically lost. The modern law of frustration involved the application of a “multifactorial approach”.28
9.19 The court concluded that the insurance provisions in the charter made it clear that the full insured value would be expected to be available to cover repairs and it was therefore not unjust to expect the owners to meet the cost of repairs. The court also suggested that there was an element of self-induced frustration in that the real reason for the termination of the charter was because the owners elected not to repair the vessel. The court therefore held that the charter was not frustrated.
9.20 It is not clear what, if any, weight the court gave to the simple fact that spending US$ 9m on something worth US$ 5.75m and whose repaired value would probably not be much more than its original value, made no economic sense, but that was really what was behind the principle the owners sought to put forward anyway.
9.21 A case in which it was alleged that a charter had been frustrated by the destruction of the intended cargo was E B Aaby’s Rederi A/S v LEP Transport Ltd.29
What happened in this case was that a ship had been chartered to load a part cargo of “about but not exceeding 65,000 cubic feet of wool in bales” for delivery at Rostock. On the day the ship gave notice of readiness to load, all but 167 bales of the intended cargo were destroyed in a fire at the warehouse in which the goods were stored prior to shipment. In these circumstances, it was held that the charter was not frustrated because it was not for the carriage of the specific goods that were destroyed – the charterers could have performed their contract by getting a different cargo and, in any event, the undamaged cargo could have been shipped. The court also held that 167 bales was not de minimis.
9.22 This is perhaps the most common cause for claiming frustration of a contract and the law reports contain many instances where this has been asserted. Many of the cases concern vessels under time charter, with regard to which similar principles apply as far as this point is concerned. The cases that follow are best considered as examples of how the courts approach the problem of deciding whether there has been an inordinate delay.
9.23 The general principles involved were summarised by Bailhache J in Admiral Shipping Co Ltd v Weidner Hopkins & Co, thus:30
The commercial frustration of an adventure by delay means … the happening of some unforeseen delay without the fault of either party to a contract of such a character as that by it the fulfilment of the contract in the only way in which fulfilment is contemplated and practicable is so inordinately postponed that its fulfilment when the delay is over will not accomplish the only object or objects which the parties to the contract must have known that each of them had in view at the time they made the contract, and for the accomplishment of which object or objects the contract was made.
9.24 The question of whether a contract has been frustrated has to be considered as at the time when the parties came to know of the facts giving rise to the delay and had to assess its likely duration before deciding what action to take. Subsequent events are only of value to the extent of showing what the probabilities at the time really were.
9.25 Some frustrating events, such as the outbreak of a general war or the blocking of a major waterway as the result of a local war, will almost certainly result in the frustration of voyage charters. Other events such as strikes, or natural phenomena such as ice or neap tides, are unlikely to result in such charters becoming frustrated. However, each case must be considered on its own facts and, as some of the cases show, if the courts hold that the contract has been frustrated but the delay subsequently turns out not to be as long as was expected, then the parties have no further redress.
9.26 In Embiricos v Sydney Reid & Co,31