UK: No Frustration Of Charterparty Where Cost Of Repairing Vessel Exceeded Her Market Value

Bunge S.A. v. Kyla Shipping Company Limited (Kyla) [2012] EWHC 3522 (Comm)

The principal issue in this case was whether a time charterparty was frustrated after the vessel was involved in a collision and the costs of repairing the vessel exceeded her market value. The particular feature distinguishing this case from previous case-law on the issue was that the charterparty contained an express continuing warranty by the owners to maintain the vessel's hull and machinery insurance up to a specified amount throughout the charterparty. Mr Justice Flaux in the Commercial Court said there was an absence of any authority directly on the point and, reversing the decision of the arbitrator, he held that the presence of this clause in the charterparty meant that the owners could not argue that repairing the vessel and continuing with the charterparty were, at the time of the collision, commercially impossible or that the vessel was a commercial loss. Rather, the clause in question meant that there was an assumption of risk and responsibility by the owners to repair any hull damage up to the insured amount. In this case, the insured amount exceeded the costs of repair and the judge concluded, therefore, that the charterparty was not frustrated.

The background facts

The vessel was chartered on an amended NYPE 1946 form for a period of 12 to 15 months in the charterers' option. It contained the following clause:

Ten weeks into the charter, the vessel was involved in a collision through no fault of the owners. Two months later, the owners notified their hull and machinery underwriters that they were abandoning the vessel as a constructive total loss and also informed the charterers that they considered the charterparty to be frustrated. The basis for the owners' approach was that the likely cost of repairing the vessel would be US$9 million, considerably higher than the sound market value of US$5.75 million at the relevant time. The underwriters originally rejected the notice of abandonment, denying that the vessel was a constructive total loss, although they later settled with the owners after the owners commenced US court proceedings against the underwriters.

The principal remaining dispute was whether the charterparty was indeed frustrated. The owners argued that the vessel was a commercial total loss and relied on an alleged general principle peculiar to charterparties that a charterparty will usually be frustrated where the vessel is damaged such that the costs of repair exceeds the value of the vessel. The charterers contended that, irrespective of any such alleged general principle where there was no warranty as to the level of hull insurance, clause 41 of this charterparty obliged the owners to repair the vessel up to the insured value of US$16 million (i.e. far more than the costs of repair). The charterers submitted that this meant that the owners could not rely on the fact that the costs of repair exceeded the vessel's market value to declare the charterparty frustrated.

The dispute went to arbitration. The arbitrator agreed with the owners that there was a general principle that a charterparty will usually be frustrated where the vessel is damaged such that the costs of repair exceed the value of the vessel and that only a very clear provision, which clause 41 in his opinion was not, would oblige an owner to repair in those circumstances. He, therefore, held that the charterparty had been frustrated on the date of the collision. The charterers appealed.

The Commercial Court decision

Mr Justice Flaux stated that the correct approach in cases of frustration was to ask, in each case, whether on its true construction, the contract under consideration provided for the event or contingency which had occurred or allocated the risk of that event or contingency to one or other of the parties. Among other cases, he cited The Sea Angel [2007] EWCA Civ 547, where the Court of Appeal confirmed that the contractual allocation of risk was a primary factor in deciding whether or not a charterparty was frustrated.

The judge was not persuaded that there was any general rule that a charterparty was discharged where the costs of repair exceeded the value of the vessel. Even had there been such a general rule, however, he was of the view that it did not apply in cases where the charterparty contained an express continuing warranty concerning hull insurance. Clause 41 in this case required the owners to keep in place full hull and machinery cover throughout the charterparty up to the amount of US$16 million. It followed that, unless the underwriters refused to pay out, there would be an expectation on the part of the charterers that the hull and machinery insurance would be available to cover the costs of repair up to the insured value.

In the judge's opinion, clause 41 made it impossible for the owners to argue successfully that the costs of repair, which were several million dollars less than the insured value, were something "radically different" from what was contemplated and provided for in the charterparty. In other words, by virtue of the continuing warranty in clause 41, the charterparty allocated to the owners the risk that, if a casualty occurred and the vessel required repair, she should be repaired where the costs of repair were within the insured value.

The judge also found that the principle that the court will disregard the fact that a party has insurance available, for example when assessing whether that party has suffered a loss, did not apply in this case. In the context of contractual disputes, that principle meant that where there was no mention of specific insurance in the contract, it was disregarded and played no part in the allocation of risk. However, the principle did not apply where one party had expressly undertaken and warranted that particular insurance to a particular value would be taken out and maintained throughout the charterparty.

The judge commented that there was no injustice in holding the owners in this case to their bargain. In fact, it was clear that the underwriters had been content for the vessel to be repaired. In the judge's view, far from the charterparty being frustrated, there seemed to be an element of "self-induced" frustration in the sense that the real reason the charterparty was terminated was that the owners elected not to repair the vessel. He concluded that the charterparty was not frustrated and allowed the appeal.

Comment

Arguments of frustration of contract do not routinely succeed before the English court, which will incline to the view that the risk for most eventualities will have been allocated in the contract and will fall on one or other party. In this case, the judge relied on the charterparty warranty regarding hull insurance to dismiss the argument of frustration. It remains to be seen which way the court goes in the future where the costs of repairing a vessel exceed the market value and there is no such warranty in the charterparty.

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