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Something “radically different”? A look a charterparty frustration

Bunge SA v. Kyla Shipping Company Limited (The “Kyla”) [2012] EWHC 3522 (Comm) (Flaux J.)

Something "radically different"? A look a charterparty frustration

Bunge SA v. Kyla Shipping Company Limited (The "Kyla") [2012] EWHC 3522 (Comm) (Flaux J.)

Where a vessel under time charter requires repair, and has the benefit of hull insurance, in what circumstances will the charter be considered frustrated if the repair time and costs are likely to be excessive? This was the issue the Commercial Court was recently asked to consider on appeal from a London maritime arbitration award.

Just 3 months into a 12-15 month time charter, "Kyla" was hit by another vessel while at berth at Santos on 9 May 2009. Repair costs were estimated to be US$9 million against the sound market value of US$5.75 million. If effected, the repairs would take 5 months.

Owners were successful in arbitration in arguing the charter was frustrated by reason of the collision and resultant damage to the vessel. The tribunal was persuaded there was a general principle that a time charter would be frustrated not only by the actual loss of the vessel, but also if the costs of repair relative to the value of the vessels made repair commercially unviable and/or if insurance purposed the vessel was a constructive total loss (Blane Steamships v Minister of Transport [1951] 2 Lloyd's Rep 155). To hold the owner to carry our repairs would be commercial nonsense and would "hold the owners to that obligation…would be to hold them to a wholly different bargain of a radically different nature such that they could fairly say …It was not this that I promised to do"

The tribunal decided that Clause 41 of the charter, which provided a continuing warranty that owners would maintain hull and machinery insurance of US$16 million, did not impact on the matter, since a specific undertaking to effect repairs from the hull proceeds could not be inferred from the provision. Its obvious purpose was to provide an enforcement asset in the event of a total loss. The clause did not say that the hull proceeds were to be treated as a repair fund. In any case, such fund was not certain since there could be coverage issues which prevented any payment by underwriters.

The Commercial Court disagreed with the tribunal, and held that the charter, the loss of which (since owners sold the vessel for scrap and only later claimed on the hull insurance) cost the charterers about US$4 million - was not frustrated.

The approach to be followed was that of Rix L.J. in The "Sea Angel" [2007] 2 Lloyd's Rep 517 (where a 3 month detention by a port authority was found not to frustrate a 20 day charterparty). The doctrine demanded a "multi-factorial" approach looking at the factual context, the parties' knowledge, expectations and contemplations, the nature of the supervening event, and the possibility of future performance in the new circumstances. However, since contracts were all about allocation of risk, the "radically different" test was important; there had to be a break in identity between the contract as provided for, and its performance in new circumstances. The analysis also turned on the demands of justice for the parties.

Flaux J. held that there was no inflexible authority that if repairs exceed value the charter is frustrated, but instead the modern approach was to look at matters in the round as Rix L.J. had suggested, not just one factor (cost versus value). In this context clause 41 was important, since it clearly contemplated that hull insurance would, amongst other things, be available to cover the cost or repairs. It was impossible to say that what had occurred- a casualty the costs of repairing which was less than the full insurance value of the vessel- was "radically different from what was contemplated or to a 'ruinous expense' or that there is a break in identity between the contract as provided for and its performance in these circumstances".

Claude 41 therefore allocated risk of the event of a casualty requiring repair less than the insured value, and there was no frustrating event. There was nothing unjust in holding owners to that bargain.

This decision provided a useful reminder that in considering frustration situations, the courts will look carefully to the parties' allocation of risk and will be loathe to permit the parties to walk away from performance simply because performance has become much more commercially onerous for one. The key question is whether the contract has become radically different, rather than radically more expensive.

Mike Burns
Marine & Transit Team
Weightmans LLP