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Frustration

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Typography

Frustration. Frustration of a contract occurs when, through circumstances entirely beyond the parties' control, the commercial object of the contract is entirely frustrated.

"Frustrated" here means that the purpose of the contract cannot be achieved. The contract becomes impossible or practically impossible to perform. Usually the parties to the contract cannot agree where the risk of loss should fall, and a dispute arises to be resolved by arbitration or litigation. The law governing frustration covers "frustrating" events that are expressly or impliedly governed in the contract. It will not apply where one party's chosen or preferred method of carrying out the contract has become impossible or illegal.

The expression "frustration of the adventure" in charterparties relates to a delay of such a durationwithout the actual fault of either party-as to frustrate the performance of the charter. The following example may explain the position. A ship on a voyage has suffered serious damage caused by an excepted peril. After survey at a port of refuge it turns out that the cost of repairing the damage will be so high as to exceed the value of the vessel when repaired. In other words, the vessel is not worth repairing from a commercial point of view. In marine insurance this is generally called a "constructive total loss". In such a case the commercial object of the maritime adventure has been frustrated by an excepted peril and the shipowner may be under no obligation to complete the voyage.

"Frustration" therefore means that the charter comes to an end: it is "determined" or "cleanly" terminated. Both parties-the shipowner and the charterers are discharged from their obligations to carry out any performance of the contract. If any money is paid it is recoverable, except for "advance freight", which may not be recoverable. If part of the original purpose of the contract can be performed or if another similar, though loss-producing, activity can be carried out; the contract may be considered to remain in force but damages can be claimed.

For example, in The Captain George, 1970, a ship was chartered in April 1967 for a voyage from Mexico to India. The distance via the Suez Canal was 9,700 miles. In June 1967 the Canal was closed owing to war. The ship tamed back from the Canal approach and continued on its voyage via the Cape of Good Hope. The new distance was 18,400 miles. The owner was not permitted to treat the original contract as having been frustrated by the Canal's being closed and the carriage of the cargo to India was under a new, more expensive "contract" which was more expensive to perform because of the additional costs for fuel. The shipowner had to carry the risk of the additional cost in carrying out the original purpose of carrying cargo from Mexico to India.

Therefore, war and hostilities usually prevent the performance of charterers, which then become frustrated. Examples of frustration occurred during the Iran-Iraq war between 1980 and 1988 and after the Iraqi invasion of Kuwait in August 1990.

In another case The Hong Kong Fir, 1962, the question of seaworthiness of a ship on time charter came before a court to be decided and the time charterers were unsuccessful in a claim of frustration of the charter. The ship was chartered for two years. The engines broke down regularly, perhaps owing to the general incompetence and inadequacy of the engine room staff. Four months after the charter commenced, major repairs had to be carried out. These took another three months and the owners wanted to redeliver the ship to the time charterers, who attempted to treat the contract as frustrated. They were not allowed to do so. It was not impossible to rectify the matter and the charterer could sue the shipowner for damages if the ship was not kept in an efficient state. However, if the owner does not remedy the problems within a reasonable period, the charterer may be allowed to treat the charter as being frustrated.

If the mere extra expense of performing a charter does not result in its frustration, other causes may allow the contract to be treated as frustrated. As explained above, delay in rectifying a deficiency could be one such cause. Another cause would be impossibility of performance because of war. For example, after the outbreak of war between Iran and Iraq in 1979 many ships were trapped in the Shaft-el-Arab waterway. The entrapment can be considered to be a frustration, as the decisions in a number of cases after the Iran-Iraq war showed.

The circumstances for which a contract of carriage can be discharged because of frustration were examined in the English Court of Appeal in The Super Servant II, 1990. A contract was made with the owners of heavy-lift vessels to carry a large drilling rig from Japan to the North Sea. It was agreed that the rig would be carried on board either Super Servant I or Super Servant II at the owners' option. The owners were allowed to cancel the contract of carriage if various circumstances occurred such as ". . . perils of the sea . . . or any other circumstances whatsoever, causing extraordinary periods of delay and similar events and./or circumstances which reasonably may impede, prevent or delay the performance of this contract".

Many months before the drilling rig was due to be carried, the Super Servant II, which the owners had intended would be used for the carriage, sank. The other vessel was under contract to carry other cargo for the period during which the drilling rig would have to be carried.

The court held that the owners could not cancel if the vessel sank because of their negligence. If the owners were negligent, the effect on frustration and discharge of the contract of carriage was governed by the classic position in English law concerning frustration. This was that frustration occurs when, without default of either party, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would cause the obligation to become radically different from that, which was agreed in the contract.

The leading judgment contained a summary of the principles of frustration:

(a) To achieve justice, frustration permitted the parties to escape from literal performance of their obligations if performance was impossible;

(b) Frustration ends the contract immediately and automatically and the parties are relieved from further performance. Therefore, the doctrine should not be used too easily;

(c) Frustration cannot occur through the act or choice of one of the parties to the contract; it must have an external cause;

(d) The external event must occur without fault on the side of the party attempting to claim that the contract should be treated as being frustrated.

If the loss of the vessel was not caused by the owners' negligence, its sinking would have been an external event allowing the contract to be frustrated and allowing the owners to escape further performance. On the other hand, the owners of the drilling rig argued that because the contract of carriage was for one vessel or a substitute, the loss of one vessel did not mean that the performance of the contract would be very different from that originally agreed. The Court of Appeal held that if there were no provision for a substitute, the contract of carriage would have been frustrated if the loss was caused without negligence of the shipowner. However, there was a substitute provision in the contract of carriage. Therefore it could not be established that the contract would have to be performed in a very different manner to that originally agreed. Therefore, the contract could not be treated as being frustrated.

With regard to the principle that a parry cannot rely on the doctrine of frustration if he is at fault for the "frustrating event", the judge said that the doctrine depended on:

". . . whether the frustrating event relied upon is truly an outside event or extraneous change of situation, or whether a is an event which the party seeking to rely on it had the means and opportunity to prevent, but nevertheless caused or permitted to come about."

Therefore the event must be one over which the party claiming frustration has no control and for which he is not responsible.

Under the English Law Reform (Frustrated Contracts) Act 1943 a court may award one parry his expenses that may have been incurred before frustration occurred. However, Section 2 of the Act states that the Act does not apply to charters except time charters and demise charters and does not apply to any other contract (except a charter) for carriage of goods by sea. Thus a contract evidenced by a bill of lading may come under the Act.

The effect of frustration relieving both parties from further performance or even liability is quite different from a breach of charter which can lead to one party's "repudiating" (cancelling) the contract, thus also bringing it to an end but reserving the right to claim for damages.

 

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