frustration

Bunge SA v Kyla Shipping Company Ltd [2012] EWHC 3522 (Comm)

Summary of fact:

Bunge SA chartered a vessel from Kyla Shipping Company Limited (the owners) on an amended NYPE 1946 form for a period of 12 to 15 months in the charterers’ option. The time charter included the following clauses:

“41.1 Owners warrant that throughout the currency of this Charterparty the vessel shall be fully covered by leading insurance companies/International P&I Clubs acceptable to the Charterers against Hull and Machinery, War and Protection and Indemnity Risk. ….”

“41.3 Insurance full style and value…. Hull and Machinery: USD16,000,000 London, Norway and USA Markets War Risks….”

After ten weeks of charter, the vessel suffered collision damage through no fault of the owners. Two months later, the owners notified their hull and machinery underwriters that they were abandoning the vessel on a claim of constructive total loss. The owners also informed the charterers that they considered the charterparty to be frustrated. The basis for the owners’ approach was that the likely repair cost of US$9 million was considerably higher than the sound market value of the vessel at US$5.75 million. The underwriters initially denied that the vessel was a constructive total loss and rejected the notice of abandonment. However, the underwriters later settled with the owners after the commencement of court proceedings.

The owners submitted that a charter was frustrated if the vessel became a constructive total loss; namely, the cost of the repair exceeded the value of the vessel. When the charter was drawn, it could not be envisaged that the owners would be required to pay more than the vessel’s worth to fulfill its charter obligations.

On the other hand, t...

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...nuing with the charterparty were commercially impossible or that the vessel was a commercial loss. Rather, this clause points to 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 far exceeded the costs of repair and the judge hence concluded that the charterparty was not frustrated.

Claims of contract frustration do not often before the English court which tends to accept that the risk for most eventualities would have been allocated in the contract and would fall on one of the parties involved. In this case, the judge relied on the charterparty warranty on hull insurance to dismiss the argument of frustration. It would be interesting how the court would decide in cases where the costs of repairing a vessel exceed the market value and no warranty provided in the charterparty.