Time Charters. Frustration Last updated 26-May-2015

What is clear is that where people enter into a contract which is dependent for the possibility of its performance on the continued availability of the subject-matter, and that availability comes to an unforeseen end by reason of circumstances over which its owner had no control, the owner is not bound unless it is quite plain that he has contracted to be so.
Bank Line v Arthur Capel & Co [1919] AC 435 per Viscount Haldane.

Continued availability of the subject-matter …

From the second half of the nineteenth century, English courts, while insisting on performance of the contract within strict limits of self-imposed obligations, started to abandon a pure literal approach in cases, where, if followed to the letter, performance would lead to results so irrational that it was absurd to suppose that two commercial men entered into a contract to pursue it to this end. Taylor v Caldwell (1863) 3 B. & S. 826; 32 L. J. (Q.B.) 164, Dakin v Oxley (1864) 15 C.B. (N.S.) 646, Jackson v Union Marine Insurance Company (1874) 10 CP 125, Dahl v Nelson, Donkin, and Others, (1881) 6 App. Cas. 38 illustrate this change in legislative approach. To do a justice between the parties the courts of law begun to apply new legal ‘device’ - the doctrine of frustration - allowing to discharge both sides from otherwise absolute mutual promises when they themselves have failed to provide for the particular event which have happened. The courts were often approached to investigate the true sense of contractual terms and to derive from the words embraced in the contract the same idea which the contracting parties intended to convey when they negotiated the contract (see also Rules of Construction).

In cases of total loss of the vessel application of the doctrine was straight in line with the Taylor v Caldwell rule, i.e. that the parties by implication shall be excused in case where further performance becomes impossible from the perishing of the subject-matter of the contract. On the other hand, many difficult disputes originated from the instances where the chartered ship was requisitioned by the government for prolonged or indefinite time and long delays suffered by the parties due to blockades and restrain of princes.

The view expressed in relation to frustration of time charter contracts in Admiral Shipping Co.,Ltd. v Weildner, Hopkins & Co [1916] 1 KB 429, by Bailhache J. reflected Lord Parker’s words in F. A. Tamplin Steamship Co.Ltd. v Anglo-Mexican Petroleum Products Co.Ltd [1916] 2 AC 397 that:

"The owners are not concerned in the charterers doing any specific thing beyond the payment of freight as it becomes due".

Thus application of the doctrine of commercial frustration to a time charterparty was questioned on the view that so long as the shipowner’s object is to receive chartered hire, then he does not care how much the charterer’s adventures are frustrated so long as he is able to pay.

But in Scottish Navigation Co., Ltd v W. A. Souter & Co. [1917] 1 KB 222 and in Bank Line v Arthur Capel & Co [1919] AC 435 this view was regarded as erroneous. During the First World War formed a legal thesis that the essence of time charterparty is the further performance of the contract by one party which forms consideration for the payment by the other. When such performance, i.e. utilisation of the owners’ vessel to provide contracted service for the charterers has become impossible, that effects a dissolution of the contract.

Rights ought not to be left in suspense or to hang on the chances of subsequent events. The contract binds or it does not bind, and the law ought to be that the parties can gather their fate then and there.
Per Lord Sumner in Bank Line v Arthur Capel & Co [1919] AC 435

Since then the doctrine of frustration has been in large degree developed from the shipping cases dealing with delay but general principles of frustration are not peculiar to contracts of affreightment. Charterparties are most commonly frustrated either by the ship becoming an actual or constructive total loss, i.e. destruction of the subject-matter of the contract, or by delay or interruption of the charter service of such length as to render the performance a thing radically different from that undertaken by the contract, i.e. destruction of the commercial purpose of the adventure. Same principle as in ordinary law of contract applies, that is, when performance of a contract becomes impossible due to some supervening and unforeseen circumstances, arising without default of either party, then the contract cease to bind either party to it.

The parties released from the contract even if the cause of frustration was within the contemplation of the parties when they made the contract. In this context the "unforeseen circumstances" means circumstances for which was no provision made in the contract.

The parties may make provision about what is to happen in the event of this destruction taking place, but if the true foundation of the doctrine is that once the subject-matter of the contract is destroyed, or the existence of a certain state of facts has come to an end, the contract is at an end, that result follows whether or not the event causing it was contemplated by the parties. It seems to me, therefore, that when one uses the expression unforeseen circumstances in relation to the frustration of the performance of a contract one is really dealing with circumstances which are unprovided for, circumstances for which (and in the case of a written contract one only has to look at the document) the contract makes no provision.
Per Goddard J. in W. J. Tatem Ltd. v Gamboa [1939] 1 K.B. 132.

Whether supervening event is of such a nature as to frustrate commercial purpose of the adventure depends on the facts of the case and is also the question of probabilities. The matter of probabilities, however, is not an easy one to decide, especially bearing in mind that fact that, the dispute usually appears in the court after some considerable time has elapsed from the moment of occurrence of an alleged frustrating event, so that the actual consequences of such event are already known. It is also evident that the question of probabilities can not be left considered by the parties for an infinite period of time, thus leaving the contract in suspension.

The probabilities as to the length of the deprivation and not the certainty arrived at after the event are also material. The question must be considered at the trial as it had to be considered by the parties, when they came to know of the cause and the probabilities of the delay and had to decide what to do. On this the judgments in the above cases substantially agree. Rights ought not to be left in suspense or to hang on the chances of subsequent events. The contract binds or it does not bind, and the law ought to be that the parties can gather their fate then and there. What happens afterwards may assist in showing what the probabilities really were, if they had been reasonably forecasted, but when the causes of frustration have operated so long or under such circumstances as to raise a presumption of inordinate delay, the time has arrived at which the fate of the contract falls to be decided. That fate is dissolution or continuance and, if the charter ought to be held to be dissolved, it cannot be revived without a new contract. The parties are free.
Per Lord Sumner in Bank Line Ltd v Arthur Kapel & Co. [1919] AC 435

Accrued rights are unaffected by the dissolution, but neither party is liable in damages for breach of an obligation in the charterparty performance of which was not already due at the date of the dissolution, nor can either party be compelled to repay money received by him under the charterparty before it was dissolved, unless at the date of the dissolution a right to this repayment had already accrued. These consequences follow whether the charterparty is for a voyage or for time, and whether the delay is or is not due to a cause covered by an exception in the charterparty.

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