There have been a number of global events in recent times which have threatened the performance of shipping contracts, whether those have been charterparties, shipbuilding contracts or international trade contracts. The doctrine of frustration is often cited by parties seeking to argue that there is a legitimate legal reason for bringing a contract to an end. This article highlights the issues surrounding the doctrine of frustration of contract and the circumstances in which it will apply.

What is frustration of contract?

As a general rule, even if performance of a contract becomes more difficult because of circumstances or even impossible the party who fails to perform is liable in damages.

An exception to this is the doctrine of frustration.  A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which makes it physically or commercially impossible to fulfil, or if an event occurs which has the effect of making a party’s obligation radically different  from that which it originally agreed to perform under the contract. An event will only amount to the frustration of the contract where:

  • it is entirely beyond what was contemplated by the parties when they entered the contract; and
  • it has not been caused by the fault of either party; and
  • the event is such that further performance is impossible, illegal or is radically different from that contemplated by the parties at the time of the contract.

The English Courts construe the facts very narrowly, so that it is difficult to successfully argue that there has been a frustration of contract.

It is not sufficient for a party to argue that their circumstances have changed for example because of a dip in the shipping market and therefore the contract will no longer benefit them. Furthermore, if the  change of circumstances is caused by one of the parties then an argument that the contract has been terminated on the ground of frustration will not succeed.

The assessment of whether or not the event amounts to a frustration will be made by reference to the facts that were available to the parties at the time.

What is the effect of frustration of contract?

Under English law, a frustrating event will result in the contract being terminated, relieving the parties from their obligations and further performance. Because no one party is at fault, neither party may claim damages from the other for non-performance of the contract. The "loss lies where it falls", so each party will bear any expenses or losses that it has borne out of the termination of the contract.

What factors will the Court consider?

In assessing whether or not a Charterparty has been frustrated the Courts have taken into account the factors such as whether the charter is impossible to fulfil (such as will be the case if the vessel sinks);  whether the Charterparty specifies a particular route and that is no longer possible to use;  and whether the new situation poses a peril to the ship, crew or her cargo.

Of course, whether or not such factors amount to a frustration of a Charterparty will also depend on the type of Charterparty; the factors listed above will be unlikely to satisfy a Court that the Charter has been frustrated where the contract is a Time Charterparty as a substitute vessel could be chartered in.

It has been held that war or threats of hostility will not be sufficient frustrate a charter. It was made clear by Mustill J in the Chrysalis (Finelvet AG v Vinava Shipping Co Ltd [1983] 1 W.L.R. 1469) that “a declaration of war will not prevent the performance of a contract: it is the acts done in the furtherance of war which may or may not prevent performance depending on the individual circumstances of the case”.

Even where such events result in the blockage of a particular route for the vessel, this will not be sufficient to frustrate a charter. In 1956, the Egyptian Government blocked the Suez Canal, forcing vessels to take a longer route around the Cape at expense. It was held that this did not amount to a fundamentally different situation so as to frustrate the charter (Denning, LJ. “The Eugenia” [1964] 2 QB 226).

The doctrine of frustration is often an argument which is put forward by parties to a sale contract, or to a shipbuilding contract, often in circumstances where they are unable to continue to perform their obligations due to an extreme weather event, unavailability of goods or the global recession. These arguments have been unsuccessful, and the parties who have sought to terminate their contracts on these grounds often find themselves on the receiving end of a claim for a breach of contract in terminating the contract early.

In the case of the wrongful early termination of a time charter by a charterer, owners are entitled to recover charter hire for the remaining charter period (subject to owner’s duty to mitigate their loss).

Given the reluctance of the English Courts to construe that there has been a frustration of contract, contracting parties will often seek to provide clauses in the contract which will provide for termination should certain events occur. In shipbuilding or international trade contracts, the parties will often agree upon a “force majeure” clause which provides that either party may cancel the contract where a specified event or something outside of the parties’ control occurs, however these clauses may not always be effective.

Summary

The doctrine of frustration is something which a contracting party may use to try to extricate themselves from their contractual obligations. In recent times, parties have sought to use it to avoid the ramifications of terminating a contract which is no longer profitable or beneficial to them.

The English Courts have a significant amount of legal authority which guides them in assessing whether or not there has been a frustration of contract, and will construe the facts narrowly. Where a party seeks to assert that they are relieved from their contractual obligations because the contract has been frustrated, the facts should be closely examined, as only in limited circumstances will the doctrine of frustration in fact apply.