While civil law jurisdictions provide a basis on which a contract may be adjusted equitably to reflect significant changes to its economic equilibrium (see for example Arts. 1467-69 Italian Civil Code), English law is particularly inflexible on the matter: the contract is either performed or frustrated, there is no middle ground.
This hard-line English approach has been recently re-affirmed in the context of charterparty frustration by Flaux J. in the Kyla case (Bunge SA v. Kyla Shipping Company Limited (The “Kyla”)  EWHC 3522 (10 December 2012).
Here, the owners claimed that a time charterparty was frustrated as their vessel, the Kyla, was the victim of a collision, which damaged the ship to the extent that her 5-month repair costs ($ 9 million) exceeded her market value ($ 5.75 million). Perceiving the vessel as a “constructive total loss”, the owners sold her on for scrap, non-performance costing the charterers around $ 4 million.
While the arbitration court ruled in favour of the owners, Flaux J. overturned its decision upon appeal. He rejected the frustration claim and distinguished the Kyla case from previous case law on the basis that the charterparty in question contained a clause (41), whereby the owners warranted that the vessel’s Hull & Machinery insurance up to $ 16 million – an amount covering and exceeding repair costs – would be guaranteed throughout the charterparty.
The arbitrator agreed with the owners on the basis of a general principle that a charterparty is frustrated where costs of repair of a vessel exceed her market value (Blane Steamships 1951). He held that only a very clear provision (which clause 41 was not) would oblige an owner to repair in such circumstances and that the said clause merely existed to a) give the charterers the benefit of having a fully insured vessel and b) to provide the owners with an asset in the event of total loss. Applying the principle of English frustration (Davis Contractors 1956), which arises where performance would render a contractual obligation radically different from that which was undertaken, the arbitrator stated that holding the owners to the obligation to repair would be “to hold them to a whole different bargain”.
On appeal, the Commercial Court rejected the arbitrator’s logic. Echoing the words of Rix LJ in the recent and more modern 2007 Sea Angel case, Flaux J. held that applying the doctrine of frustration required a “multi-factorial approach”, taking into account not just one factor (cost vs. value) but a whole series including “the terms of the contract itself, its matrix or content, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk…”
Flaux J. stated that the general rule whereby a charterparty is frustrated doesn’t apply in cases where the latter contains an express and continuous hull insurance warranty. Rather, clause 41 allocated to the owners the risk that, in the event of damage, they would repair the vessel if the costs of repair fell within the insured value of $16 million.
Flaux J. affirmed that there was nothing unjust in holding the owners to their bargain. Rather, he pointed to an element of “self-induced” frustration on the part of the owners, contrary to one of the fundamental elements of English frustration law (The Super Servant II 1990), in the sense that the real reason for the charterparty’s frustration was that the owners elected not to repair the vessel.
This very rigid approach obliging an affected party to perform his contractual obligations in the said circumstances may come as a surprise to those operating in civilian jurisdictions. Civil law systems, including Italy, would most likely have provided an intermediate solution, allowing the parties to adjust the terms of such a contract to the new circumstances, for example by allowing the owners to provide a new vessel to perform the original charterparty, hence avoiding frustration yet not imposing upon them such onerous conditions as full repair of the vessel beyond its market value.
The Kyla case should be borne in mind when negotiating and drafting charterparties subject to the English doctrine of frustration, as the Courts shall pay greater attention to interpreting the terms of the contract in favour of performance rather than considering whether an event has rendered contractual obligations radically different from those which were undertaken.