Partner Hong Kong
"Charterers may wish to exit a contract that is suddenly more expensive and will take longer than anticipated."
The Strait of Hormuz (the “Strait”) is the only access point for shipping into the Persian Gulf (the “Gulf”). Current military action in the region threatens to make the Gulf impassable. Commercial parties may wish to avoid the Gulf but find themselves bound into contracts under which they are obliged, but do not want, to proceed. Shipowners may want to avoid the risk of their vessel being trapped or use the vessel for alternative employment. Charterers may wish to exit a contract that is suddenly more expensive and will take longer than anticipated.
The charterparty may contain provisions that give one or both parties a way to exit the contract – for example, war or force majeure clauses, which are explored in other articles in this series.
But what if there is no such provision in a charterparty? Unless they can mutually agree a termination, the parties are faced with open-ended delay and associated costs/losses, as well as the risk of the vessel being stranded or worse, the victim of military action.
Can the parties walk away?
Without a force majeure clause or other appropriate contractual provisions, the parties may try to rely on the English common law doctrine of “frustration” to terminate the contract.
If a contract is “frustrated” neither party is required to perform its obligations after the moment of frustration.
Frustration has a long case history, but in summary a contract may be frustrated where:
- after the contract is entered into, a supervening event takes place;
- which is not the fault of either party to the contract;
- nor provided for in the terms of the contract; and
- makes the further performance of the contract impossible OR radically different to what the parties agreed to perform.
"This doctrine applies to all contracts."
This doctrine applies to all contracts but, in the maritime context, it has been held that:
- a time charter was frustrated when a vessel hired to evacuate Republican personnel during the Spanish Civil War was seized by Nationalist forces;
- a time charter was frustrated when a vessel became trapped in the Shatt-al-Arab as a result of the outbreak of the Iran/Iraq War;
- a voyage charter was frustrated when a vessel was arrested by receivers and the local authorities banned the discharge of the cargo because it was clear that performance would not be possible within “any commercially acceptable period”;
- a time trip charter was NOT frustrated by the blocking of the Suez Canal in 1956, because although the route via the Cape of Good Hope was longer and more expensive, it was not radically different to what had been agreed; and
- a 20-day time charter was NOT frustrated by a three-month detention of a vessel by port authorities.
"If a charterparty allows the vessel to load cargo somewhere outside the Gulf, it will be very hard to argue that the closure of the Strait would frustrate the contract."
Sounds simple, but…
When assessing if a contract is frustrated, a court or tribunal will consider all the facts such as the type of incident, the length of delay, the obligations and the length and nature of the contract.
If a charterparty allows the vessel to load cargo somewhere outside the Gulf, it will be very hard to argue that the closure of the Strait would frustrate the contract.
If the contract is for a short-term situation, delay caused by a supervening event might be more likely to frustrate the contract than delay to a long-term time charter. The question of how long is too long is difficult to answer and there is no fixed rule.
However, it is clear that there will not be frustration if performance of the contract will simply cost more money than anticipated.
Before a party can successfully argue for the frustration of a contract, they will have to satisfy several different requirements. Much will depend on taking the time to gather the right evidence from the beginning of the relevant events and ensuring that it will satisfy the tests set out above. The courts are generally unwilling to find that there has been frustration except in extreme or irrevocable situations.
Sometimes performance of a contract might be affected by a supervening event beyond the control of both parties but there is a contractual mechanism dealing with the risk of the event (such as demurrage for delay). In such circumstances, the courts are more likely to apply the terms of the contract than allow parties to walk away.
"Whilst it is hoped that the ceasefire continues to hold, parties nonetheless need to be aware of the options to prepare and protect themselves if it does not."
Conclusion
Situations such as the current turmoil in the Middle East can lead to concerns and uncertainty, not least for the safety of ship, crew and cargo, but also as to how to ensure that business can continue. Frustration is just one of the legal arguments that can be put forward to assist contractual parties in dealing appropriately with the factual position. Frustration arguments are more difficult to run because of the various hurdles in the legal test that must be overcome and the general unwillingness of the courts to allow parties to step away from commercially agreed contractual obligations. That said, if vessels are trapped for substantial periods or are unable to enter the Gulf and your contract does not provide guidance on what the parties should do or who should bear the risks, it may be possible to argue that a contract has been frustrated. The complete closure of access to and from the Persian Gulf could well be the type of situation in which it would be appropriate for the contract to be ended. Many examples of successful frustration claims arose out of the Iran-Iraq War and we may well see a repeat of that situation.
As this article series highlights, there are a number of possible situations at play. Whilst it is hoped that the ceasefire continues to hold, parties nonetheless need to be aware of the options to prepare and protect themselves if it does not. In such circumstances, both parties should of course seek legal advice regarding their position, whether they seek to argue for or argue against frustration. Please do not hesitate to get in touch with the authors or your usual WFW contact.
Click here to view the full article series.
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