Bunge SA v Kyla Shipping Company Ltd

The Appellants (to whom I will refer as “the charterers”) appeal (with the permission of Hamblen J) a question of law arising out of the Partial Final Award of the sole arbitrator, Mr Simon Rainey QC dated 11 April 2012, whereby the arbitrator decided in favour of the Respondents (to whom I will refer as “the owners”) that the time charterparty of the owners’ vessel KYLA (“the vessel”) was frustrated on 4 May 2009.

The essential facts as found by the arbitrator which are relevant for the purposes of this appeal are as follows. The vessel was an elderly Capesize bulk carrier built in 1982, whose fifth special survey was due in May 2010. On 6 February 2009, the parties entered into the time charter, although the vessel had previously been chartered to the charterers by an intermediate disponent owner. The time charter was on an amended NYPE 1946 form for a period of 12 to 15 months in the charterers’ option.

The relevant terms of the charterparty were as follows:

Clause 1 That the Owners shall provide and pay for all provisions, wages and consular shipping and discharging fees of the Crew; see also Rider Clauses shall pay for the insurance of the vessel.. . and maintain her class and keep the vessel in a thoroughly efficient state in hull, and holds , machinery and equipment.

Clause 15 That in the event of the loss of time from... damages to hull, machinery or equipment... the payment of hire shall cease for the time thereby lost...

Clause 16 ...The Act of God, enemies, fire, restraint of Princes, Rulers and People, and all dangers and accidents of the Seas, Rivers, Machinery, Boilers and Steam Navigation, and errors of Navigation throughout this charterparty, always mutually excepted.

Line 138 (below clause 21 which was deleted) In case of unforeseen circumstances/emergency it is Owners’ privilege to dry-dock and/or repair the vessel at any time during the currency of this Charter Party.

Clause 26 ...The Owners to remain responsible for.. . insurance.... same as when trading for their own account.

Clause 35 Trading

35.3

Any trading in areas declared as war zones by Lloyd’s or banned by the UN/USA/EU or by the flag state is not allowed unless Owners’ prior consent has been given, and against Charterers paying any extra insurance premiums and any crew bonuses which is not to exceed Lloyd’s scale.

Clause 41 Insurance/P&I Cover

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. Cost of such cover to be at the sole expense of the Owners with the exception of extra insurance cost that may be incurred as per clause 35- Trading.

41.2

If required by the Charterers, prior to the commencement of the Charter or at any other time, the Owners shall procure that the Managers of the Hull and Machinery insurance and the Protection and Indemnity Association shall give the Charterers proper evidence that the vessel is fully covered by the Owners.

41.3

Insurance full style and value

Hull and machinery: USD16,000,000 London, Norway and USA Markets War Risks: Hellenic Mutual War Risk Association Protection and Indemnity risks: UK P&I Club

The vessel was delivered into service under the charterparty on 25 February 2009. On 4 May 2009 the vessel was berthed alongside at the TGG Terminal at Santos, Brazil, port side to, bow to bow with the UBC TAMPICO, which was berthed starboard side to. Whilst berthed there and through no fault of the owners, she was struck on the port side by the ZHEN HUA 27 and driven along the quay, eventually making contact with the UBC TAMPICO. At the time of the incident the vessel was loading a cargo of soya beans.

Following inspection by the classification society, it was clear to all parties by 15 May 2009 that the vessel would have to be dry-docked both to assess the extent of necessary repairs and to carry them out properly. Over a period from then until September 2009, a number of different quotations for the cost of repairs were obtained by the owners and their hull and machinery underwriters. At the arbitration it remained in issue what a reasonable person in the position of the owners would have concluded was the cost and duration of the repairs. After hearing factual and expert evidence, the arbitrator determined that a reasonable person in the position of the owners possessed of the necessary relevant information at the relevant date (which he determined was 4 May 2009) would have concluded the probable cost of repairing the vessel (including temporary repairs at Santos) was US$9 million and that the total time required would have been of the order of 160 days.

On 3 July 2009, on the basis of a pessimistic surveyor’s report as to the extent of damage, the repairs needed and their cost, the owners tendered notice of abandonment to their hull and machinery underwriters, asserting the vessel was a constructive total loss. On the same day the owners informed the charterers that the cost of repairing the vessel was uneconomic and as a result the voyage could not be performed. A few days later they amplified this by saying the cost of repair would exceed the sound market value of the vessel, so that the owners considered the charterparty was frustrated.

As the arbitrator found, the sole event relied upon by the owners as having frustrated the charterparty was the collision with the resultant damage to the vessel. On that

In October 2009, the hull and machinery underwriters rejected the notice of abandonment, denying that the vessel was a constructive total loss. The owners subsequently sold the vessel for scrap in November 2009 for US$3,300,000. The owners then commenced proceedings in the United States against the hull and machinery underwriters, claiming the vessel was a constructive total loss and claiming an indemnity under the policy for the insured value of US$16 million together with US$4 million sue and labour expenses. In November 2010, those proceedings were settled by the underwriters paying US$14,275,263 to the owners.

The arbitration commenced in February 2010. The principal dispute between the parties was whether the charterparty was frustrated.

In very broad outline, on the basis that the likely cost of repair (US$9 million) far exceeded the sound market value of the vessel (US$5.75 million) as at 4 May 2009, the owners contended that the vessel was a “commercial total loss” and relied upon an alleged general principle peculiar to charterparties that a charterparty will usually be frustrated where the vessel is damaged such that the cost of repair exceeds the value of the vessel. The charterers in essence submitted that even if that general principle applied in cases where there was no warranty as to the level of hull insurance, in the present charterparty, clause 41 was part of a scheme whereby the owners were obliged to repair the vessel up to the insured value of US$16 million (which was far more than the cost of repairs in the present case) and could not rely upon the fact that the cost of repair exceeded the sound arrived value as a matter which frustrated the charterparty.

The arbitrator found that, as the owners had submitted, there was a general principle that a charterparty will usually be frustrated where the vessel is damaged such that the cost of repair exceeds the value of the vessel and that a very clear provision (which clause 41 was not) would be required to oblige an owner to repair in those circumstances. Accordingly, he held that the charterparty had been frustrated on 4 May 2009, the date of the collision. In order to put in context the question of law on which permission has been obtained, it is necessary to summarise in a little more detail the reasoning by which he arrived at that conclusion. For present purposes, this is contained in section D3 of the Reasons ([207] to [269]) headed “Frustration due to the cost of repair”.

The arbitrator begins by recording that it was accepted by Mr Kendrick QC on behalf of the charterers that, in the case of a charterparty which did not contain clause 41, if there was a gross disparity between the cost of repair and the resultant benefit to the owner, the charterparty would be frustrated. The arbitrator therefore began this part of his analysis by considering the position if the general law of frustration applied, in other words if clause 41 were not in the charterparty.

He recorded that both parties had relied upon a passage in Wilford on Time Charters 6^th edition para 26.14:

“A time charter will be frustrated or terminated not only by the actual total loss of the chartered ship, but also if she is so badly damaged that she has effectively been destroyed as a commercial ship or rendered unfit for the charter with no prospect of being made again fit: see Blane Steamships v. Minister of Transport [1951] 2 Lloyd's Rep. 155 (C.A.), a demise charter case. It is suggested that a time charter will also be frustrated or terminated by the constructive total loss of the chartered ship if she is abandoned by her owners to their underwriters”

He also recorded that both parties had accepted that the cases which were cited in support of that statement did set out principles of application to the present case, whether analysed as establishing an implied term of the charter in law to the relevant effect (as the owners contended) or as frustration cases, albeit using in the older cases the language of implied terms which is no longer regarded as the appropriate foundation for the doctrine of frustration (as the charterers contended).

He then analysed the cases cited to him, from Moss v Smith (1850) CB 94 to Blane Steamships v Minister of Transport [1951] 2 KB 965 in some detail. I will need to consider these cases myself below and simply record for present purposes that the arbitrator concluded at [228] that:

“While there may be an issue as to whether these cases lay down a mechanistic rule as an implied term of a charterparty, viewed simply through the optic of the modem law of frustration, they are all perfectly explicable as instances where the Court has concluded that the performance required of the shipowner is radically different after the damage or casualty given that the cost of the repair far exceeds the value of the vessel and (using Maule J's words) falls outside what any prudent owner would do or would be expected to do in any realistic commercial sense.”

The arbitrator went on to conclude at [232] that:

“The vessel was in commercial terms a constructive total loss or a commercial loss. In commercial terms the vessel was one which was good only for scrapping or disposal on a 'wreck' basis. The obligation in these circumstances to repair the vessel so as to restore her to use was one which no prudent owner would undertake. To hold the Owners to that obligation to repair in so extreme a case would be to hold them to a wholly different bargain of a radically different nature such that they could fairly say: "Non haec in foedera veni. It was not this that I promised to do".”

I should add in parenthesis that, although Mr Berry QC sought to rely upon this passage as a finding of fact which was binding upon the charterers, it is important to have in mind that this conclusion was reached in the context of consideration of what the position would be under the general law of frustration, before any consideration of clause 41. The arbitrator was not saying at this point of his reasoning that if clause 41 had the effect for which Mr Kendrick QC contended (and of course as summarised below, he rejected Mr Kendrick’s submissions on clause 41) the charterparty would still be frustrated.

He then adopted the “reality check” of the justice of the situation advocated by Rix LJ at [132] of The Sea Angel [2007] EWCA Civ 547; [2007] 2 Lloyd’s Rep 517 and concluded the justice of the situation was all one way: the charterers had lost the benefit of six months use of the vessel, whereas if the charterparty was not frustrated the owners would be compelled to restore a vessel of low value at “a greatly disproportionate cost far exceeding the value of the vessel herself". Accordingly, he found in the owners’ favour on the general principles of frustration.

He went on to consider at [239] to [252] the owners’ alternative argument that it was an implied term by operation of law in any charterparty that where the cost of repair exceeds the value of the vessel, the charterparty is discharged. That argument rested upon the proposition that there was a special rule in law in charterparty cases before 1863 (when Taylor v Caldwell (1863) B &S 826, the case which is generally regarded as the foundation of the modem law of frustration, was decided) which had continued and remained unaffected by and separate from the general development of the law of frustration. The arbitrator rejected that argument, holding that all the cases from Moss v Smith onwards could be perfectly easily accommodated within the modem law of frustration and were so treated by all the textbooks including Wilford on Time Charters and Scrutton on Charterparties.

The arbitrator also rejected at [252] the owners’ further refinement of reliance on a contractual exception of perils of the sea, here in clause 16 of the charterparty. He held that it added nothing to the general position in frustration where the court or tribunal has to consider whether a supervening event (here a peril of the sea) which occurs through no fault of the owner, does or does not frustrate the charterparty. The owners have sought to resurrect this point by way of a Respondent’s Notice on this appeal, so that I shall have to deal with it later in the judgment.

The critical part of his Reasons for present purposes, where he considers whether the charterparty by its express terms (specifically clause 41) excludes the operation of the doctrine of frustration, begins at [253], At [255] he states the principle in these terms:

“The principle which here applies is that there can be no discharge by supervening impossibility if the express terms of the contract bind the parties to performance notwithstanding that the supervening event may occur. As it was put by Lord Simon of Glaisdale in National Carriers v Panalpina [1981]

A.C. 675 at 700, frustration of a contract only takes place where there supervenes an event "for which the contract makes no sufficient provision". Where the contract either specifically deals with the supervening event or, though it does not precisely refer to or cover the event, nevertheless evidences that the parties contemplated that event and made provision for it or allocated the risk in respect of it, frustration will be excluded.”

The arbitrator then recorded Mr Kendrick QC’s argument, repeated before me, that the effect of clause 41 was that the owners had assumed an obligation to repair the vessel irrespective of its actual value up to US$16 million and a commercial total loss under this charterparty would only arise if the cost of repair exceeded that sum. The arbitrator concluded that it was difficult to infer from that provision a specific undertaking by the owners to repair the vessel using the hull insurance up to the insured value stated. He considered that the provision existed merely to give the charterers the benefit of having a vessel which is fully and properly insured. Although he accepted owners’ argument that an obvious commercial purpose was to provide an asset in the event of a total loss against which a freezing order could be obtained, he also recognised that another commercial purpose was that: “the charterers would have the assurance that in the event of a casualty there would be the normal expectation that there would be hull and machinery cover for salvage expenses and for the costs of repairs” [260]. However, he found that fell short of an undertaking by the owners binding themselves to use the insurance for any particular purpose.

He concluded that with the exception of the conditions as to markets and levels of insurance, clause 41 added little to the standard obligation under clause 26 to insure the vessel “same as when trading for their own account”. No authority had been cited to him which suggested that the hull proceeds were to be treated as a fund to be set aside for the repair of the vessel.

At [262], he set out his conclusion as to why clause 41 did not have the effect for which Mr Kendrick contends:

“I consider that very clear words would be needed to achieve such an obligation. As Viscount Haldane stated in Bank Line v Capel [1919] A.C. 435 at 445:

‘What is clear that where people enter into a contract which is dependent for the possibility of 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 do so.’

Given the well-settled case law peculiar to charterparties which lays down the general principle that a charterparty will usually be discharged where the vessel chartered is damaged such that the cost of repair exceeds the value of the vessel, it seems to me that a very clear provision would need to have been framed to bind an owner to repair on a different basis and to bind himself to use his hull insurance for that purpose.”

The arbitrator then pointed out certain practical difficulties that would arise with charterers’ construction of clause 41, specifically (i) what would happen if hull underwriters had a defence to a claim under the policy and whether the warranty would be broken in those circumstances and (ii) the fact that in the normal course, there would be a delay before payment whilst underwriters investigated the casualty and what the owners would do about repairing the vessel in the absence of funds.

Accordingly, at [270] the arbitrator concluded that the charterparty was frustrated by reason of the cost of repair greatly exceeding the value of the vessel so that continued performance of the obligations of the owners would be radically different or commercially impossible.

The charterers sought permission to appeal under section 69 of the Arbitration Act 1996 in respect of three questions of law said to arise out of the Award:

(1)

Is there a general principle peculiar to charterparties (including time charterparties) that a charterparty will usually be discharged where the vessel chartered is damaged such that the cost of repair exceeds the value of the vessel?

(2)

How can such rule, if any, be reconciled with the classic test for frustration, as formulated by Lord Radcliffe in Davis Contractors v Fareham UDC and Lord Simon in National Carriers v Panalpina and as applied to time charterparties in The Sea Angel?

(3)

What is the effect on the doctrine of frustration of a clause in a time charterparty which requires that owners maintain H &M insurance at a stipulated level? In particular, is the insured value res inter alios acta when considering the owners’ obligation to repair damage or does it create an assumption of risk and responsibility on the owners to repair hull damage up to this figure?

Hamblen J gave permission to appeal only on the third question, giving as his Reasons:

“(1)

Question of Law (3) raises a question of law of general public importance. I do not accept that it will only arise on unusual facts. I am satisfied that the decision of the arbitrator on this question is open to serious doubt and that the other statutory requirements are met.

(2)

Whilst Question of Law (3) is likely to involve a consideration of the law of frustration as it applies to time charterparties generally, I am not satisfied that questions of Law (1) and (2) are discrete issues of law which arise out of the award.”

At the forefront of Mr Kendrick’s submissions as to why the arbitrator was wrong in law, was the proposition that he adopted the wrong approach to considering whether the charterparty was frustrated, by looking first at the terms of the contract as if clause 41 were not present and only applying Rix LJ’s “reality check” to that hypothetical contract, to arrive at the conclusion that that contract would have been frustrated applying the “general principle” peculiar to charterparties, then deciding that a very clear provision would be needed to displace the application of that principle.

Mr Kendrick submitted that the application of the modem law of frustration involved consideration of the contract as a whole to determine whether, on its true construction, the contract provided for the contingency or event which had occurred or allocated the risk of what had occurred to one or other of the parties. If the arbitrator had adopted that correct approach, he should have concluded that the charterparty made provision for the event which had occurred (namely a casualty the cost of repair of which was in excess of the sound market value of the vessel but less than the insured value) or allocated the risk of it occurring to the owners, with the consequence that the charterparty was not frustrated. Applying the reality check to the actual contract, the arbitrator would have realised that conclusion was also the just one.

He submitted that the old cases upon which Mr Berry relied from Moss v Smith onwards did not establish some principle of law applicable to time charters that, where the cost of repair exceeds the value of the vessel, the vessel will be treated as lost and the contract frustrated. He disputed that he had accepted before the arbitrator that there was any such principle of law. With one exception (The Bessie Morris ) the old cases were not charterparty but freight insurance cases and in any event, none of them was a case where there was an express warranty about hull and machinery insurance or insured value. Indeed they dealt expressly with the position of the prudent uninsured.

Mr Kendrick submitted that none of the earlier cases supported the approach espoused by the owners and adopted by the arbitrator of applying the so-called “general principle” first, before looking at the terms of the charterparty. He submitted that the correct construction of clause 41 was that it was part of a contractual scheme which included the repairing obligation in clause 1 and the right to dry dock at line 138 (for emergency drydocking as distinguished from periodic drydocking), so that if the cost of repair was less than the insured value of the vessel, the owners’ obligation was to repair and keep the vessel running.

Mr Kendrick also made a series of what might be described as “jury” points about the unfairness of the conclusion that the charterparty was frustrated, in the sense that his clients had lost the remainder of a charter which was profitable to them, suffering a loss of some US$4 million, whereas the owners had the windfall of a US$14 million constructive total loss recovery. I was unimpressed with all this. Whatever else Rix LJ’s reality check as to whether the conclusion the court or tribunal reaches accords with the dictates of justice encompasses, it does not include looking at subsequent events which occurred many months or years after the event which is said to have frustrated the charterparty. In any event, the owners appear to have obtained a settlement from hull underwriters, no doubt in the face of the threat of a jury trial in the United States, in circumstances where, under the terms of the hull policy, the vessel was not a constructive total loss and the owners were arguably only entitled to recover depreciation in value of the vessel under section 69(3) of the Marine Insurance Act 1906. As the arbitrator correctly concluded at [13], the question is whether on 4 May 2009, the date of the casualty, a reasonable person would have taken the view that that event would lead to a sufficiently serious interference with performance of the charterparty to bring about its discharge by frustration.

Mr Berry submitted that there was a principle of law to be derived from the old authorities that in charterparty cases, where the cost of repair significantly exceeds the value of the vessel and the benefit to the owner of carrying out the repair, the vessel will be treated as commercially lost or destroyed and the contract frustrated. This was the working out in charterparty cases of Lord Radcliffe’s “radically different” test. Mr Berry contended this had been common ground before the arbitrator, so was not open to challenge on appeal. He even went so far as to submit that because Hamblen J had refused permission on Questions of Law 1 and 2, it was not open to the court to question the scope and application of the principle for which Mr Berry contended. I consider this rigid approach misunderstands Hamblen J’s reasons, which expressly contemplate that the court hearing the appeal will need to examine the law of frustration as it applies to charterparties, which must include this principle.

In terms of construction of the charterparty, he submitted that clause 1, the repair and maintenance obligation, was not absolute, because of the operation of the doctrine of frustration and the exception of perils of the sea in clause 16, which he contended relieved the owners from any liability in the event which had occurred here. Clause 41 added little if anything to clause 26. He submitted that clause 41.3 was not a continuing warranty as to either the identity of the insurers or the maintenance of the level of insurance. This clause was to be contrasted with the sort of more far reaching clause found for example in construction contracts which obliged someone to insure for joint interests.

Although he recognised that almost all hull policies now contain an express provision that in ascertaining whether there has been a constructive total loss the insured value is to be taken as the repaired value (thereby overriding section 27(4) of the Marine Insurance Act 1906: see Arnould’s Law of Marine Insurance and Average 17^th edition para 12-05), he submitted that clause 41 did not impose any obligation to take out a hull policy containing such an express provision.

Mr Berry placed considerable emphasis on the perils of the sea exception in clause 16 which he submitted, whether analysed in terms of a full and complete provision or as an allocation of risk, pointed in the opposite direction to that contended for by Mr Kendrick, indicating rather that where there was a loss by perils of the seas, whether physical or commercial, the owners were to be relieved of all liability, including to repair the vessel.

In summary, Mr Berry submitted that, in accordance with the line of authorities on which he relies, the vessel was commercially lost or destroyed because there was a gross disparity between the value of the vessel when repaired and the cost of repair.

Before considering whether the line of cases relied upon by the owners and the arbitrator do establish a general principle or rule that where the cost of repair exceeds the value of the vessel, the charterparty is discharged, I propose to consider the principles of the modem law of frustration. An authoritative summary of the applicable principles is to be found in the judgment of Bingham LJ in J Lauritzen A.S. v Wijsmuller B.V. (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at 8:

“The classical statement of the modem law is that of Lord Radcliffe in Davis Contractors Ltd. v. Fareham Urban District Council [1956] A.C.696 at 729:

“... frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

As Lord Reid observed in the same case (at page 721):

“... there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.”

Certain propositions, established by the highest authority, are not open to question:

1.

The doctrine of frustration was evolved to mitigate the rigour of the common law's insistence on literal performance of absolute promises (Hirji Mu l ji v. Cheong Yue Steamship Co. Ltd. [1926] A.C.497 at 510: Denny Mott & Dickson Ltd. v. James B. Fraser & Co. Ltd. [1944] A.C.265 at 275; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corporation Ltd. [1942] A.C.154 at 171). The object of the doctrine was to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances ( Hirji Mulji , supra, at 510; Joseph Constantine Steamship Line Ltd. (supra), at 183, 193; National Carriers Ltd. v. Panalpina (Northern) Ltd. [1981] A.C.675 at 701.

2.

Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended ( Bank Line Ltd. v. Arthur Capel & Co. [1919] A.C.435 at 459; Davis Contractors Ltd. supra, at 715, 727; Pioneer Shipping Ltd. v. B.T.P. Tioxide Ltd. (The Nema) [1982] A.C.724 at 752).

3.

Frustration brings the contract to an end forthwith, without more and automatically ( Hirji Mulji , supra, at 505, 509; Maritime National Fish Ltd. v. Ocean Trawlers Ltd. [1935] A.C.524 at 527; Joseph Constantine Steamship Line Ltd. supra, at 163, 170, 171, 187, 200; Denny Mott & Dickson Ltd. supra, at 274).

4.

The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it ( Hirji Mulji , supra, at 510; Maritime National Fish Ltd. supra, at 530; Joseph Constantine Steamship Ltd. supra, at 170; Denny Mott & Dickson Ltd. supra, at 274; Davis Contractors Ltd. supra, at 728. A frustrating event must be some outside event or extraneous change of situation ( Paal Wilson & Co. A/S v. Partenreederi Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 A.C. 854 at 909).

5.

A frustrating event must take place without blame or fault on the side of the party seeking to rely on it ( Bank Line Ltd. supra, at 452; Joseph Constantine Steamship Ltd. supra, at 171; Davis Contractors Ltd. supra, at 729; The Hannah Blumenthal , supra, at 882,909).

The modem approach to the doctrine of frustration as it applies to charterparties is also exemplified by the judgment of Rix LJ in Edwinton Commercial Corporation & Anor v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd's Rep 517. That case concerned whether a delay of three months towards the end of a short 20 day charterparty caused by unlawful detention of the vessel by port authorities frustrated the charterparty. The Court of Appeal concluded that it did not. It is clear from his judgment that Rix LJ was unimpressed by submissions by the unsuccessful charterers that a particular factor (for example detention of a vessel by the authorities) gave rise to some prima facie rule that the charterparty was frustrated, but was equally unimpressed by submissions by the owners that any particular factor precluded the doctrine of frustration.

Rix LJ stated the applicable principles in these terms at [110] to [112]:

[110]

In the course of the parties' submissions we heard much to the effect that such and such a factor "excluded" or "precluded" the doctrine of frustration, or made it "inapplicable"; or, on the other side, that such and such a factor was critical or at least amounted to a prima facie rule. I am not much attracted by that approach, for I do not believe that it is supported by a fair reading of the authorities as a whole. Of course, the doctrine needs an overall test, such as that provided by Lord Radcliffe, if it is not to descend into a morass of quasi-discretionary decisions. Moreover, in any particular case, it may be possible to detect one, or perhaps more, particular factors which have driven the result there. However, the cases demonstrate to my mind that their circumstances can be so various as to defy rule making.

[111]

In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as "the contemplation of the parties", the application of the doctrine can often be a difficult one. In such circumstances, the test of "radically different" is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

[112]

What the "radically different" test, however, does not in itself tell us is that the doctrine is one of justice, as has been repeatedly affirmed on the highest authority. Ultimately the application of the test cannot safely be performed without the consequences of the decision, one way or the other, being measured against the demands of justice. Part of that calculation is the consideration that the frustration of a contract may well mean that the contractual allocation of risk is reversed. A time charter is a good example.

Under such a charter, the risk of delay, subject to express provision for the cessation of hire under an off-hire clause, is absolutely on the charterer. If, however, a charter is frustrated by delay, then the risk of delay is wholly reversed: the delay now falls on the owner. If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests. Since the purpose of the doctrine is to do justice, then its application cannot be divorced from considerations of justice. Those considerations are among the most important of the factors which a tribunal has to bear in mind.”

He went on to consider the application to that case of the various factors he had identified. In relation to the dictates of justice, he said this at [132]:

“It is not an additional test, but it is a relevant factor which underlies all and provides the ultimate rationale of the doctrine. If one uses this factor as a reality check, its answer should conform with a proper assessment of the issue of frustration. If it does not appear to do so, it is probably a good indication of the need to think again.”

With the principles set out by Bingham LJ and Rix LJ in mind, I turn to consider the question whether, as Mr Berry submits, and as the arbitrator found, there is some general rule or principle peculiar to charterparties that a charterparty will usually be discharged where the vessel is damaged to such an extent that the cost of repair exceeds the value of the vessel.

The earliest case upon which Mr Berry relies is Moss v Smith (1850) 9 CB 94, a decision of the Court of Common Pleas involving a claim under freight insurances taken out by the owner distinct from the hull insurance. The vessel was damaged in heavy weather and had to put back to the load port where the cost of repairs needed before the voyage could be concluded exceeded the value of the freight but were less than the value of the vessel. The Court held that there was not a total loss of vessel or freight so that the claim under the freight insurances failed.

Maule J stated the principle under consideration in these terms at p. 103:

“So, if a ship sustains such extensive damage, that it would not be reasonably practicable to repair her, - seeing that the expense of repairs would be such that no man of common sense would incur the outlay, - the ship is said to be totally lost. It is in that way alone that the question as to what a prudent owner would do, arises. However damaged the ship may be, if it be practicable to repair her, so as to enable her to complete the adventure, she is not totally lost. The ordinary measure of prudence which the courts have adopted, is this, - if the ship, when repaired, will not be worth the sum which it would be necessary to expend upon her, the repairs are, practically speaking, impossible, and it is a case of total loss.”

Cresswell J at p.106 stated the principle in similar terms:

“The courts of law have also engrafted this qualification upon the contract, - that, if the damage which results from a peril of the sea, is so great that it cannot be repaired at all, or only at a cost so ruinously large that no prudent owner would undertake the repairs, the owner may treat the loss as total, and say that he is prevented by a peril of the sea from performing his contract. Now, what is the contract of the underwriter? That the owner shall not be deprived of his freight by perils of the sea. The jury have in this case found that the ship might have been repaired at an expense such as a prudent owner, uninsured, would have incurred, regard being had to the value of the ship, and that the ship would have been enabled by that expenditure to earn the freight. The owner, then, has not been prevented from earning the freight by a peril of the sea, when, at an expense which it was reasonable for him to incur, he might have earned the freight.”

In my judgment what that passage makes clear is that the principle which the court was considering and applying was one which regulated the relations between the insured owner and his underwriters under the contract of freight insurance. That is made abundantly clear by the third judgment, that of Wilde CJ, at 108-9:

"The, underwriter undertakes to indemnify the owner against a loss of freight by perils of the sea. The law has fixed the meaning of this warranty against sea-damage in such [109] distinct terms, that, for many years, every contract of insurance has been made with reference to the known and recognised principle, that a ship is prevented from performing her voyage, and consequently from earning freight, when she has sustained damage which can only be repaired at an expense which no prudent owner uninsured would incur; and that is when the outlay will exceed that which he will get by it, viz. when the ship, after the repairs are executed, will not be worth the sum which has been expended upon her. The ship is prevented from earning freight, when she is by a peril of the sea damaged to that extent.”

In other words, nothing in those judgments touches on the position between the owner and the charterer under a charterparty, let alone one where there is an express continuing warranty concerning hull insurance. It is true that the next case relied upon by Mr Berry in this line of cases, the decision of the Court of Appeal in Assicurazioni Generali v SS Bessie Morris Company Limited (“The Bessie Morris”) [1892] 2 QB 652 was a voyage charterparty case. However, that was not a case where there was any warranty by the owner as to the insurance position or where the point presently at issue could be said to have been tested, because in that case the cost of repair was in fact less than the value of the vessel. The voyage charter was for a cargo-carrying voyage from Adriatic ports to the United Kingdom. Having loaded cargo and sailed for London, the vessel went aground near Gibraltar and required repair. The vessel was repaired but instead of carrying the cargo on to London, it was sold at Gibraltar and the vessel proceeded to perform another charterparty. In resisting a claim for breach of the charterparty for not carrying the cargo on to destination, the owners relied upon a contention that notice of abandonment had been given to underwriters, who had repaired the vessel, so that she was a constructive total loss. Unsurprisingly, that contention found little favour with either Collins J at first instance or the Court of Appeal.

Lord Esher MR, having referred to the judgment of Maule J in Moss v Smith said this at 657-8:

“But, in fact, the ship was got off, and she was taken to Gibraltar, where she could be repaired. What is the duty of the shipowner in such a case? His duty is to repair the ship, if it is possible for him to do so. That the ship in the present case could, in fact, be repaired cannot be denied. But, as Maule, J., said, in the case to which I have referred, the possibility must be a business possibility. If it is possible in a business sense of the word to repair the ship, the shipowner is bound to repair her. If the cost of the repairs necessary to enable her to complete the voyage contracted for would be more than the benefit which the owner would derive from them, then it would be impossible in a business sense to repair her.

....

In the present case the ship was repaired at Gibraltar, and the cost consisted of the expenses of the salvage of the ship and of the repairs necessary to bring her to London. We know that she was repaired sufficiently to enable her to reach Liverpool by a voyage longer than that provided for by the charterparty, at a cost of 7501. in addition to the expenses of salvage. Any reasonably sensible shipowner would have acted as these shipowners did up to the time when they went to law. The repairs were executed at a cost very far less than the value of the ship, and, that being so, no reasonable shipowner having regard to his own interests would have failed to do the repairs. The shipowners were prevented from performing the voyage, not by the perils of the sea, but by their own wilful disregard of their contract, or, at any rate, by their misreading of it. They were bound to bring to London all the cargo offered to them by the charterers which it was possible for them to bring, unless they were prevented from so doing by the perils of the sea, and they were not prevented by those perils. There is really no ground for the argument which has been addressed to us. The only colour for it is to be found in the suggestion that the case is governed by the rules applicable to what is known as “constructive loss.” But the doctrine of constructive loss can arise only between an underwriter and his assured. There is no underwriter concerned in the present case, and the doctrine of constructive loss has no application to it. The shipowners' contract has been broken by them.”

Bowen LJ dismissed the argument in even more trenchant terms at 659-660:

“Their only excuse for the non-performance of the voyage would be, that its performance was prevented by the perils of the sea. The ship went aground; but, in order to shew that she was prevented from performing the voyage agreed upon by the perils of the sea, she must have become unnavigable for that voyage, either on the ground that it was impossible to get her afloat again, or that, on account of the extraordinary expenditure necessary for that purpose, it would be unreasonable to require the shipowners to incur it. In the present case, so far from the ship being unnavigable, or having been treated as such, she was repaired, and was put into a condition fit for the performance of her voyage. The test, what is the state of circumstances which entitles the shipowner to abandon the voyage, is obviously applicable only when he acts upon it; and if, whatever the expense of repairing the ship may be, he submits to incur it, it would be absurd to discuss the question of constructive loss.”

He then went on to say that the law on the point was plain and laid down by Maule J in Moss v Smith. He then cited the passages from the judgments of Maule J and Cresswell J to which I have referred. He then said of the latter judgment, at 661:

“That learned judge also is discussing the measure of prudence which will justify the shipowner in abandoning the voyage, and is not referring to a case in which the ship has been actually put afloat again. In the present case, the answer to the contention of the shipowners is, that the ship never was unnavigable, that she never was incapable of performing her voyage. Even assuming that the circumstances were such as would have justified the owners in abandoning the voyage, they never adopted that course. If the argument for the appellants be right, it must go to this length, that the ship would have been incapable of performing the voyage, even though she had actually performed it with all the cargo on board. This is a reductio ad absurdum. The fallacy consists in applying to a case in which the ship was not in fact prevented from performing the voyage the test of the measure of prudence which would justify the owner in not performing it.”

Carras v London and Scottish Assurance [1936] 1 KB 291 was a freight insurance case. The vessel stranded on the approach voyage to the load port pursuant to a voyage charter and was abandoned to her hull underwriters, who subsequently compromised for a total loss by paying 100%, the owners retaining the vessel and remaining liable to the salvors. The vessel was surrendered to the salvors, who repaired her. The owners claimed under the freight insurance for a total loss of freight. The judge at first instance, Porter J, held that this was not recoverable, because there had not been a constructive total loss of the vessel, as the cost of repairs, whilst it exceeded the actual value of the vessel, £13,000, was less than the insured value under the hull policy of £30,000. That decision was reversed in the Court of Appeal.

Lord Wright MR cited the earlier cases of Moss v Smith and The Bessie Morris and stated at p.301:

“The test is the same, under the freight policy and under the charterparty - namely, whether the shipowner has been prevented either in a physical sense or in a business sense from performing the freight contract, so that the freight is lost.

In this way a question has to be solved analogous to that which arises when it is claimed on a hull policy on the ground of cost of repairs that there has been a constructive total loss of ship. But the three contracts, the charterparty, the freight insurance and the hull insurance are completely different.”

He then went on to say that Porter J had treated the earlier cases as meaning that to claim for a total loss under the freight policy, the vessel must be an actual or constructive total loss under the hull policy. Lord Wright pointed out at p.302-3 that merely because the vessel was a constructive total loss under the hull policy did not mean there was a total loss under the freight policy, for example where, after property passes to hull underwriters on abandonment, the vessel earns the freight. He emphasised at p.305 that the concept of a constructive total loss under the hull insurance did not qualify the common law rules laid down in The Bessie Morris according to which it was to be decided as between shipowner and charterer if the vessel had been lost in a commercial sense.

Slesser LJ at p.311 and Greene LJ at p.313 similarly emphasised the distinctions between the three contracts, charterparty, hull policy and freight policy. Greene LJ stated that: “The rights and obligations of the parties under the charterparty are not affected by the existence or the terms of either the hull policy or the freight policy.” That is essentially a statement of the classic position that insurance is res inter alios acta, but demonstrates that the Court of Appeal was not considering a charterparty such as that in the present case, which contained an express warranty by the owner as to the extent and amount of hull insurance. For that reason, I do not consider the judgments in that case of any assistance in determining whether, where the owner has given such a warranty in the charterparty and the cost of repair, whilst more than the actual value of the vessel, is less than the insured value under the hull policy, it can still be said by the owner that the vessel is a commercial loss or that performance of the charterparty is commercially impossible.

Kulukundis v Norwich Union [1937] 1 KB 1 was another freight insurance case. Having loaded cargo the vessel ran aground. The owners and the hull underwriters agreed to abandonment on terms that the underwriters paid the owners £7,500 (the hull being insured for an insured value of £25,000). The owners claimed for a total loss of freight on the grounds either that the vessel was a constructive total loss or that the venture contemplated by the charterparty was frustrated. Porter J held that the claim for loss of freight failed. Following the decision of the Court of Appeal in Carras the owners amended their claim in the Court of Appeal, contending that there was a total loss of freight because the cost of temporary repairs (necessary to carry the cargo to destination) exceeded the amounts the owners could recover by way of contribution to repairs, the repaired vessel and the net freight. The claim on that alternative basis succeeded in the Court of Appeal.

The decision of the Court of Appeal in Kulukundis (or at least the judgment of Scott LJ in that case) arguably marked a move away from some peculiar rule derived from the earlier cases, that commercial prevention or loss is equivalent to physical prevention or loss, towards assimilation of these cases into the modem law of frustration. Nonetheless, too much reliance cannot be placed upon Kulukundis since a majority of the Court of Appeal essentially applied the rule or principle derived from Moss v Smith and The Bessie Morris.

Thus, Greene LJ considered the earlier cases and reaffirmed the principle derived from them in terms of four propositions at p.22:

“Before turning to a consideration of the authorities which bear upon the question under discussion, I will summarize the conclusions to which my examination of the principle has led me. (1.) In all cases where repair is possible, the prima facie duty of the shipowner under his contract of affreightment is to carry out such repairs to the ship (whether temporary or permanent and complete, as the case may be) as may be necessary to enable her to carry the cargo to its destination. (2.) This duty is not affected by the fact that as between the shipowner and his hull underwriter, if any, the case may, or would, be one of constructive total loss of ship, a fact which is not relevant to the consideration of the duties of the shipowner under the contract of affreightment. (3.) The shipowner is excused from the duty to carry out the appropriate repairs (whether temporary or permanent and complete, as the case may be) if he can prove that the cost of doing so would exceed the repaired value of the vessel. (4.) A consideration of the cost of repairs, which are not the appropriate repairs in the particular case, is irrelevant.”

Slesser LJ at pp.12-14 likewise did not go beyond the earlier cases. Scott LJ on the other hand took a broader approach. He formulated the question before the Court as being were the owners prevented by the stranding of the vessel from carrying the cargo to destination. He recognised (at p.40) that the earlier cases had established that prevention, like loss, could be commercial as well as physical but that the main difficulty in arriving at the correct interpretation of “commercial prevention” was the need to give effect to the principle of the law of contract that the fact that a contract proves unprofitable is not of itself prevention and is no ground for release from the obligations under the contract.

His solution for reconciliation of these two principles was through the application of the principle of what is now called frustration, although Scott LJ does not use that word. This is clear from pp.41-2 of his judgment:

“The rule expressed in cases like The Bessie Morris that in commercial contracts commercial prevention is equivalent to physical prevention has therefore to be harmonized with this rule of holding a man to his contract though it be financially to his own let or hindrance. Both rules are fundamental and the solution must transgress neither. The way of escape from the antinomy in my view lies in a third principle of the law of contract - that a contract may be intended by both parties to be dependent for their mutual benefit upon some basic condition, such as the continued existence or availability of a particular thing, or state of affairs, so that if the condition fails the contract is discharged, or at any rate becomes unenforceable: Taylor v. Caldwell, or Jackson v. Union Marine Insurance Co., or Bank Line v. Capel, and see also Comptoir Commercial Anversois v. Power, Scrutton on Charterparties (13th ed.), pp. 110 et seq., and the cases there cited. The basic condition under the charterparty here (at any rate with the shipowner's common law liberty of transhipment excluded from it by the policy restriction of the venture to performance by the Mount Taygetus alone) was the continued existence and availability of the Mount Taygetus throughout the voyage.

If the Mount Taygetus should be at any time during the contract voyage rendered by sea perils incapable of completing the voyage within a reasonable time so as to earn the freight, then whether the incapability was physical or commercial the basic condition of the contract would be broken, and the charterparty contract ipso facto discharged, as Lord Sumner said in Bank Line v. Capel, or at any rate each party would have the option of treating the contract as at an end. On that footing it is clear that if the ship as a merchant ship employed in a shipowner's business should be so damaged that as one of his fleet and an asset of his business it would not be worth his while to incur the cost of repair, the ship would be commercially lost and the basic condition would be broken; the charterer's right to insist on carriage of the cargo to destination, and the owner's to insist on payment of freight, would both lapse.”

Scott LJ framed the question in the appeal (at p.42) as: “whether the facts in evidence are sufficient to establish a commercial loss of [the vessel] judged by the charterparty criterion.” It is striking that the approach he was advocating, of assimilating the earlier cases into the general law of frustration had occurred to Scrutton LJ and Mr Mackinnon KC when editing the 8^th edition of Scrutton on Charterparties in 1917 in a note which stated that the decision in The Bessie Morris that the owner: “must prove commercial impossibility to repair (i.e. commercially, destruction of the ship) illustrates the connection of these cases as to frustration with cases as to destruction of the subject-matter of a contract, like Taylor v Caldwell". The same passage in the then current 13^th edition (1931) of Scrutton on Charterparties was cited to the Court of Appeal in Kulukundis by counsel for the respondents (see p.7).

The approach of Scott LJ found favour with a majority of the Court of Appeal in B l ane Steamships v Ministry of Transport [1951] 2 KB 565, where the application of the doctrine of frustration to charterparties was considered. That was a case of a vessel which was on demise charter to the charterers which stranded. Although notice of abandonment was given to hull underwriters on 6 September 1950, that was not accepted as, technically, the vessel was not a constructive total loss because, at that date, the master and crew were still on board. The underwriters did accept that the vessel was a constructive total loss on 12 September 1950. However, between those dates, on 7 September, the charterers purported to exercise an option under the charterparty to purchase the vessel. The specific question was whether they were entitled to do so or whether, notwithstanding that the vessel was not technically a constructive total loss on 6 September, the charterparty was frustrated by that date, so that the option was no longer available. One of the issues in that case was whether the hire provision under the charterparty (clause 8) catered for the events which had happened and so precluded the doctrine of frustration from applying.

Cohen LJ cited with apparent approval the passage from the judgment of Scott LJ in Kulukundis which I have quoted above and the speech of Viscount Sumner in Hirji Mulji and concluded at p.989 that clause 8 was not inconsistent with the implication of a provision into the contract that in the event of the farther use of the vessel under the charter becoming commercially impossible, the charterparty should automatically be brought to an end. That case was of course decided at a time when the courts analysed the doctrine of frustration in terms of an implied term of the contract. Cohen LJ concluded that the vessel had been destroyed as a cargo carrying vessel before the time when the option was purportedly exercised.

Singleton LJ reached the same conclusion, stating at pp.995-6:

“It is clear from the decision of the House of Lords in Bank Line Ltd. v. Arthur Capel & Co. that the principle of frustration of the adventure applies to a time charter. It seems to me that one must imply into the contract between the parties that the ship must remain capable of carrying out the purposes for which she was hired; in other words, if her use for the purposes of the hire became impossible during the continuance of the term for which she was hired, the charterparty automatically came to an end. I am content to rest my judgment on the test put by Scott, L.J. [in Kulukundis], in a different class of case, “Whether the facts in evidence are sufficient to establish a commercial loss of the 'ship' judged by the charterparty criterion”. There is nothing in this inconsistent with the terms of the charterparty itself. Indeed, cl. 8 supports the view I have formed.”

Morris LJ decided the case on a slightly different basis of implying a term into clause 8 that from the time when hire payments ceased to be due under that clause, the charterparty terminated. However it is evident from a passage at the end of his judgment at p.1002, that he would, if necessary, have concluded the charterparty was frustrated.

Whilst it is correct that the test of commercial loss or impossibility accepted by a majority in Blane Steamships has been approved in at least one later case, The Badagry [1985] 1 Lloyd’s Rep 395 per Donaldson MR at 399, I agree with Mr Kendrick that this is somewhat wide of the mark, in the sense that the Court of Appeal in that case does not suggest that the test is some rule of law, on the contrary, they decide the issue of frustration by construing the relevant terms of the charterparty.

In my judgment, the earlier cases are indeed capable of being subsumed within the modem doctrine of frustration. They should not be treated as establishing some inflexible rale that, where the cost of repairs exceeds the value of the vessel the charterparty will be frustrated, but rather as applications of a principle that if a vessel is what Scott LJ in Kulukundis and Singleton LJ in Blane Steamships describe as a “commercial loss” the charterparty will generally be frustrated, just as it would be if the vessel were physically lost. As the judgment of Rix LJ in The Sea Angel demonstrates, the tendency in the modem law of frustration has been to move away from deciding the issue through the application of inflexible rales of any kind, dependent upon one factor (there delay, here cost versus value) to what he describes as the “multi-factorial approach”. The factors which will need to be considered are set out in [111] of his judgment which I have quoted above.

In relation to the question whether the contract caters for the contingency which has occurred, Mr Berry relied upon a passage from Lord Sumner’s speech in Bank Line v Arthur Capel [1919] AC 435 at p.455 approving a dictum of Bailhache J in Admiral Shipping Co Ltd v Weidner, Hopkins & Co [1916] 1 KB 429 at p.438:

“The theory of dissolution of a contract by the frustration of its commercial object rests on an implication, which arises from the presumed common intention of the parties. ‘Where the contract makes provision’ (that is, full and complete provision, so intended) ‘for a given contingency it is not for the court to import into the contract some other and different provision for the same contingency called by a different name’: Bailhache, J. This is a matter of construction according to the usual rule. A contingency may be provided for, but not in such terms as to show that the provision is meant to be all the provision for it. A contingency may be provided for, but in such a way as shows that it is provided for, only for the purpose of dealing with one of its effects and not with all”.

However, the tendency, with the more flexible approach to the doctrine of frustration in the modem law, is to look at the question of whether the contingency or event is provided for by the contract in terms of allocation of risk: see for example per Rix LJ in The Sea Angel at [111]. Nonetheless, the distinction between the two approaches may be more apparent than real. As Mr Berry recognised in argument, whether analysed in terms of a full and complete provision or of allocation of risk, the question in each case is whether the contract obliged the owners to repair up to the insured value in the event which happened.

It follows that I accept Mr Kendrick’s submission that the correct approach in each case is to ask whether on its true construction, the contract under consideration provides for the event or contingency which has occurred or allocates the risk of that event or contingency to one or other of the parties. That approach is summarised by the editors of Scrutton on Charterparties 22^nd edition at 1-089:

“The enquiry must always commence with a careful analysis of the contract to determine whether it is capable of accommodating the changed circumstances: put another way, are the changed circumstances within the contractual allocation of risk?”

The footnote at the end of that passage is instructive. It provides:

“Some judgments adopt an implied contractual term as the juristic basis of the doctrine of frustration: e.g. Tamplin (FA) Steamship Co Ltd v Anglo- Mexican Petroleum Products Co Ltd [1916] 2 AC 397 at p.404; Larrinaga & Co v Societe Franco-Americaine des Phosphates de Medulla (1923) 29 Com. Cas. 1 at p. 11. Modem formulations favour a rule of law, but one that affords due priority to the contract in responding to post-formation changes of circumstance. Indeed, emphasising that priority has been said to be a virtue of an implied term analysis: Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 at p.163.”

Against the background of those statements as to the correct approach to the issue of frustration, I turn to consider whether on the true construction of the charterparty, it was frustrated on 4 May 2009 and, specifically, to consider the effect of clause 41 of this charterparty. In my judgment, contrary to the submissions of Mr Berry QC and the view formed by the arbitrator, this provision does go much further than clauses 1 and 26 of the standard NYPE 1946 form in relation to the insurance obligations of the owners.

The effect of those standard obligations was considered by Neill J in Telfair Shipping Corporation v Athos Shipping Co SA (“The Athos”) [1981] 2 Lloyd’s Rep 74 at 86:

“In reaching a conclusion on this matter I take as my starting point the fact that an owner’s obligation under a time charter is merely to make the ship available to the charterers and to provide the services of a master and crew to sail the ship for the charterers’ purposes. Many matters remain within the discretion of the owner. Clause 1 of the charterparty in this case defined in general terms the owners’ obligations and the areas of their responsibility. Clause 26 was in the same sense. I do not consider that in this context the words ‘insurance of the vessel’ in cl. 1 should be construed narrowly. The extent of the cover is a matter for the discretion of the owners though that discretion is to be exercised according to the standards of a prudent owner.”

Whilst clause 41 does not prescribe what terms and conditions are to be contained in the insurance, clause 41.1 provides that the vessel is to be fully covered, clause 41.3 provides that the hull and machinery insurance is to be for US$ 16 million with London, Norway and US insurance markets which clause 41.1 has said are to be “leading insurance companies” and clause 41.2 provides the charterers with an entitlement to have proper evidence from the insurers at any time (in other words throughout the currency of the charterparty) that the vessel is fully covered. This is a comprehensive insurance provision which goes a good deal further than the clauses in the standard form.

Furthermore, the opening words of clause 41.1 make it clear that the owners are warranting that this full hull and machinery cover will be in place throughout the charterparty. I reject Mr Berry’s submission that this continuing warranty did not apply to the insured value throughout the charterparty but only at the outset. That construction of the clause is an artificial one which would dilute the effect of the continuing warranty. The words “fully covered” and the heading to clause 41.3: “Insurance full style and value” are cross-referring to each other and make it clear that the full cover includes the insured value. There is nothing particularly surprising or onerous for owners in that construction of the clause, since the charterparty was only for 12 to 15 months, so there would probably be no more than one insurance renewal during the currency of the charterparty.

I also reject Mr Berry’s submission that it would have been open to the owners to take out hull insurance which did not contain the now almost invariable by-pass of section 27(3) whereby the policy provides that the insured value shall be the repaired value for the purposes of ascertaining whether there has been a constructive total loss. In my judgment, if, unusually, the policy taken out had not contained that provision, the vessel would not have been “fully covered” with a “full... value” of US$16 million and the owners would have been in breach of the warranty.

Whilst Mr Kendrick’s submission that the purpose of the provision was to ensure that there would be a pot of money up to US$16 million available to pay for repairs may have overstated the position, since there must always be a risk that hull underwriters will seek to avoid the insurance or otherwise refuse to pay, it is clear that absent such non-payment there would normally be an expectation on the part of the charterers that the hull and machinery insurance would be available to cover the cost of repairs up to the insured value. Indeed the arbitrator himself recognises this as one of the sensible commercial purposes of the provision at [260] of the Award, although he does not give effect to it. In my judgment, that is probably the principal purpose of this provision, although it may also have had others, including the availability of an asset for enforcement purposes. I reject Mr Berry’s argument that the purpose of setting out the insured value was merely to enable the charterers to know what level of war risks insurance to take out under clause 35. There would be no need for a warranty as to the insured value to achieve that purpose which could be achieved by a phone call.

The fact that the charterparty contains this express continuing warranty as to the hull insurance and its amount makes it impossible for the owners to contend that the principle that insurance is normally res inter alios acta should apply. The rationale for the principle that the courts will disregard the fact that a party has insurance available, for example when assessing whether that party has suffered a loss, is that where that party has been prudent enough to expend his money on premiums to buy insurance, he should not have to give credit for them to the other party who has caused his loss and that to hold otherwise would cut across the rights of subrogation of the insurers against the party who has caused the loss: see for example per Lord Radcliffe in Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 at p.589. In the context of contractual disputes, the principle means that where there is no mention of specific insurance in the contract, it is disregarded and plays no part in the allocation of risk. However, that principle can have no application where one party has expressly undertaken and warranted that particular insurance to a particular value will be taken out and maintained throughout the period of the charterparty.

In terms of contractual analysis, it seems to me that the presence of the insurance warranty in clause 41 in the charterparty makes it impossible for the owners to say that what has occurred (which is a casualty the cost of repairing which is several million dollars less than the insured value of the vessel) amounts to something radically different from what was contemplated or to a “ruinous expense” or that there is a break in identity between the contract as provided for and contemplated and its performance in these circumstances. In other words, whichever test for what constitutes a frustrating event is adopted, this provision is, in Bailhache J’s words interpreted by Lord Sumner, a full and complete provision for the given contingency. Put another way, it seems to me that, by virtue of the continuing warranty in clause 41 this contract allocates to the owner the risk that if a casualty occurs, the vessel requires repair, where the cost of repair is within the insured value.

Equally, the presence of the insurance warranty in clause 41 means that the owners cannot argue that repairing the vessel and continuing with the charterparty were, as at 4 May 2009, commercially impossible or that the vessel was a commercial loss. It follows that, even if I had accepted Mr Berry’s submission that there was some general principle of law peculiar to charterparties, that a charterparty was discharged where the cost of repair exceeded the value of the vessel, I would have concluded that the principle could not and did not have any application where there was, as in the present case, a specific warranty as to the hull insurance and the insured value to be maintained. None of the earlier cases contains any such provision or suggests that the concept of commercial impossibility would apply, where the owner had warranted there would be hull insurance for a particular insured value and the cost of repairs was less than that insured value. In the absence of any authority directly on the point, it is open to the court to decide the point as one of principle, which I do, concluding that commercial impossibility or commercial loss do not arise in the present case.

The point made by Mr Berry (and adopted by the arbitrator) about practical problems with the charterers’ construction of the clause because of the inherent likelihood of delay in payment pending investigation by underwriters or because of the risk of avoidance or some other refusal to pay is, with respect, a non-point. Even in a case where the repair cost was less than the sound market value of the vessel, so that on owners’ case the charterparty would not be frustrated and clause 1 of the charterparty would oblige the owners to repair the vessel, the owners would face the risk that underwriters might decline to pay or might delay in payment. That is a commercial risk owners always run.

Like the arbitrator I am unimpressed by Mr Berry’s alternative argument based on the mutual exception in clause 16 for dangers and accidents of the seas (i.e. perils of the sea). The arbitrator correctly concluded at [252] that the relevance of perils of the sea is that it identifies the causal event as an independent one not arising through the fault of the owner. Furthermore, it seems to me that whilst clause 16 relieves the owners from any liability for the actual event, namely the casualty, it does not eliminate or relieve them from their other obligations under the charterparty, specifically the obligation to repair the vessel provided that the cost of repair is less than the insured value imposed by clause 1 and by clause 41, which as an added typed clause would take precedence over the printed clause 16 in any event.

If I apply the reality check advocated by Rix LJ of whether it would be just to relieve the owners of the consequences of their bargain, which was a contract in which they had warranted that, throughout the charterparty, the vessel would be covered by hull and machinery insurance up to the value of US$16 million, it seems to me that, to adopt the arbitrator’s words, the justice of the situation is all one way (although not the way he went, since he erroneously only conducted the reality check against a notional contract which did not contain clause 41). As I have already held, the effect of clause 41 is that the contract allocates to the owner the risk that if a casualty occurs, the vessel requires repair, where the cost of repair is within the insured value. There is nothing unjust in holding the owners to that bargain. Indeed, although subsequent events are not strictly relevant to the objective assessment whether the charterparty was frustrated on 4 May 2009, it is apparent from the fact that underwriters’ surveyors inspected the vessel and prepared repair estimates that, in principle, the underwriters were content for the vessel to be repaired.

The fact that she was not was in large measure because of the commercial decision of the owners not to repair her but to scrap her and then seek to claim against the underwriters in the US courts for a constructive total loss, even though, as Mr Berry recognised in argument, the vessel was not a constructive total loss under the hull policy and, in all probability, as a matter of English law the owners would have been limited to a claim for diminution in value under section 69(3) of the Marine Insurance Act 1906. Far from the charterparty being frustrated, there would seem to be an element here of self-induced frustration, in the sense that the real reason why the charterparty terminated is that the owners elected not to repair the vessel. In my judgment, as at 4 May 2009, a reasonable person would have taken the view that the casualty did not make performance of the contract by the owners, that is repair of the vessel pursuant to clause 1, radically different from what they had promised, precisely because under clause 41 they had warranted that hull insurance up to an insured value of US$16 million would be in place and was in place and the cost of repairs would be amply covered by that insurance. Accordingly, contrary to the arbitrator’s conclusion, the charterparty was not frustrated.

It follows that the answer to the Question of Law is that clause 41 does create an assumption of risk and responsibility on the part of the owners to repair the hull damage up to the insured figure of US$16 million and the appeal is allowed.