Frustration of a charterparty


Published: 14 July 2014

The Association is grateful to Dimitris Seirinakis, Consultant at Ince & Co Shanghai, for contributing to this update.

The development

The "doctrine" of frustration under English law has long been a difficult legal topic, not least because it has often been, in error, associated with the civil law concept of "force majeure".

There may also be at times a mistaken perception that because a contract works out differently than intended, usually someone is making an unforeseen loss, that this doctrine allows an exit to a deal gone wrong.

In both situations a misunderstanding of the correct legal position may lead to decisions being made that do not see the contract ended due to a correct application of the doctrine of frustration, but rather results in an unwitting repudiatory breach of the charterparty by the party seeking to exit the contract, with all of the legal consequences that typically follow such a serious breach.

In the attached note, Messrs. Ince & Co explore the issues of the doctrine of frustration in the context of an unusual charterparty dispute and set out both the legal development of the doctrine over time, but also the key elements of the modern English law position.

Defence advice

It is easy to appreciate that the view taken by the law does not always fit with the way that commercial people may consider a particular situation, and certainly the outcome of the case discussed above was indeed surprising to many.

The Association would advise members who are faced with a dramatic change in the execution of their contract to make contact so that the situation can be reviewed.

Certainly it is recommended to seek the appropriate legal support prior to making any decision as to whether to consider a contract "frustrated" or otherwise as coming to an end earlier than intended.

With a team of over 80 claims handlers including lawyers from 16 different legal jurisdictions, the Association is well placed to assist members with such cases.

Loss prevention advice

The best way to manage the risks that follow from contracts is to focus on their terms before the deal is concluded.

That includes a detailed assessment of the balance of risk and reward between the parties to the deal, as well as considering what exceptions to include in the contract.

There is no concept of "force majeure" under English law, in the way that it can exist in civil law jurisdictions. Therefore, if a particular eventuality or occurrence is to become an exception to a contract (which is subject to English law), say an exception to laytime or demurrage, then this must be clearly set out in an appropriate contract term. Equally, if the parties want to create an option for an early end to the contract, say in the event of an outbreak of war between specific nation states, then this would also have to be expressly provided for with clear contractual terms.

Making the investment of extra time and effort to ensure contractual terms are clear and cover all the concerns of the parties before the deal is fixed, is a very effective way of mitigating against the risks of disputes.

Should disputes arise, and they do, then such investment yields a significant dividend in allowing the substantive matter to be dealt with rather than being involved in protracted arguments about what contract terms are actually meant to apply and what they may mean.

Should members have further queries, they are asked to contact the Association.