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Frustration and Force Majeure in Liner Contracts

Author: M.Jagannath
Date: April 20, 2016

This article focuses on frustration and force majeure provisions which may be available in shipping contracts such as slot charter parties. While frustration and force majeure appear to be similar in nature, the effect is different and the purpose of this article is touch on these aspects with respect to Container Liner Shipping.

  1. All contracts are entered on the premise that they will be performed with each party deriving the benefit which they sek. However, due to change in circumstances (for e.g. price of bunkers goes up, closure of Suez Canal, etc.), some contracts may become more difficult to perform. Hence, one of the parties may wish to seek to escape from the performance of the contract and the route usually taken is either by declaring that the contract is “frustrated” or the contract provides for a “force majeure” provision allowing one of the parties to be excused from the performance of the contract.

  2. Frustration in English law will occur when a contract becomes impossible to perform or one party is prevented from performing his obligation due to an unforeseeable change of circumstances. Mere inconvenience, extreme hardship or financial loss will not lead to frustration. Further, frustration is very difficult to establish.

    1. In Paal Wilson & Co v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) decided in the English House of Lords, it was stated that “there are two essential factors which must be present in order to frustrate a contract. The first essential factor is that there must be some outside event or extraneous change of situation, not foreseen or provided for by the parties at the time of contracting, which either makes it impossible for the contract to be performed at all, or at least renders its performance something radically different from what the parties contemplated when they entered into it. The second essential factor is that the outside event or extraneous change of situation concerned, and the consequences of either in relation to the performance of the contract, must have occurred without either the fault or the default of either party to the contract.

    2. In The Super Servant Two, a contract was made for the carriage of the claimant’s drilling rig on one of the vessels of the carrier, at their option (either The Super Servant One or The Super Servant Two). After the contract formation, The Super Servant Two was lost and the carrier claimed that the contract was frustrated given that the other vessel, The Super Servant One, was the subject of another fixture and not available to carry the claimant’s cargo. The English Court of Appeal rejected this argument on the basis that the carrier’s decision to use The Super Servant One for the other fixture amounted to an election and which stopped the carrier from relying on the loss of The Super Servant Two. If the contract had specifically mentioned The Super Servant Two, it is submitted that it would have been a case of frustration.

  3. Force Majeure: The concept of force majeure does not exist in English Law. Instead, it is a civil law concept and which may be contractually incorporated. Force majeure, when applicable, may provide for one or both parties to cancel the contract or be excused from either part or complete performance of the contract on the occurrence of certain specified events. A force majeure clause will not always bring a contract to the end and therefore the contract may continue to subsist with some variations. Force majeure clause has been expanded to include events created by external human intervention such as strikes, war, flood, earthquake, storm, hurricane, etc. In order for an event to be regarded as a force majeure event, it must fulfil three tests and which are:

    1. Externality – the event must be beyond the control of the contracting parties

    2. Unpredictability – the event cannot be anticipated

    3. Irresistibility – the event is unavoidable.

The party relying on the force majeure has the burden of proof and has to show that the occurrence of the event falls under the clause, such that they were wholly or partially prevented from performing the contract (see Channel Islands Ferries Ltd v Sealink UK Ltd [1988] I Lloyd’s Rep 323).

  1. The essential difference is that frustration will bring the contract to an end where as in force majeure, the contract may continue to subsist. In liner contracts, there may be a gap between the overlying contract (contract between the liner operator and the vessel operator by way of slot charter) and the underlying contract (liner operator and the cargo interests) and due to which the liner operator may be exposed to extra costs. Examples of these are as follows:

    1. Frustration: If the vessel sinks prior to the arrival at the load port, then this would be a frustrating event. Invariably, Bills of Lading issued by Liner Operator have provision for substituting vessels and therefore it is submitted that the Liner Operator’s contract would not be frustrated. Instead, the Liner Operators would have to make alternative arrangements for the carriage of the cargo awaiting loading at the port (similar to The Super Servant Two).

    2. Force majeure: If a vessel is unable to call a port due to bad weather (force majeure event provided in the contract), the liner operator may incur additional expenses for say container storage, carriage into another vessel / terminal to accomplish the voyage, etc.

  2. Risk Management: Liner operators must carefully vet their contracts (with both the overlying and underlying parties) to avoid any gaps between the contracts. When gaps have been ascertained, it would be best to conduct risk management measures to minimize any cost exposure. For example – the contract of the liner operator with their underlying parties could try to mirror the provisions provided in the overlying contracts - booking confirmation / notes issued by the Liner Operator to the underlying party which states that any costs incurred due to any Frustrating or Force Majeure event would be to the cargo interests account. Alternatively, cover could be sought from Transport Liability Insurers for such risks (“Completion of Carriage costs”).

  3. In conclusion, while Frustration and Force Majeure appear to be similar, there may be different consequences for the liner operator. In particular, frustration or force majeure may excuse a vessel operator from performance of the contract, however, the liner operator may sometimes be unable to do so. Hence, a liner operator should consider appropriate risk management measures to deal with the exposures either by contractually transferring the risks to the underlying parties and / or insuring the same.

 

 

 

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