- The basic rule is that a contract is meant to be performed. It does not matter that the contract has become more difficult or expensive to performi. A key exception to this basic rule is frustrationii. Accordingly, an Owner of a vessel would be entitled to terminate the adventure for the following reasons:
- Damage to the ship – where the costs of repairs exceed the value of ship when repaired plus the value of freight, if still at risk.
- Damage to cargo and which cannot be reconditioned on a commercial basis or without inordinate delay such that its onward carriage is impacted/frustrated.
- Delay and which would depend on the length and nature of the voyage. It is quite possible for the voyage to continue even if there is a long delay. However, this would not be the case for perishable or time sensitive cargoes such as fruits and vegetables and which would not survive a long delay.
- The above doctrine does not raise any difficulty when the contract of carriage is with the Owners i.e., Owners issue their Bills of Lading (“BL”) for the subject shipment. However, if the BL’s are issued by intermediaries such as Container Operator/NVOCC/Freight Forwarder as Carriers, would they be entitled to take the same position as Owners? This article considers these issues and attempts to answer them.
- The contractual position in containerised shipping is often different given that there are many contractual parties (like Container Carriers, “CCs”) involved who may:
- be performing a portion of the carriage by themselves and sub-contracting the others (bailees);
- not be performing the carriage by themselves and subcontracting the whole of the carriage (quasi baileesiii), who could be:
- NVOCCs who use their own equipment and make arrangements to load with various vessel operators;
- NVOCCs who sub-contract the whole of the voyage with a Container Operator, who may be an Owner/Operator or NVOCCiv.
- We have considered the contractual terms of the major CCs and note that their BL’s generally provide for a liberty to sub-contract with a clause like “The Carrier shall be entitled to sub-contract on any terms whatsoever the whole or any part of the carriage” and with some additions (MSCv and Maerskvi BL Terms for sub-contracting below). This concept, known as bailment on terms, was developed in the Privy Council’s decision in The Pioneer Container, and is now well established in common law jurisdictions.
- The liberty to sub-contract clause does not change or vary contractual responsibilities of the original parties. This being the case, absent contractual provisions, the defence of frustration can only be raised by the CC if the performance of the contract becomes impossible for them (CC) to perform. We submit that in most instances, the position would be similar for both the Owners and CCs such that they would be entitled to plead the defence of frustration.
- However, in some instances, the CC would indeed be able to accomplish the voyage, say by using their own resources and/or engaging other sub-contractors thereby incurring additional expenditure. If the additional expenditure is so substantial, arguably, this itself may be a frustrating event which may entitle the CC to plead the defence of frustration.
- CCs who are in control of the movement (Operators/NVOCCs who own equipment and load with various vessel operators) may be able to deal with such abandonment issues of the overlying carrier without any great inconvenience or costs. However, in the case of NVOCCs who contract wholly with the Owners who abandoned the contract, may face additional costs and which may be considerable. If the costs of completion of carriage are disproportionate and exceed the value of the cargo involved, it may make sense for CCs to either simply reimburse the value of the cargo or make an offer of settlement to the cargo interests based on the limitation of liability available under the cargo conventionsvii instead of accomplishing the voyage.
- Insurance coverage:
- CC: The completion of voyage, in our view, is more of an operational issue and therefore these costs would have to be borne by the CCs themselves. However, some Transport Liability policies do provide for additional cover for the completion of carriage such that it would be triggered to respond to these additional costs. We understand that the cover is generally for a very low limit such that this may not be of assistance when these costs are substantial. Hence, CCs should either seek higher limits for this cover (completion of carriage) and/or have a risk management strategy to deal with such exposures, say, by constantly reviewing their counterparties to ensure that they do not have commercial stresses which may impact the completion of a voyage.
- Cargo: Cargo is generally insured based on Institute Cargo Clauses 1/1/82 or 1/1/2009 (A), (B) or (C). All of these forms do provide cover for Forwarding Charges and which would be triggered to respond to any additional expenses incurred for completing the carriage should a Carrier abandon the voyage.
- To conclude
- Whether a carrier would be entitled to abandon the voyage would depend on the circumstances;
- Should the overlying carrier abandon the voyage, the underlying carrier/CC should complete the voyage unless they themselves are able to show that their contract is frustrated;
- Parties to a voyage (including Carriers and Cargo interests) should have a risk management strategy including insurance cover to deal with costs which would arise should their overlying counterparty abandon the voyage.
i. See The Eugenia  2 QB 226
ii. When a serious event occurs after the formation of a contract which is both unexpected and beyond the control of the parties and which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. See also The doctrine of frustration in English law – Lexology
iii. A quasi bailee is similar to sub-bailment except that the intermediary does not take possession himself, but arranges for possession to pass directly from the owner to a third party.
iv. As mentioned in our earlier article, TT Club takes an expansive view of a Freight Forwarder in that it includes both a Freight Forwarder acting as an Agent (who does not issue their own Bills of Lading) and one who issues their Bills of Lading (in which case they become, in our view, a NVOCC). We have therefore maintained the distinction.
v. Clause 4.1 “The Carrier shall be entitled to sub-contract on any terms whatsoever the whole or any part of the carriage, including liberty to further sub-contract.
vi. Clause 4.1 “The Carrier shall be entitled to subcontract on any terms whatsoever the whole or any part of the Carriage”.
vii. The Cargo conventions are namely The Hague or The Hague Visby Rules. Also the Convention on Limitation of Liability for Maritime Claims (LLMC), if applicable.