Frustration Essay

982 words - 4 pages

Bunge SA v Kyla Shipping Company Ltd [2012] EWHC 3522 (Comm)

Summary of fact:

Bunge SA chartered a vessel from Kyla Shipping Company Limited (the owners) on an amended NYPE 1946 form for a period of 12 to 15 months in the charterers’ option. The time charter included the following clauses:

“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. ….”

“41.3 Insurance full style and value…. Hull and Machinery: USD16,000,000 London, Norway and USA Markets War Risks….”

After ten weeks of charter, the vessel suffered collision damage through no fault of the owners. Two months later, the owners notified their hull and machinery underwriters that they were abandoning the vessel on a claim of constructive total loss. The owners also informed the charterers that they considered the charterparty to be frustrated. The basis for the owners’ approach was that the likely repair cost of US$9 million was considerably higher than the sound market value of the vessel at US$5.75 million. The underwriters initially denied that the vessel was a constructive total loss and rejected the notice of abandonment. However, the underwriters later settled with the owners after the commencement of court proceedings.

The owners submitted that a charter was frustrated if the vessel became a constructive total loss; namely, the cost of the repair exceeded the value of the vessel. When the charter was drawn, it could not be envisaged that the owners would be required to pay more than the vessel’s worth to fulfill its charter obligations.

On the other hand, the charterers submitted that there was no general principle that a charter party was frustrated in the event of a constructive total loss and that the correct approach was to consider whether the charter had allocated the risk of the event that occurred. They also contended that it would be unfair to conclude the charter was frustrated as the owners would get a huge profit from their decision not to perform the charter, and would burden the charterers with a $4m loss.
The dispute went to arbitration. The arbitrator agreed with the owners that there was a general principle that a charterparty would usually be frustrated where the vessel is damaged such that the costs of repair exceed the value of the vessel and that only a very clear provision, which clause 41 in his opinion was not, would oblige an owner to undertake repair. He, therefore, held that the charterparty had been frustrated on the date of the collision. The charterers appealed.

Issue:

The principle issue in this case was whether a time charterparty was frustrated after the vessel was involved in a collision and the costs of repairing the vessel exceeded her market value.

Judgment:

Mr Justice Flaux...

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