CTI Group Inc v Transclear SA

Frustration of a contract for the sale by description of unascertained goods is legally possible, including goods of specified origin. However, the seller ordinarily undertakes a personal obligation to procure the goods and bears the risk of supplier failure. A supplier’s refusal, even following powerful commercial pressure, does not itself frustrate the contract where delivery remains physically and legally possible. Frustration requires a supervening event, not contemplated by the contract, that makes performance impossible or fundamentally different. The inquiry turns on true construction of the contract, read with its nature, terms and commercial context. A prohibition making shipment unlawful may qualify. The court must accept arbitrators’ primary findings of fact, but may decide independently whether the legal test is met where the issue is a clear question of law.

CTI Group Inc contracted with Transclear S.A. for the sale of Indonesian cement to be shipped on the vessel Mary Nour. After commercial pressure from Cemex caused intended suppliers in Indonesia and Taiwan to refuse to provide cargo, Transclear failed to deliver and CTI claimed damages.

An arbitration tribunal held that the contract was frustrated. Field J varied the award, holding that the sellers had assumed the risk of failure by their contemplated supplier and rejecting an alternative implied-term argument. The appeal concerned only frustration: whether the supplier refusals and resulting inability to ship made performance impossible or fundamentally different under the contract. Field J’s decision is reported at [2007] EWHC 2020 (Comm).

The Court of Appeal unanimously dismissed the sellers’ appeal. Lord Justice Moore-Bick gave the leading judgment, with Ward LJ and Rimer LJ agreeing.

1. Appellate approach. The court accepted the arbitrators’ primary findings of fact. However, the issue whether those facts satisfied the legal test for frustration was largely a clear question of law, so the court was not bound by the arbitrators’ conclusion.
2. Governing principles. Frustration depends on the true construction of the contract, considered in light of its nature, terms and surrounding circumstances. The performance required in the new circumstances must be fundamentally different from that originally undertaken. Mere impossibility is insufficient, as is the loss of one intended method of performance where another remains available. These principles were drawn from Davis Contractors Ltd v Fareham Urban District Council [1956] A.C. 696 and illustrated by J. Lauritzen A.S. v Wijsmuller B.V. (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1.
3. Sale of unascertained goods. Such a contract, including one for goods of specified origin, can in principle be frustrated. Ordinarily, however, the seller promises personally to procure delivery and bears the risk that the ultimate supplier will fail or refuse to supply. An exceptional supervening event, such as a legal prohibition on export, may produce frustration.
4. Application. The substance of the contract was shipment of the contractual cargo on the named vessel at Padang. The suppliers’ refusals resulted from their choice to yield to Cemex’s pressure. There was no finding that goods were physically unavailable or that shipment was unlawful. The nature of the contractual performance therefore remained unchanged, and the sellers bore the risk because they had no binding supply contract.
5. The implied-term ruling was not under appeal. The order varying the arbitral award therefore stood.

• Court of Appeal (Civil Division): The sellers’ appeal was dismissed, leaving the order below in force.
• High Court of Justice, Queen’s Bench Division, Commercial Court: Field J varied the arbitral award, holding that the contract was not frustrated and rejecting the proposed implied term. The decision is reported at [2007] EWHC 2020 (Comm).