Bunge SA v Kyla Shipping Company Ltd

A charterparty is not frustrated by applying an inflexible rule that repair costs exceeding the vessel’s value automatically discharge the contract. The court must construe the charterparty as a whole and ask whether the supervening event falls within its contractual allocation of risk. The modern approach is multi-factorial and includes the contract’s terms and context, the parties’ objective expectations and assumptions, the nature of the event, and the prospects of future performance.

Where owners warrant that hull and machinery insurance of a specified amount will be maintained throughout the charterparty, and repair costs fall within that insured value, the warranty allocates to the owners the risk and responsibility of repairing the vessel. Insurance is not res inter alios acta where the contract expressly provides for it. The charterparty is therefore not frustrated merely because repair costs exceed the vessel’s sound market value.

The charterers appealed under section 69 of the Arbitration Act 1996 from a partial final arbitration award. The arbitrator had held that a time charterparty was frustrated when the chartered vessel was damaged in a collision at Santos, Brazil.

The vessel’s probable repair cost was assessed at US$9 million, compared with a sound market value of US$5.75 million. The charterparty required the owners to maintain full hull and machinery insurance, including an insured value of US$16 million, throughout the charterparty.

Permission to appeal was granted on the question whether that insurance warranty created an assumption of risk and responsibility requiring the owners to repair damage up to the insured value. The central issue was whether, on the true construction of the charterparty, the casualty was within the contractual allocation of risk.

1. Appeal allowed. The charterparty was not frustrated by the collision and resulting damage.
2. The earlier authorities concerning commercial loss or the cost of repairs were not an inflexible charterparty rule. They were applications of the modern doctrine of frustration. The court must adopt a multi-factorial approach, considering the contract, its context, the parties’ objective knowledge and expectations, the nature of the supervening event, and the prospects of future performance. The question whether the contract provides for the event is addressed by construing the contract and identifying its allocation of risk.
3. Clause 41 was a comprehensive and continuing insurance warranty. It required full hull and machinery cover, including the insured value of US$16 million, throughout the charterparty. The insured value was not limited to the commencement of the charterparty.
4. The express warranty meant that the ordinary principle that insurance is res inter alios acta did not apply. The charterers were entitled to expect that the insurance would ordinarily be available to meet repair costs up to the insured value. Clause 41 therefore allocated to the owners the risk that a casualty requiring repair would occur where the repair cost was within that value.
5. Because the repair cost was substantially below the insured value, repairing the vessel was not radically different from the owners’ contractual promise and was not commercially impossible. Clause 16 relieved the owners from liability for the casualty itself, but did not remove their separate obligation to repair under clauses 1 and 41.
6. The owners’ decision to scrap the vessel and pursue a constructive total loss claim did not establish frustration. On the relevant date, a reasonable person would have concluded that the casualty did not frustrate performance. The arbitrator had erred by applying the reality check to a hypothetical charterparty without clause 41.

The appeal was brought under section 69 of the Arbitration Act 1996 from a partial final award dated 11 April 2012. Hamblen J granted permission to appeal on the question concerning the effect of the hull insurance warranty. The High Court (Commercial Court) allowed the appeal.