Crew Contract - Frustration?

(Sea Venture Volume 21)

A case which came before the English Courts involved a dispute relating to a crew management agreement in respect of a cruise vessel operating in the Eastern Mediterranean. Passengers were to board the vessel in Israel and be taken outside Israeli waters for the purpose of gambling and duty free shopping.

The crew management agreement ("the Agreement") was made in March 2000. September 2000 saw the breakdown of the US-brokered Israeli/Palestinian peace negotiations triggering the start of the current "Intifada" - an violent uprising, centred around a campaign of suicide bombing by Muslim extremists of Israeli civilian targets, in protest of Israeli control of the Gaza Strip and West Bank.

By October 2000 cancellations had occurred, and there were far fewer bookings being made than had been anticipated. As a consequence, the Charterers took the line that due to the deterioration of the security situation and due to the reduced bookings the charter would have to come to an end. The Charterers cancelled the Agreement giving as reasons "the warlike hostilities and the dangerous security complications in the area". A similar message was sent to the vessel's owners and the vessel was re-delivered.

The Cruise Operators, the Charterers of the vessel, terminated the Agreement on the grounds that terrorist activity in the area had frustrated the venture, or alternatively, had enabled the operators to declare force majeure in accordance with the Agreement terms.

The Crew Management Company brought a claim for wrongful termination. They were successful at first instance.

The Court of Appeal dismissed the Charterers' appeal. Lord Justice Longmore, who gave the lead judgment, ruled that the terrorist activity in question was not such as to frustrate the Agreement.

When a claim was brought for monies due under the Agreement, and damages resulting from wrongful termination thereof, the Charterers attempted to defend their position on the grounds that the hostilities and dangerous security situation constituted a frustrating event or a force majeure event under clause 8.1 of the Agreement, which read as follows:

"Force majeure neither the Owners nor the crew managers shall be under any liability for any failure to perform any of the obligations hereunder by reason of any cause whatsoever of any nature or kind beyond their reasonable control."

The Charterers argued that the frustrating event was "a deterioration in the security situation in the Eastern Mediterranean such that no reasonable operator would continue to operate his vessel in any part of the trading area."

Lord Justice Longmore, in dismissing the appeal, addressed the issue of Frustration quoting from Chitty on Contracts:

"If the literal words of the contractual promise were to be enforced in the changed circumstances, would performance involve a fundamental or radical change from the obligation originally undertaken?"

In this case, this question was to be answered in the negative for the following reasons:

1. The deterioration in the security situation in the Eastern Mediterranean was not a surprising let alone a radically different event. Despite war risk underwriters giving notice of cancellation and requiring additional premium, no indication that they would decline cover for shipping in the area entirely was ever given. It follows from such reasoning that the courts are unlikely to construe a rise in the cost of insurance cover, however great, as in itself a frustrating event. On the other hand, a change in circumstances that results in underwriters refusing to cover altogether the activities in question is likely to enable a party to claim frustration of an agreement.

2. Dismissing the evidence given by security experts from the region, Lord Justice Longmore contended that in the absence of evidence from any reasonable shipowner that he would not operate a vessel in the prevailing conditions the Charterers would struggle to establish frustration.

On this point Longmore LJ stated that:

"It is not … for an academic expert to decide for the court what a reasonable shipowner or charterer would or would not do."

3. The fact that the Charterers tried to re-negotiate the terms of the crewing arrangement following the developments in the area showed that performance in such circumstances was not a radically different thing to that which was the subject of the Agreement.

4. Clause 8.1 of the Agreement could not be relied on unless frustration could be shown. In these circumstances, for the reasons already given, the Agreement was not frustrated.

This case serves to underline the difficulty faced by a party trying to establish frustration under English law. A contract is not frustrated merely because unexpected events render the venture less profitable than anticipated.

For an event to constitute frustration it must be more than simply unexpected. It has to be so far removed from the contemplation of the parties, and have effects so profound, as to make performance "radically different" to that agreed. Making performance radically less profitable is not enough.

1.Boulos Gad v. Global Marine Management. Court of Appeal, March 2002 (Unreported).