Frustrating Events and Liberty Clauses

September 2006

On 30 January 2003 "the Florida" was chartered on a Vegoilvoy standard form charterparty to carry vegetable oil from Dumai and/or Kuala Tanjun to Lagos, Nigeria. On 1 March however, before the cargo was presented for loading, the Nigerian authorities banned the importation of vegetable oil. The charterers attempted to cancel on the basis that the voyage was frustrated but owners refused, relying on the liberty clause in the charterparty. No cargo was ever made available for loading and eventually owners commenced arbitration proceedings against charterers in respect of their failure to perform.

The question before the Court in Select Commodities Ltd v Valdo SA (2006) EWHC 1137 was; can a liberty clause in a charterparty preclude charterers from relying on the doctrine of frustration?

The clause relied on by owners set out a number of liberties against various events and, so far as relevant, provided:

"In any situation whatsoever and wheresoever occurring and whether existing or anticipated before commencement of or during the voyage, which in the judgment of the owner or Master is likely to …make it unsafe, imprudent, or unlawful for any reason to commence or proceed on or continue the voyage or to enter or discharge the cargo at the port of discharge, or to give rise to delay or difficulty in arriving, discharging at or leaving the port of discharge or the usual place of discharge in such port, [1] the owner may before loading or before the commencement of the voyage,require the shipper or other person entitled thereto to take delivery of the cargo at port of shipment and upon their failure to do so, may warehouse the cargo at the risk and expense of the cargo;…, When the cargo is discharged from the Vessel, as herein provided, it shall be at its own risk and expense; such discharge shall constitute complete delivery andperformance under this contract and the owner shall be freed from any further responsibility. For any service rendered to the cargo as herein provided the owner shall be entitled to a reasonable extra compensation".

The Tribunal found that, but for the liberty clause, the charterparty would have been frustrated by reason of the Nigerian import ban. In this case, however, the charterers were precluded from relying on the doctrine of frustration because the liberty clause dealt with the situation where no cargo had yet been loaded. The charterers appealed.

On appeal Mr. Justice Tomlinson held that the key question was whether or not the liberty clause provided sufficiently for an event which, even before a cargo had been designated and brought forward for loading, made discharge at the contractual destination impossible. If it did then there was authority that, in such circumstances, the doctrine of frustration would be inapplicable. He referred to "The Safeer" (1994) 1 LLR 63, a case in which a war risk clause dealt with what otherwise would have been a frustrating event. The vessel had loaded a cargo of bagged rice for discharge at Kuwait and had arrived and started discharge the day before the Iraqi invasion of Kuwait in August 1990. After a significant delay discharge was resumed but under the orders of the Iraqi Military. The charterers argued that the Charterparty had been frustrated whereas the owners position was that the charter provided liberty to comply with the directions of a belligerent state to deliver cargo. Rix J (as he then was) said:

"If the vessel has liberty to comply with a direction to discharge or deliver the goods to a party not entitled to them, why should the contract be frustrated while that liberty is being carried out "

In Select Commodities Ltd the Court's view was that the liberty clause did not make full and complete provision for all the effects of the Nigerian ban on vegetable oil importation. The clause was designed to deal with the practical disposition of cargo. No provision was made within the clause to deal with the situation, as in the present case, where performance was rendered impossible before a cargo was even designated and brought forward for loading. Indeed, the Court held that the purpose of the clause was not to permit owners to earn freight in the event of frustration, but simply to apportion responsibility and liability in such circumstances where a cargo had already been loaded, or at least had been brought forward for loading, when the frustrating event occurred.

As such, Mr. Justice Tomlinson allowed the appeal in charterers' favour. The Nigerian ban on vegetable oil imports was a frustrating event. The liberty clause did not deal with or make full provision for the effect of a frustrating event in circumstances where there was no cargo to load. Therefore the charterparty was frustrated and owners were not entitled to damages for breach of contract.

So, to answer our question, a liberty clause potentially will preclude charterers from relying on the doctrine of frustration, but only if the liberty clause deals fully and completely with the effects of the frustrating event.

 

We are grateful to Christian Dyer of Ince & Co for contributing this article.