Note: on 22 July 2008, the Court of Appeal confirmed the judgment below. To access the note on the Court of Appeal judgment, click here

DMC Category Rating: Confirmed

This note is based on an article written by Alexandra Saxty, a lawyer with the firm of Hill Dickinson in London. The article first appeared in the January 2008 edition of the Hill Dickinson Marine Newsletter

The Facts
CTI planned to export a cargo of cement to Mexico in an attempt to break a cartel operated by an entity called Cemex in that market. CTI asked TransClear SA ("T") to source a quantity of about 27,000mt of cement from Asia for loading in bulk onto their vessel, which was, at the time, in China for dry dock repairs.

As highly experienced cement traders, T was well aware of Cemex’s domination in the Mexican cement market. They were also aware of CTI’s intention to ship cement to Mexico, and had discussed with C the possibility that Cemex might use its influence to try to prevent CTI’s vessel from loading cement destined for the Mexican market. Notwithstanding this, T was confident that it would be able to source a supply of cement for loading onto the vessel. However, to safeguard against any possible intervention from Cemex, T suggested that the Certificate of Origin and an inspection Certificate should not show a destination, and further that all other ship’s documents should show the destination as Honduras.

T found an available source of cement at Padang, Indonesia, and the fob contract between T and CTI was finalised. In pursuance of this, CTI ordered the vessel to Padang for loading. However, shortly before arriving off Padang, T terminated the contract. T advised CTI that it was no longer in a position to load the cargo at Padang because "high management" in Jakarta had instructed the shippers not to load the vessel. It appeared that Cemex owned 25% of the supplier’s parent company and had used its power to prevent the suppliers from loading cement onto CTI’s vessel.

T subsequently found an alternative supply of cement in Taiwan at a higher price. T remained confident that CTI’s vessel would be loaded successfully, but again suggested that the ship’s documents should show Honduras as the destination. A substitute fob contract was made, and CTI instructed the vessel to sail to Taiwan for loading.

While the vessel was en route to Taiwan, T advised CTI that the Taiwanese suppliers were no longer willing to load the cement onto CTI’s vessel and it was therefore ending the parties’ sale arrangements. It was apparent that the suppliers had been pressurised into refusing to load the vessel by another Taiwanese Company which had a major supply contract with Cemex. Neither CTI nor T could find any other available sources of cement in Asia, and in mitigation of its losses CTI instructed the vessel to sail to Novorossiysk (via the Suez Canal) where she was able to load an alternative cargo of cement at a price between the two "failed" contract prices.

CTI claimed loss and damage of about US$400,000 arising from T’s breach including (1) loss of time (2) the cost of bags ordered by CTI stamped "Indonesian origin" (3) the difference between the first contract price and the price paid in Novorossiysk (4) the cost of extra bunkers used (5) various additional port expenses and (6) the Suez Canal charges.

The Tribunal’s Award
In an Award dated 1 December 2006, a Tribunal of three LMAA Arbitrators dismissed CTI’s claim and held:-

1. that the contract (or contracts) had been frustrated when they became ‘commercially impossible’ to perform; and
2. that a term was to be implied that, if Cemex intervened to prevent the contractual cargo from being available in Asia, then ‘all bets were off’.

The Award did however provide that had CTI’s claim succeeded, CTI would have been entitled to damages for claims (3) to (6). This was about US$300,000, plus interest.

The Tribunal’s decision caused great surprise both on the issue of frustration and on the implied term, all the more so in view of the very small amount of time that had been spent on these matters at the hearing – only about 15 minutes of a 2 day hearing.

The defence of frustration is notoriously hard to establish. English law distinguishes between (1) cases where a contract becomes impossible to perform for reasons which are outside the parties’ control (for example, strikes, storms, earthquakes, embargoes) and (2) cases where the contract becomes impossible to perform by reason of something for which one of the parties is responsible. In the first type of case, the contract may be frustrated. However, in the second, it is not. In this case, the cause of the ‘impossibility’ was the refusal of T’s sub-contractor (the cement supplier) to load CTI’s vessel. The contract had therefore become impossible to perform by reason of a matter for which the seller, T, was responsible.

The Appeal to the High Court
CTI obtained permission from the High Court to appeal the Arbitration Award, and the appeal was heard before Mr. Justice Field in July 2007.

The appeal was on the grounds that the Tribunal's decision on frustration and the implied term was obviously wrong in law, and that no reasonable Tribunal could have made such a decision.

One of the points argued on appeal was whether the fault of a supplier could be attributed to a seller where there was no legally binding contract between the seller and the supplier. This was important because a party is not entitled to rely on frustration if the event on which he relies was his fault or responsibility. Counsel for CTI argued that the Tribunal had failed to apply this fundamental principle: the fault of the suppliers (that is, their failure to supply the promised cargo) should be attributed to T, because the suppliers were those to whom T had delegated the performance of the contract with CTI. It was also argued that the fact that there was no binding contract between T and the suppliers did not matter, as the Tribunal had held that the agreement between T and the suppliers was tantamount to a contract. What mattered was whether or not T had engaged or arranged to use a particular supplier.

On this, Mr Justice Field disagreed, and held that the default of a supplier can only be attributed to a seller where there is a legal obligation between the seller and the supplier. As the Tribunal had found that there was no such legal obligation, CTI failed on that point.

However, Mr Justice Field did agree that, as a matter of law, the contract had not been frustrated. He held that once it had been found that the contract was impossible to perform, the key question was whether the risk of failure of supply was on the sellers or on the buyers. In this case the risk was with the sellers, and the Award was wrong. The judge made the following points:-

• Where a seller makes an unqualified promise to sell, he bears the risk of failure of his supplier where (1) that source is not the specified source, or the goods are not specific goods and (2) the supplier is not excused by frustration, for example, it is physically and legally possible for the supplier to make delivery, but he chooses not to.

• There is always a risk of supplier failure, and it is the seller who is in a position to protect against this by either (1) making a binding and enforceable contract with the supplier with an appropriate jurisdiction or arbitration Clause, or (2) making his promise to the buyer conditional on the goods being available for delivery.

Mr Justice Field also held that neither of the two contracts could be said to contain the supposed implied term, as it was "fundamentally inconsistent with the effect of the contract’s express terms". Furthermore, the term was not necessary to give the contract business efficacy, or so obvious that either it went without saying or should be implied as a matter of law.

Appeal to the Court of Appeal
But that is not the end of it. Following Mr Justice Field’s decision on frustration, T made an application for an order that, even if the contract was frustrated, CTI had not suffered any loss and therefore no damages were payable. The Judge dismissed T’s application, and awarded CTI the same amount as the Tribunal would have awarded if it had not found the contract to have been frustrated.

T then sought permission to appeal to the Court of Appeal. This was granted, but only on the issue of frustration. The appeal is due to be heard in June 2008.

Comment
The instinctive feeling is that this contract was not frustrated, but there are no authorities exactly on the point. This might explain why the decision has received so much attention and indeed, we understand that it is already the subject of discussion in the academic world. Meanwhile, work on the appeal continues

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