DMC Category Rating: Confirmed

Case note contributed by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Trainee Solicitor and Contributor to DMC’s CaseNotes

Briefly, CTI planned to export a cargo of cement to Mexico in an attempt to break a cartel operated by Cemex in that market. CTI asked Transclear to source a quantity of cement from Asia for loading on to their vessel, which was, at the time, in China for drydock repairs.

However, Cemex was successful in thwarting Transclear’s attempts to source the cement at Padang in Indonesia and in Taiwan by discouraging suppliers in those markets from selling to Transclear and neither CTI nor Transclear could find any other available sources of cement in Asia.

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 Transclear’s breach for non-delivery of the cement 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.

Transclear based its defence to the claim on two grounds: first, that in the circumstances of this case, the charterparty was frustrated; second, that a term must be implied into the charterparty to the effect that, if the suppliers refused to supply cement for reasons relating to the use to which the buyers intended to put it, the parties would be discharged from performance.

Before the arbitrators, the sellers succeeded on the grounds that the contract was frustrated. The buyers appealed to the High Court.

The High Court reversed the arbitral tribunal’s decision. It found in favour of CTI by holding that (1) the contract was not frustrated because Transclear had taken the risk of a failure of their contemplated source of supply and (2) a term was not to be implied in to the contract that both parties were to be discharged in the circumstances that had arisen and awarded US$300,000 damages. Following this, Transclear applied for permission to appeal to the Court of Appeal, which allowed an appeal to be heard on the question of frustration of the contract only.

The reasoning for the decision on frustration given in the High Court, by Field J, was that: "where a seller makes an unqualified promise to sell he bears the risk of a failure of his contemplated source of supply where that source is not the specified source or the goods are not specific goods and 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. This is because there is always a risk of supplier failure …"

The Court of Appeal identified the primary facts, found by the arbitrators, that were essential for the purpose of deciding the appeal: "the sellers entered into a contract on 7^th May to sell a cargo of cement f.o.b. the 'Mary Nour' at Padang; the sellers made arrangements with a local supplier, PT Semen Padang, for the shipment of the cargo, but did not enter into a binding contract with it for the loading of the vessel; Cemex used its commercial influence to persuade PT Semen Padang not to provide the goods; Cemex also used its commercial influence to dissuade other potential suppliers in the region, in particular the alternative supplier that the sellers had identified in Taiwan, China Rebar, from making goods available for shipment on the vessel."

Judgment
The judgment was given by Moore-Bick LJ, with whom Ward and Rimer LJJ agreed.

He identified that "the root cause of the sellers' inability to deliver the goods they had contracted to sell was the abuse by Cemex of its commercial position combined with the willingness of suppliers to acquiesce in its demands". Given that that was the case the "primary question … is whether such conduct was sufficient to frustrate the contract."

He cited the well know dictum of Lord Radcliffe in Davis v Fareham [1956] AC 696 at p.729 as being generally accepted as encapsulating the modern law on frustration:

"frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."

However, with reference to the dictum of Lord Reid in Davis v Fareham,¹ he was quick to add that "not every supervening event which prevents performance of the contract will result in its being frustrated because it may be apparent from the general nature of the contract, its particular terms and the context in which it was made that it was intended to apply in the circumstances that have arisen."

He then stated (at para.14) that the dicta of Lords Radcliffe and Reid showed that

"it is essential to the doctrine of frustration that the performance of the contract in the new situation should be fundamentally different from that originally contemplated. In deciding whether that is the case it is necessary to have regard to the general nature of the contract as well as its specific terms, the context in which it was made and the contemplation of the parties as to the range of circumstances in which it might come to be performed… it is important to recognise that a contract will not necessarily be frustrated simply because performance has become impossible…and that it will not be frustrated simply because one party is prevented from performing in the manner originally intended if performance in some other manner is possible."

Given the nature of the present case it was not "surprising that [Counsel drew] attention to a number of authorities relating to contracts for the sale of unascertained goods by description where a failure by the ultimate supplier had led to the seller's failing to perform the contract." He added that "in most, but not all, of those cases the supplier's failure to make goods available to the seller did not have the effect of frustrating the contract (para.16)"

He stated (at para.23) that the authorities "make it clear that the principles of frustration are capable of applying to a contract for the sale by description of unascertained goods of a specified origin..." He added that "they also make it clear that, in the absence of some exceptional supervening event, such a contract will not be frustrated simply by a failure on the part of the ultimate supplier to make goods available for delivery." He considered that the reason for that was not hard to find: "it is implicit in a contract of this kind that the seller will either supply the goods himself or (more likely) will make arrangements, directly or indirectly, for the goods to be supplied by others. In other words, he undertakes a personal obligation to procure the delivery of contractual goods and thereby takes the risk of his supplier's failure to perform. That obligation will be discharged by frustration if a supervening event not contemplated by the contract renders that performance impossible or fundamentally different from what was originally envisaged, but most events which result in the failure of a supplier to provide the goods will not fall into that category…it is not surprising, therefore, that the authorities support [the submission of counsel for the buyers] that the contract will not be frustrated if, although delivery remains physically and legally possible, the seller’s supplier chooses (for whatever reason) not to make the goods available."

On the facts of the present case there was "no finding that cargo was physically unavailable for shipment, either at Padang or in Taiwan, or that shipment from either location was unlawful. In each case the supplier simply chose not to make the goods available for shipment. That was a matter of its own choice, which in this case it was free to exercise, being under no contractual obligation to the sellers." He stated (para.27) that "however much pressure Cemex put on [the] suppliers, the nature of the performance called for by the contract remained the same. Whether the suppliers chose to succumb to that pressure was a matter of choice." It followed that the appeal would be dismissed and the judgment in favour of the buyers at first instance upheld.

Comment
The doctrine of frustration is notoriously limited in its availability as a defence to failure to perform a contract.

The present decision is fair because it is the seller who is in a position to guard against the risk of its supplier failing to supply the goods. The seller can guard against the risk (1) by making a binding and enforceable contract with his supplier or (2) by making the promise to the buyer conditional on the goods being available for delivery.

Such steps are necessary when selling unascertained goods because the circumstances where such a contract would usually be frustrated are limited to, for example, the situation (1) where the prohibition of export renders the shipment of the goods unlawful and (2) where the supply of the goods is physical impossible.

The only other realistic way of having a viable defence to situations where performance is hindered to an extent that it becomes "commercially impossible" is to include a force majeure clause in the contract. But the English courts treat these as exclusion clauses and so interpret them strictly against the interests of the party seeking to rely on them. As a result a force majeure clause needs to be comprehensively and clearly drafted if it is to be of real value.

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