War conditions often have a disruptive effect on merchant shipping. However, will harrowing attacks on neutral vessels permit a shipowner to legally terminate a charter party by refusing a charterer’s order to send a ship into a combat zone?
The question is difficult to answer. Yet, it’s a question that many shipowners had to ask themselves during the Iraq-Iran tanker war in the 1980s. It is also the inquiry that three arbitrators had to address in the recent New York maritime arbitration of the M/T Jerom (S.M.A. 2790).
In admiralty law, an unjustified refusal to perform an obligation under a charter party constitutes a breach that can give rise to liability and a claim for damages. However, a charter party may be terminated when its performance becomes impossible or commercially impracticable. The justification is based on the legal doctrine of “frustration.”
To establish a frustration defense, the shipowner must satisfy three criteria:
“First, a contingency (something unexpected) must have occurred. Second, the risk of the unexpected occurance must not have been allocated either by agreement or custom. Finally, occurrence of the contingency must have rendered performance commercially impracticable. Unless . . . these three requirements (are) satisfied, the plea of impossibility must fail.” (363 F.2nd 312, 315).
In the Jerom arbitration, the arbitration panel found that the shipowner failed to satisfy all three frustration requirements. The dispute arose during a three-year time charter of the crude oil tanker Jerom. The vessel was chartered in March 1985 and was employed by the charterer for the first 22 months, primarily in the West Africa trade to the United States and Caribbean. There were, however, two Persian Gulf loadings during this period.
In 1987, the charterer ordered the vessel to the Persian Gulf to load for a voyage to New Zealand. The shipowner refused the order and argued that circumstances in the gulf had drastically changed for the worse since 1985. The shipowner urged that increased use of sophisticated weapons had brought about unforeseeable extreme conditions that justified a refusal to send a vessel into a combat zone, based on the doctrine of frustration./p>
During the arbitration, the panel analyzed the charter party and determined that the contract permitted the vessel to be employed in any part of the world, subject to war-risk restrictions. The charter further provided that it would be unreasonable for the shipowner to withhold its consent to any voyage request, if war-risk insurance was available (which it was, at charterer’s expense).
The charterer successfully argued to the arbitrators that the frustration doctrine did not apply because the shipowner failed to satisfy all three criteria of the defense: 1. the Gulf tanker war was not something unexpected; 2. the risk of war was allocated in the charter war-risk insurance provision; and 3. since other tankers continued to trade in the gulf, performance was not commercially impracticable.
The arbitrators noted that in 1985, the tanker war had been a sad fact of tanker life for some three years. Furthermore, any shipowner not excluding Persian Gulf loading in a charter party should have known what it could mean. For the owner of the Jerom, it meant paying $467,141 to the charterer for breaching its Gulf loading order.
Unfortunately, history has a tendency to repeat itself. A shipowner could again be faced with the difficulties associated with ordering his chartered vessel into a war zone. If this happens, a careful analysis of the Jerom arbitration may assist in resolving the dilemma.