Difference between revisions of "Bunge SA v Kyla Shipping Company - The Kyla"
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Bunge SA v Kyla Shipping Company Limited
English High Court; Flaux J;  EWHC 3522 (Comm); 10 December 2012
Dominic Kendrick QC and Noel G. Casey (instructed by Reed Smith LLP) for the Appellants, Bunge SA
Steven Berry QC and James Turner (instructed by Holman Fenwick Willan LLP) for the Respondents, Kyla Shipping Company Limited
NYPE 1946 CHARTERPARTY: H&M INSURANCE REQUIRED FOR AGREED FIGURE: CASUALTY REPAIRS EXCEED SHIP’S MARKET VALUE BUT NOT AGREED HULL VALUE: WHETHER CHARTERPARTY FRUSTRATED
The “Kyla” suffered a casualty whilst on a time charter. Repairs would have cost more than its sound market value but less than its insured value, a fixed figure which had been agreed in the charter . Owners contended that the charter was frustrated because the cost of repairs exceeded the sound market value (but not the agreed insured value) and suggested that there was a principle of law to that effect. Owners’ claim succeeded in arbitration.
Charterers appealed on a question of law and were successful before Flaux J, who rejected the principle contended for by Owners and, applying general principles of frustration, decided that the charter had not been frustrated, because it provided for H&M insurance in an amount greater than the cost of repairs. Where the cost of repairs did not exceed the agreed insured value, Owners were obliged to repair the ship and ocntinue with the charter.
This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), an advocate and solicitor of the Singapore Bar
Owners, Kyla Shipping Company, time-chartered the “Kyla” to Bunge SA for 12-15 months. The charter was on an amended NYPE 1946 form, which provided that Owners would remain responsible for insurance (Clause 26) and H&M cover was to be “USD16,000,000 London, Norway and USA Markets” (Clause 41)). That clause read, in material part:
“41.1 Owners warrant that throughout the currency of this Charterparty the vessel shall be fully covered by leading insurance companies/International P&I Clubs acceptable to the Charterers against Hull and Machinery, War and Protection and Indemnity Risk….
41.3 Insurance full style and value Hull and machinery: USD16,000,000 London, Norway and USA Markets War Risks…"
Approximately two and a half months after delivery, the “Kyla” was struck by another vessel while at berth. There was no fault on Owners’ part. The repair cost was US$9 million and the “Kyla’s” sound market value was US$5.75 million.
Owners subsequently declared the “Kyla” a constructive total loss and tendered a notice of abandonment to the Hull &Machinery insurers. The notice was rejected. Owners sued the insurers and obtained a settlement of approximately US$14.3 million. Owners also sold the “Kyla” for scrap for US$3.3 million.
Owners informed Bunge SA that the charterparty was frustrated as the cost of repairs exceeded the “Kyla’s” sound market value. Owners and Bunge SA referred their dispute to arbitration, where Owners’ position was affirmed.
Bunge SA appealed on a question of law in relation to the effect of clauses in charterparties stipulating that Owners maintain H&M insurance of a fixed level on (a) the doctrine of frustration, and (b) Owners’ obligation to repair.
Flaux J held that the charterparty was not frustrated.
Flaux J did not agree with Owners’ submission that a charterparty would be automatically frustrated by a casualty if the cost of repairs exceeded the sound market value of the chartered vessel. He found that the cases relied upon by Owners could be “subsumed within the modern doctrine of frustration” (at ), of which The Sea Angel  2 Lloyds Rep 517 (CA) was cited as the primary example. This emphasized an underlying consideration of the justice of the case as a “reality check” when deciding whether to apply the doctrine of frustration, and involved considering whether the contract provided for/allocated the risk of the contingency in question. If the contract did so, it would persist and parties would be held to their contractual bargain.
Flaux J then considered the effect of Clauses 26 and 41 of the charterparty and found that they imposed an obligation upon Owners to insure which exceeded the usual obligation to insure in the NYPE form. In particular, the plain wording of Clause 41 contained a continuing warranty by Owners to maintain H&M insurance with a value of US$16 million throughout the currency of the charter. On that basis, the Owners had undertaken the risk of a casualty requiring repairs to the “Kyla” of up to US$16 million and could not therefore claim that repairs of US$9 million frustrated the charter (at ).
In the course of his reasoning, Flaux J noted the arbitrator’s decision that whether the charter was frustrated or not was to be determined as at the date of the alleged frustrating event, that is, the date of the casualty (at ). Consistent with that, Flaux J gave short shrift to submissions based on events long subsequent to the alleged frustrating event, and emphasised that the “reality check” discussed in The Sea Angel did not involve a consideration of such events (at ). (Bunge SA unsuccessfully submitted that as they had lost the remainder of a profitable charter while Owners subsequently obtained a windfall settlement from the H&M insurers, the justice of the case pointed towards a finding that the charter had not been frustrated.)
Separately, in relation to the Owners’ obligation under Clause 41 to “fully cover…” the “Kyla”, Flaux J stated that this required Owners to take out a H&M policy containing a term by-passing Section 27(4)(fn.1) of the Marine Insurance Act*, whereby the policy would provide that the insured value would be the repaired value for the purposes of ascertaining whether there had been a constructive total loss. If the Owners had failed to do this, they would have been in breach of their obligation to “fully cover…” the “Kyla”.
Fn.1 "4. Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss."
Bunge v Kyla and the “modern doctrine of frustration” discussed within should not be taken as significantly altering the law on frustration as set out in Davis Contractors Ltd v Fareham Urban District Council  AC 696. Indeed, Flaux J recognized (at  and ) that whether the problem is approached from the angle of whether the contract provided for a particular event/the contract allocated the risk of a particular event, the answer is the same. In short, the classic question remains unchanged: was the alleged frustrating event within the parties’ contemplation when contracting?
Bunge v Kyla also restricted the “reality check” discussed in The Sea Angel, restricting it to events not too far after the alleged frustrating event. This rightfully focuses the analysis of frustration on the event itself (or events close to it).
Separately, given Flaux J’s focus on Clause 41 and in particular the expressly-stated figure of US$16 million, Bunge v Kyla is probably of little application to charterparties which require owners to take out “full” or “adequate” insurance without stipulating the precise value of cover required.
Finally, Bunge v Kyla emphasizes the link between clauses related to insurance and the allocation of contractual risks (see ). However, although an insurance clause is an important indication of the risk allocation arrangements in a contract, care should nonetheless be taken to consider the contract’s full provisions in detail before concluding that the risk of a particular event falls one way or another.