The world was recently captivated by images of the MV Ever Given grounded across the width of the Suez Canal. The blockage of the Suez Canal caused delay to a large number of vessels waiting to pass through the canal, and it is expected that there will be significant ripple effects in the supply chain.
While the grounding of the MV Ever Given may be the first occasion where a single vessel blocked the passage through the Suez Canal, it is certainly not the first time that the canal was closed to shipping traffic. For instance, on 26 July 1956, then Egyptian president Gamal Abdel Nasser decided to nationalize the canal which led to the British and French sending their paratroopers to the canal. This resulted in the Suez Canal being closed from October 1956 until March 1957.
The closure of the Suez Canal in that period brought about several claims being brought to the Courts and in this edition of our Notes from the Bar, we examine two of these cases, namely Tsakiroglou & Co Ltd v. Noblee Thorl GmbH [1962] AC 93 and The Eugenia [1964] 2 QB 226. The first is in relation to a dispute arising from a CIF sale contract, and the second is in relation to a dispute arising from a time charterparty.
Tsakiroglou v. Noblee
By a contract dated 4 October 1956, the sellers agreed to sell Sudanese groundnuts for shipment CIF Hamburg during November/December 1956. Because of the closure of the Suez Canal, the seller was unable to ship the groundnuts via this route, and the alternative route would have been to ship it via the Cape of Good Hope.
The sellers refused to ship the groundnuts and claimed that they were prevented from doing so due to the closure of the Suez Canal. There was evidence that the freight rates in November 1956 to ship via the Cape of Good Hope increased by 25% and it continued to increase to about 100% by December 1956.
A finding of fact was made that as at the date when the contract was entered into, shipment of Sudanese groundnuts via the Suez Canal was the usual and normal route, and that it would have been unusual and rare for any Sudanese groundnuts to be shipped to Europe via the Cape of Good Hope.
One of the defences relied upon by the sellers was the force majeure clause in the contract which provides as follows:
“In case of prohibition of import or export, blockade or war, epidemic or strike, and in all cases of force majeure preventing the shipment within the time fixed, or the delivery, the period allowed for shipment or delivery shall be extended by not exceeding two months. After that, if the case of force majeure be still operating, the contract shall be cancelled.”
The House of Lords considered the word “shipment” in this clause and took the view that even taken at its widest, “… it cannot mean more than bringing the goods to the shipping port and then loading them on a ship prepared to carry them to their contractual destination.”
Based on this interpretation, the closure of the Suez Canal is not a force majeure event covered by the force majeure clause as it does not affect the seller’s ability to load the groundnuts onto the vessel at the Port of Sudan.
The other argument raised by the seller was that the closure of the Suez Canal results in the contract being frustrated.
The House of Lords held that in order for the contract to be frustrated, there must be an express or implied term that the groundnut must be shipped via the Suez Canal. The House of Lords found that there is no basis for implying such a clause. While the seller would be exposed to increased cost, the shipping the groundnuts via the Cape of Good Hope does not fundamentally change the obligations of the seller in a CIF contract.
The seller was held to be in breach of the contract of sale.
The Eugenia
By a time charterparty of September 9, 1956, the Eugenia was let to the charterers for a “trip out to India via Black Sea” from the time the vessel was delivered to the charterers at Genoa. The charterparty by clause 21, a customary war clause, provided:
“The vessel, unless the consent of the owners be first obtained, not to be ordered nor continue to any place or on any voyage nor be used on any service which will bring her within a zone which is dangerous as the result of any actual or threatened act of war, war hostilities, warlike operations. …”
When the charterparty was negotiated the agents of both parties realised that the Suez Canal might be closed but no express terms were inserted in the charter to meet that eventuality. The vessel was delivered on 20 September at Genoa.
On 25 October 1956, she sailed from Odessa, the customary route at this time to India being still by the Suez Canal. She arrived at Port Said on 30 October, when Egyptian anti-aircraft guns were in action. Port Said and the Suez Canal were then zones which were “dangerous” within clause 21.
The vessel entered the canal on 31 October and proceeded south. The canal was blocked by the Egyptian Government, and the vessel was trapped. A passage was cleared northward in January 1957, and on 12 January 1957, the vessel arrived at Alexandria. On 4 January 1957 the charterers claimed that the charterparty had been frustrated by the blocking of the canal. The owners denied frustration. They treated the charterers’ conduct as repudiation and claimed damages.
On appeal to the Court of Appeal, it was held that by ordering the vessel to enter the canal on 31 October, the charterers were in breach of the war clause. If there was any frustration, it was a self-induced frustration and cannot be relied on by the charterers.
It was argued by the charterer that even if the vessel did not enter the canal, the closure of the Suez Canal ought to bring about a frustration as requiring the vessel to sail via the Cape of Good Hope would be fundamentally different from what the parties contracted for.
While the High Court agreed that it was frustration, the Court of Appeal disagreed. Lord Denning MR’s explanation is simple but clear:
“To see if the doctrine applies, you have first to construe the contract and see whether the parties have themselves provided for the situation that has arisen. If they have provided for it, the contract must govern. There is no frustration. If they have not provided for it, then you have to compare the new situation with the situation for which they did provide. Then you must see how different it is. The fact that it has become more onerous or more expensive for one party than he thought is not sufficient to bring about a frustration. It must be more than merely more onerous or more expensive. It must be positively unjust to hold the parties bound. It is often difficult to draw the line. But it must be done.”
The charterer’s defence of frustration in that case failed and the charterer was held to be liable.
Our Comments
The closure of the Suez Canal caused by the grounding of the MV Ever Given is a lot shorter than the closure due to the Suez Crisis. However, the effect of the closure is likely to be felt for some time to come.
The two cases that we have examined above may provide a helpful insight into how the doctrine of frustration is applied, and how a force majeure clause may be construed by the Courts. While cases with identical fact situation as these two cases are unlikely to occur given the relatively short time that the canal was closed, the resulting delay in moving cargoes through the canal may bring about situations where one party to the contract may find it more onerous to perform it than before. However, being more onerous or more expensive to perform does not mean that the contract can be brought to an end. Any party contemplating terminating a contract because it became a lot more expensive to perform would have to consider very carefully if he is entitled to do so. If in doubt, always consult a lawyer first.
If you have any queries, please feel free to contact us.
