In Bunga S.A. v. Kyla Shipping Company Limited [2012] EWHC 3522 (Comm), the Commercial Court considered whether an arbitrator had made an error of law under Section 69 of the Arbitration Act 1996. The court concluded that a continuing warranty to maintain hull insurance created an assumption of risk and responsibility, defeating the contention that a charterparty had been frustrated.

The appellant chartered a bulk carrier vessel belonging to the respondent. Under the terms of the charterparty, the respondent was to provide the vessel to the appellant for its use, and the respondent warranted that the hull and the machinery of the vessel would be “fully covered” throughout the charter to the sum of USD$16 million.

After the vessel was delivered, it was damaged by a third party and could not be used by the appellant. Although the vessel could have been repaired, the respondent refused to do so as the estimated repair cost (USD$9 million) exceeded the vessel’s sound value (USD$5.75 million). As such, the respondent claimed that the charterparty had been frustrated as the charter was radically different from what was originally contemplated by the parties.

If the respondent was successful in claiming frustration, the charterparty would have been discharged and the appellant would not have been able to claim damages for the respondent’s failure to provide the vessel for its use.

The arbitrator had held that the charterparty had been frustrated as the cost to repair the vessel exceeded its value and that the insurance warranty given by the respondent was a standard term. The appellant sought permission to appeal the arbitrator’s decision and appeal was granted in respect of a point of law.

The court had to determine whether the respondent’s warranty to insure the hull prevented it from claiming that the charterparty was frustrated.

In allowing the appeal of the arbitrator’s decision, the court found that:

  1. the correct approach to determine frustration was to consider whether the contract provided for the event that occurred or allocated the risk of the event to either party;
  2. the respondent’s continuing warranty was not a standard term and created an assumption of the risk and responsibility to repair the damage to the vessel up to the sum of USD$16 million; and
  3. therefore, the charterparty had provided for the risk of damage to the vessel and had allocated this risk to the respondent. As such, the respondent could not claim that the charterparty had been frustrated.

This case is a reminder that parties should be mindful of the implications in providing continuing warranties to insure.