Misrepresentation, Deviation and Frustration

Disputes under contracts relating to the purchase of goods and/or transport of goods and/or charter of ships and/or insurance commonly arise from varied reasons - Misrepresentation, Deviation and Frustration introduction. These reasons range from concerns addressed at the start, at the beginning or prior to the start or beginning of the contract to concerns that take place after the execution of the contract but before the performance of the obligation and to concerns that take place during the execution of the contract and during the performance of the obligation. These reasons range from cases of misrepresentation, deviation and frustration, among others.

This Paper seeks to define and analyze these three terms, and subsequently differentiate them accordingly in relation to maritime transport or insurance. Each term shall be discussed accordingly and in doing such shall provide for cases from two different jurisdictions — the United States of America and the Philippines. The latter is located in the Asia Pacific, particularly in Southeast Asia, which due to its colonial descent its legal system is largely patterned from the legal system of its previous colonizers. The country’s legal system is a combination of both civil and common law — civil law because of its Spanish influences and common law because of its American influences. This means that its legal system is predominantly based on codes and statutes that are passed by its legislature together with the jurisprudence enriched by the judiciary. However, it is predominantly of civil law descent and influence as despite the richness of its jurisprudence, most cases are decided in line with the enacted codes or statutes. The common law influence surfaces only when there is ambiguity or dearth in the code or statute with regard to a particular legal controversy. In such instance, the judiciary established precedence through jurisprudence. The former — United States of America, on the other hand consists of states whose legal systems are primarily governed by common law although there are a few states that are predominantly governed by civil law such as the state of Louisiana.

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This Paper shall first proceed with a discussion and analysis of each the above-mentioned terms — misrepresentation, deviation and frustration. From the discussion and analysis of each of these terms, the cases from the two jurisdictions presented per each term then shall be compared or contrasted with one another, if the same is possible. Afterwards, a comparison or contrast of the three terms shall be presented.

Misrepresentation

In order to define what misrepresentation is its positive counterpart must first be defined, which is representation. In other words, in order to define misrepresentation, what it is not must first be identified or defined (via negativa). Thus the following exposition.

Representation is an oral or written statement of a fact or a condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to assume the risk under an insurance contract (Sentinel Life Insurance Company v. Blackmer, 77 F. 2d 347, 350).  Conversely, a misrepresentation is a false or fraudulent statement incidental to the contract of insurance relative to some fact having reference to the same insurance contract and upon the faith of which, the insurance contract is entered into. Simply put, a misrepresentation is a false or fraudulent representation, the intention of which is the inducement of the insurer for the latter to assume the insured’s risk under an insurance contract.

In addition to the discussion of misrepresentation as against representation, a discussion of misrepresentation in relation to concealment is likewise necessary in order to better understand the concept of misrepresentation.

It must be noted that there are four primary concerns of the insurer. These are (1) correct estimation of risk so that he/she will be able to approve the policy applicable and the premium rate; (2) delimitation of the risk; (3) control of risk to guard against increase of risk; and (4) determine is loss occurs and if so the amount thereof. In order to address these concerns, the insurer uses the following devices to ascertain and control risks and loss: (1) concealment; (2) representation; (3) warranty; (4) condition; and (5) exception. Thus at this point it is apparent that both concealment and representation are the tools that the insurer uses. However these two differ in that concealment is the neglect of one party to communicate to the other material facts. The information the insured gives in compliance with his duty to reveal information is representation. Representation thus is the communication required to comply with the prohibition against concealment. Concealment is the passive while misrepresentation is the active form of the same act of bad faith (Mawbray on Insurance, 58).

As a misrepresentation is an inducement to a contract of insurance, it must ordinarily be made at the same time of, or before, the issuance of the policy (Insurance Code of the Philippines, Section 37). However, representation may likewise be made after the issuance of the policy, when the purpose thereof is to induce the insurer to modify an existing insurance contract since the provisions on representation are applicable not only to the original formation of an insurance contract but also its modification policy (Insurance Code of the Philippines, Section 47). Thus, the operative fact is the likeliness of inducement on the part of the insurer to undertake the insurance contract.

In other words, the general rule is that misrepresentation may be made only before the execution or effectivity of the insurance contract, however, where the parties are modifying or amending their contract then misrepresentation may be made even after its effectivity.

The effect of misrepresentation to an insurance contract is that if such is discovered before loss or death, then the insurer can rescind or cancel the policy. If the same is discovered after, the insurer can refuse to pay the insured or his/her beneficiary (Insurance Code of the Philippines, Section 48). Specifically, in marine insurance, a representation which is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract (Insurance Code of the Philippines, Section 111).

However rescission must be made in a timely manner. Whenever a right to rescind a contract of insurance is given to the insurer by any provision, this right must be exercised prior to the commencement of an action on the contract (Insurance Code of the Philippines, Section 48). Also, there may be instances when the insurer waives the right to rescind the insurance contract. Take for instance cases when the insurer accepts payment of premium with the knowledge on the ground of rescission, there is a waiver of such right (Insurance Code of the Philippines, Section 45). In other words, when an insurer had knowledge of facts that entitled it to rescind the contract of insurance but failed to cancel or rescind the policy and instead preferred to continue the same, its inaction amounted to a waiver of its right to rescind the contract (Gonzales v. Lao v. Yek Tong Lin Fire & Marine Insurance Company, 55 Phil. 386). Naturally, there can be no waiver of such right to rescind when the insurer had no knowledge of the ground therefore at the time of acceptance of premium payment (Stokes v. Malayan Insurance Company Incorporated, 127 SCRA 766).

Illustrations of these are the following:

An insurance policy required the disclosure of any other insurance policy on the same thing insured. The insured did not reveal the other insurance by which the same thing is insured. The insurer knew of this but did not rescind the policy. In this case, as the insurer knew of the misrepresentation, he is estopped from raising the same as a defense to his liability. “If, with the knowledge of the existence of other insurance in violation of the policy, the insurer preferred to continue the policy, its inaction amounted to a waiver of rescission of the contract (Gonzales v. Lao v. Yek Tong Lin Fire & Marine Insurance Company, 55 Phil. 386).

Lady applied for personal accident insurance. In her application she indicated her date of birth, which showed that during the execution of the contract, she was already 65 years old. Such policy however has a provision on exclusion or exemption of liability for persons who are under 16 years of age or over the age of 60. In this case, the insurer cannot refuse to pay Lady her benefits under the insurance contract should an accident happen to her as the insurer is estopped from claiming forfeiture of policy. Lady indicated this fact in the application and yet the insurer accepted the payment of premium and issued the policy (Edillon v. Manila Bankers Life Insurance, 117 SCRA 187).

In another case, the insurer knew that the premises insured against fire did not have the number of fire hydrants required in the policy. Given this knowledge, the insurer cannot later on refuse to pay the proceeds of the policy as he is barred by waiver or estoppel to claim violation of the policy through misrepresentation. It must be noted that when the policy contains a condition which renders it voidable prior to its execution, and this is known to the insurer, it is presumed that the insurer intended to waive the condition rather than to make it appear to the insured that he is covered by the policy when he is not (Qua Che Gan v. Law Union and Rock Insurance, Limited 52 O.G. 1982).

In one case, the applicant for life insurance and the members of the family of such applicant disclosed to the insurance agent, to whom the application was made and who subsequently received and indorsed the application, that he was experiencing lung troubles and had been in a sanitarium. The applicant for insurance merely signed a blank document or signed the application in blank but disclosed truthful statements of material facts to the agent of the insurer. However, when the agent was filling the application up, he filled it up in such as way as to negative the ill-health of the applicant. The insurer later on sought exemption from liability by virtue of the alleged misrepresentation of the applicant when in fact, the applicant for insurance made truthful statements of material facts to the insurer’s agent but it was the agent who misrepresented the facts. In such case, the insurer cannot avoid liability. The insurer cannot in this case raise misrepresentation as a defense as the insurer must assume liability for the acts of its agent. In truth and in fact, the insured was not guilty of misrepresentation or concealment as he disclosed all material facts to the agent. It was the agent who misrepresented to the insurer (Insular Life Assurance Company v. Feliciano, 73 Phil. 201).

Otherwise stated, where an applicant for insurance made truthful statements of material facts to the agent of the insurer and merely signed a blank application, but it was the agent who filled the answers misrepresenting the facts, the insurer cannot avoid the policy as it must assume responsibility for the acts of its agents (Insular Life Assurance Company v. Feliciano, 73 Phil. 201). But, it must be noted that when there is connivance between the applicant for insurance and the agent of the insurer, the insurer may still seek exemption from liability (Insular Life Assurance Company v. Feliciano, 73 Phil. 201).

Representations can either be: (1) affirmative which is an affirmation of a fact existing when the contract begins; or (2) promissory which is a statement of the insured concerning what is to happen during the term of the insurance. Thus misrepresentations as they are false or fraudulent representations, are affirmative or promissory.

In interpreting representations, they need not be literally true and accurate in every respect, rather it is sufficient if it is substantially or materially true and in case of promissory representation, it is sufficient if it is substantially complied with (7 Couch 2d., 19). Consequently in cases of misrepresentations, they need not be literally false in every respect. It is sufficient if it is substantially or materially false or fraudulent for the defense of misrepresentation to arise on the part of the insurer.

Take for instance this case. Husband bought a car for PhP 2,800 and had the same repaired at the cost of PhP 900. Husband then gave the car as a gift to his wife. The wife in applying for insurance on the said car represented that the “price paid by the proposer” was PhP 3,500 and the present value was PhP 3,000. Despite the fact that the wife who insured the car did not pay the price as it was merely given as a gift to her, there is no misrepresentation in this case. Literal truth is not necessary in such cases. “It cannot be assumed that the insurer should not have issued the policy unless it were strictly true that the price representing the cost of the car had been paid by the insured and by no other person” (Harding v. Commercial Union Assurance Company, 38 Phil. 469).

Take for instance this next example. The insured represented that he did not drink beer or other intoxicants. The truth was that he drinks beer occasionally. In this case, once again, there is no misrepresentation as the literal truth is not necessary. Occasional drinking does not translate to a misrepresentation as to the query on drinking in the insurance application. Thus such is not a material circumstance that entitled the insurer to rescind the policy on the basis of misrepresentation (Insular Life Company v. Pineda, 40 O.G. 285).

Representation must be presumed to refer to the date on which the contract goes into effect (Insurance Code of the Philippines, Section 42). Thus even though a representation that no other insurance exists on the property insured is true at the time it is made, yet it is untrue at the time the application is accepted and the policy issued, the insured is guilty of misrepresentation that vitiates the policy (45 Corpus Juris Secundum 270).

When the insured has no personal knowledge of a fact but merely receives information from others, he may or may not communicate such information to the insurer and when he does, he we will not be responsible for its truth (Insurance Code of the Philippines, Section 43).

In the same case as mentioned above, Husband purchased a car for PhP 2,800. He gave the said car to his wife and informed her that the value of the car was PhP 3,000. The wife insured the car and repeated the information given by her husband that the value of the car was PhP 3,000. She informed the insurer’s agent that her husband was the source of the information. In the case, despite this, the insured is not guilty of misrepresentation. The insured did not state of her own knowledge that the value of the car was PhP 3,000. She merely repeated the information which had been given by her husband, and at the same time disclosed to the insurer’s agent the source of the information (Harding v. Commercial Union Assurance Company, 38 Phil. 469). Having merely repeated the information gathered from her husband, the insured was not responsible for the truth thereof (Insurance Code of the Philippines, Section 43).

In another case, the Supreme Court of the Philippines ruled that absent evidence that insured had sufficient medical knowledge as to distinguish between peptic ulcer and tumor, is a representation made in good faith and with no deliberate intent to mislead the insurer as to invalidate the policy (Ng Gan Zee v. Asian Crusader Life Insurance Company, 122 SCRA 461).

However, in the following instances, information received from other must be communicated by the insured: (1) when the information material to the transaction was acquired by an agent of the insured since knowledge of the agent is also knowledge of the principal (Leonor v. Filipinas Compania De Seguros, Court of Appeals-G.R. No. 3659-R); and (2) in marine insurance, the information of the belief or expectation of a third person, in reference to a material fact is material and must be communicated to the insured (Insurance Code of the Philippines, Section 108).

If a representation is false on a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false. However, the right to rescind granted to the insurer is waived by the acceptance of premium payments despite knowledge of the ground of rescission ((Insurance Code of the Philippines, Sec. 45, as amended by Batas Pambansa Bilang 874).

The insured represented that she never had cancer or tumor or undergone operation notwithstanding the fact that two months before the issuance of the policy, she was operated on for cancer. In this case, the insurer may rescind the contract as the insurer was guilty of misrepresentation on a material point (Buell v. Connecticut Mutual Life Insurance Company, 4 Fed. Cas. No. 2, 104).

The insured was required to answer questions in the application for life insurance as to what physicians had been consulted by, or had treated the applicant. The insured answered in the negative knowing that he had been confined in a hospital and treated on a number of occasions for various ailments, including incipient pulmonary tuberculosis. The insured died. However, there can be no recovery from the insurer since the answers given by the insured were false and fraudulent; hence, were misrepresentation on a material point (Musngi v. West Life Coast Life Insurance Company, 61 Phil. 864).

In another case, the Supreme Court of the Philippines ruled that answers of the applicant, who is not a doctor, regarding the medical history of his wife largely depends on opinion rather than fact. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue (Philamcare Health Sysems, Incorporated v. Court of Appeals and Julita Trinos, G.R. Nos. 125678).

How then is materiality of representation or misrepresentation determined? Materiality of a misrepresentation is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due in forming his estimates of the disadvantages of the proposed contract or in making his inquiries (Insurance Code of the Philippines, Section 31).  Materiality does not depend on the state of mind of the insured nor on the actual or physical event, which took place (Sunlife Assurance v. Court of Appeals, 245 SCRA 268). The test of materiality is whether knowledge of the true facts would have influenced the risk of or in fixing the amount of premiums (9 Couch 2d., 350).

In sum, misrepresentations are collateral to the contract and not a part thereto. Representation must be substantially correct and not necessarily literally correct. It must be shown to be material. Misrepresentation sets aside a policy on the ground of fraud. The insured and the insurer make representations.

Both in the United States of America and in the Philippines, as exemplified in the cases and other sources from these two jurisdictions, the definition and the effect of misrepresentation with respect to the insurance contract is the same. Misrepresentation puts in motion the rescission or cancellation of the insurance contract. In addition, in both jurisdictions reckoning point by which misrepresentation should have been made is the same. Both realize that misrepresentation should have been made prior to the execution of the contract. The United States of America on the other hand believe that the same may also be done after the execution of the contract but prior to modifications of the existing provisions of the insurance contract. Such similarities in the concepts is very prevalent as the Insurance Code of the Philippines was originally patterned from and drafted in view of the Insurance Code in effect in most states in the United States of America.

Deviation

Deviation in simple terms or in layman’s terms is a defiance or departure from something that is supposed to be done or performed. In the case of maritime transport or insurance, what is it that is defied or departed from? What is defied, departed or deviated from is the course of the voyage indicated in the contract of carriage and the contract of insurance.

When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the course of the voyage insured is: (1) the one agreed upon by the parties; (2) in the absence of the agreement, the course of sailing fixed by a mercantile usage; and (3) if the course of sailing is not fixed by mercantile usage, one which to a master of ordinary skill and direction would seem the most natural, direct and advantageous (Insurance Code of the Philippines, Sections. 121 and 122).

Thus, deviation is: (1) departure from the course of the voyage of the insured; (2) an unreasonable delay in pursuing the voyage; or (3) the commencement of an entirely different voyage (Insurance Code of the Philippines, Section. 123). Similarly, American cases define  “deviation” as a “voluntary departure without necessity, or any reasonable

cause, from the regular and usual course of the voyage” (Vision Air Flight Service, Incorporated. v. M/V National Pride, 155 F.3d 1165, 1175-76 n.12 (9th Cir. 1998) (citing Constable v. National S.S. Company, 154 U.S. 51, 66 (1894)).

Deviation is proper: (1) when caused by circumstances over which neither the master nor the owner of the ship has any control; (2) when necessary to comply with a warranty or avoid a peril, whether or not peril is insured against; (3) when made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or (4) when in good faith, for the purpose of saving human life, or relieving another vessel in distress (Insurance Code of the Philippines, Section 124). Every deviation not specified above is improper (Insurance Code of the Philippines, Section 125).

Thus, in order for a deviation to be improper or unreasonable, the cause for the deviation must not fall under the four above-mentioned classifications. In addition, in the American jurisdiction, cases point to the fact that in order for the deviation to be unreasonable, the carrier must intentionally have caused damage to the shipper’s goods. This means that even when the carrier has been grossly negligent, the carrier shall not be liable for improper or unreasonable deviation if no intentional damage was done to the shipper’s goods (Vision Air Flight Service, Incorporated. v. M/V National Pride, 155 F.3d 1165, 1175-76 n.12 (9th Cir. 1998) (citing Constable v. National S.S. Co., 154 U.S. 51, 66 (1894)).

When there is improper deviation, the insurer is not liable for any loss happening to a thing insured subsequent to an improper deviation ((Insurance Code of the Philippines, Section 126), even if the risk has not increased or even if the risk has not increased or even if its has been apparently diminished (Fernandez v. Great Western Insurance Company, 48 N.Y. 571, 8 Am. R. 571).

Examples of deviation are as follows. A fishing vessel was insured from Plymouth for a fishing voyage to the banks of Newfoundland. In former seasons she had secured a supply of bait on the banks, but on this voyage no bait could be obtained there. The vessel sailed to a nearby port, which is St. Peter’s to procure the necessary bait. After an absence of less than a week she returned to the banks and resumed fishing. Several days later a severe storm arose, in which the vessel floundered. In this case, the insurer was not liable since the voyage to St. Peter’s port was an improper deviation, which discharged the insurer, although it did not in any respect contribute to the loss (Burgess v. Insurance Company., 126 Mass. 70, 30 Am. Rep. 634 cited in Vance, 2nd ed., 848).

The master of MV Strongwind received an advice from the atmospherical agency of its country that there is an approaching typhoon along the course that was being pursued by his vessel. With this information, the master then changed the course of his voyage because of his belief that the information given was true. The vessel was damaged. In this particular case, in contrast to the above, the insurer is liable as there was proper deviation. There was proper deviation so long as the master acted in good faith relying on the information of the government agency.

Under Section Four of the Carriage of Good by Sea Act or COGSA, proper deviation is one of the immunities of the carrier for loss or damage to goods, thus:

x x x

(2) Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from:

x x x

(c) Perils, dangers, and accidents of the sea or other navigable waters;

x x x

(l) saving or attempting to save life or property a sea;

x x x

(4) Any deviation in saving or attempting to save life or property at sea or any reasonable deviation shall not be deemed to be an infringement or breach of this Act or of the contract of carriage, and carrier shall not be liable for any loss or damage resulting therefrom; Provided however, That if the deviation is for the purpose of loading or unloading cargo or passengers, it shall, prima facie, be regarded as unreasonable.

With this, it must be noted that there are similarities with respect to the provisions of the United States of America and the Philippines, with respect to deviation, as they are both signatories to the Carriage of Goods by Sea Act. Deviation in the United States of America and the Philippines, depending on whether the same is proper or improper have the same effect to the contract of insurance. However, in the former, it matters as to whether or not damage to the property or loss was done with intention. In the latter, what is important is whether or not any of the four above-mentioned caused the deviation in order to determine whether or not the same is proper and improper, which in turn will determine whether or not the carrier or the insurer is liable.

Frustration

Frustration of the contract is also known as the (1) frustration of commercial object or enterprise or (2) the doctrine of extreme difficulty or (3) rebus sic stantibus. This has also been referred to as subjective impossibility, which means that “a promissor’s duty is never discharged by the mere fact that the supervening events deprive him of the ability to perform, if they are not such as to deprive other persons, likewise of ability to render such performance” (United States v. Wegmatic Corporation., 360 F.2d 674 cited in E. Allan Farnsworth and William F. Young, Cases and Materials on Contracts 3rd ed., Mineola New York, The Foundation Press, Inc., 1980, p. 972).

This doctrine finds its roots in international law, which believes that when two states enter into a treaty, they take into account the circumstances at the time it was entered into. Thus when these change as to make the fulfillment of the treaty extremely difficult, one of the parties may seek the termination of the treaty. The underlying philosophy is that when parties enter into an agreement, the parties contemplate existing circumstances. When things supervene, the parties may be discharged because they were not able to contemplate and take into account such difficult circumstances.

This is in stark contrast with Roman law, which expects parties to a contract to perform its respective obligations no matter how difficult the obligation is (pacta sunt servanda).

For frustration to apply, the following are its requisites: (1) the event or change could not have been foreseen at the time of the execution of the contract; (2) the event or change makes the performance extremely difficult but not impossible; (3) the event must not be due to an act of either party; and (4) the contract is for a future prestation (Civil Code of the Philippines, Article 1267 and Naga Telephone Co. v. Court of Appeals, G.R. No. L-107112).

An example is this. For example, if an obligor is bound to deliver 40 cases of mangoes from the Philippines to South Africa by ship at the cost of US $ 30,000.00 on or before 11 April 1997, and the usual route known to the parties in going to South Africa has been suddenly closed prompting the obligor to look and eventually pass through another route, which is likewise closed, again leaving the obligor with no other choice but to attempt passing through another alternative route four times longer than the usual route, and which route could be traversed by its vessel without damaging itself and without entailing enormous additional and unreasonable cost and also without subjecting the fruits to possible harm as they would most likely spoil along such a long trip, the obligation in this case has clearly become so difficult to do and is manifestly beyond their contemplation; thus, the obligation should be deemed extinguished.

Contrary is this following case. The lessee in a lease contract sought its release from the payment of said rentals by virtue of the concept of frustration, claiming that due to the change in political climate after a revolution and change in the financial condition of the country, the lessee was not longer able to use the property for the purpose for which it was intended. However, the Supreme Court denied the claim of the lessee saying that frustration so as to merit exemption from the performance of obligation must involve an absolutely exceptional change of circumstances. The principle of frustration takes into account the fact that parties enter into a contract assuming the risks of unfavorable developments. Therefore, frustration must involve an absolutely exceptional change of circumstance so as to merit exemption from the performance of the obligation. In other words, only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor (Philippine National Construction Corporation v. Court of Appeals, G.R. No. 116896).

In the United Kingdom, the essence of frustration is that “it should not be due to the act or election of the party” (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)).

In one interesting case, a charter party was entered by and among the parties for the charter of various vessels. One of these vessels was the St. Cuthbert. “The St. Cuthbert was a vessel, which was fitted with, and could only operate as a trawler with, an otter trawl. The appellants, in addition to the St. Cuthbert, also operated four other trawlers, all fitted with otter trawling gear” (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)).

The charter has been renewed continuously that various legislations had been passed through the course of these renewals. One of which is the requirement of obtaining fishing licenses from the Ministry of Fisheries. The following events then took place:

On the 11th March, 1933, the appellants applied to the Minister of Fisheries for licences for the trawlers they were operating, and in so doing complied with all the requirements of the Regulations, but on the 5th April, 1933, the Acting Minister replied that it had been decided (as had shortly before been announced in the House ‘Of Commons) that licences were only to be granted to three of the five trawlers operated by the appellants. he accordingly requested the appellants to advise the Department for which three of the five trawlers they desired to have licences. The appellants thereupon gave the names of three trawlers’ Other than the St. Cuthbert, and for these three trawlers licences were issued, but no licence was granted for the St. Cuthbert. In consequence, as from the 30th April, 1933, it was no longer lawful for the appellants to employ the St. Cuthbert as a trawler in their business. On the 1st May, 1933, the appellants gave notice that the St. Cuthbert was available for re-delivery to the respondents; they claimed that they were no longer bound by the charter (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)).

Thus, the St. Cuthbert was not included in the application.  Without such license, St. Cuthbert cannot proceed with its voyage and consequently, the charterer through the St. Cuthbert cannot perform its obligations under the charter party. This is why the charterer believed that it cannot proceed with its obligations under the charter party. This is also why the charterer believed that “that through no fault, act or omission on the part of the appellants, the charter party contract became impossible of performance on and after the 30th April, 1933, and thereupon the appellants were wholly relieved and discharged from the contract, including all obligations to pay the monthly hire which was stipulated” (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)).

The Court held that frustration to be a valid defense must arise from a cause beyond the will of the parties. The same must arise from an event beyond the contemplation of the parties. In this case, it was the will of the charterer or its volition that triggered the illegality of the performance of the obligations under the charter party. Thus,

the discharge of a contract by reason of the frustration of the contemplated adventure follows automatically when the relevant event happens and does not depend on the volition or election of either party. They held that there was in this case no discharge of the con­tract for one or both of two reasons. In the first place they thought that the appellants when they renewed the charter in 1932 were well informed of the legislation and when they re­newed the charter at a reduced rate and inserted no protect­ing clause in this regard, must be deemed to have taken the risk that a licence would not be granted. They also thought that if there was frustration of the adventure, it resulted from the deliberate act of the appellants in selecting the three trawlers for which they desired licences to be issued (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)).

As have been mentioned above the essence of frustration is that “it should not be due to the act or election of the party” (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 (12 April 1935)). In this case, the performance of the contract was largely dependent on the grant of the license. The election of the charterer prevented the performance of the obligation. Thus, it is the charterer own’s fault, which frustrated the adventure. Hence, they should not be allowed to take refuge behind such concept.

In both jurisdictions, requisites for frustration to apply are the same. Likewise, the effect of frustration is that the contract is rescinded.

Misrepresentation, Deviation and Frustration

It must be noted that these three terms are similar and different all at the same time.

These terms are similar in that they are all material in the rescission of the contract of insurance. All three terms allow the insurer, once proven true and material, to rescind the contract of insurance.

On the other hand, these three are different in that they refer to three different things as they refer to three different points of time in relation to the contract of insurance.

Misrepresentation is collateral to the contract. It is not part of the contract. Thus, this means that misrepresentation occurs prior to the execution of the contract; although American jurisdiction recognizes the possibility of the same to occur subsequent to the execution of the contract. In this respect, misrepresentation cannot be considered a breach of contract, as there is no contract yet to speak of. Misrepresentation must be as to material aspects in relation to the contract of insurance.

Deviation on the other hand takes place after the execution of the contract and during the fulfillment of the party’s obligation. Thus, deviation is already a breach of the contract.  Deviation per se does not excuse the insurer or the insured from liability. Exemption from liability largely depends on whether deviation is proper or improper.

Frustration takes place after the execution of the contract but before the parties are able to comply with their respective obligations under the contract, or before one of the parties are able to comply with its obligations. Frustration exempts parties to a contract only when the mentioned requisites are complied with; otherwise, frustration will not serve as an exemption of the insurer or insured’s liability, whichever is applicable.

Thus, these three serve as defenses on the part of the insurer in denying liability under a contract of insurance.

 

 

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