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Force majeure clauses, “but for” causation and the compensatory principle

08.10.2019 Energy & infrastructure

Anna Macdonald

Anna Macdonald Partner

Leila Peggs

Leila Peggs Managing Associate

In the recent case of Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1002 the Court of Appeal has upheld a Commercial Court decision on the interpretation of the causation requirement in a force majeure clause in a long-term contract of affreightment. It found the trial judge misapplied the compensatory principle in taking into account the impact the event of force majeure would have had on Charterers’ performance even though it could not rely on the force majeure event to avoid liability for its breach.

Facts

Classic Maritime (“Owners”) and Limbungan (“Charterers”) entered into a long-term contract of affreightment (“COA”) for the carriage of iron ore pellets from Brazil to Malaysia. The shippers under the COA were Samarco and Vale though all shipments had been with Samarco.

Charterers failed to provide seven intended shipments between July 2015 and June 2016. The Owners commenced proceedings against the Charterers for breach of the COA. Charterers accepted that they had no defence for the first two of the seven missed shipments. However, prior to the third shipment, a tailings dam burst at Samarco’s mine which resulted in a cessation of production and a suspension of shipments.

Charterers argued that they were relieved of liability for the failure to supply the remaining 5 shipments under clause 32 of the COA, which provided:

“EXCEPTIONS

Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under This Charter Party. If any time is lost due to such events or causes such time shall not count as Laytime or demurrage (unless the Vessel is already on demurrage in which case only half time to count).” (emphasis added)

Owners denied Charterers were entitled to claim under clause 32 for the remaining shipments and sought damages for lost freight.

First instance decision

To rely on clause 32, Charterers needed to establish that the dam burst (which the parties agreed was covered by “accidents at mine or production facility”) resulted in it being unable to supply a cargo for the remaining 5 shipments.

At first instance, the court considered the applicability of the House of Lords decision in Bremer Handelsgesellschaft v Westzucker [1981] 2 Lloyd’s Rep 130 which held that a “but for” test for causation did not apply to contractual frustration clauses (those which operate to bring a contract to an end on the occurrence of an event of force majeure). However, in this case, the court held that, on construction, clause 32 was not a contractual frustration clause, rather it was an exceptions clause that provided a defence to a claim of damages for actual breach of contract.

As such, Charterers needed to demonstrate that “but for” the dam burst the cargo would have been supplied. The court found Charterers were unable to demonstrate that their breach of the COA was “resulting from” or “directly affected” by the dam burst, as they had not fulfilled the two shipments prior and, at the time the dam burst, they were not able and willing to supply cargoes for shipment pursuant to the COA.

However, despite this finding, the court did not award substantial damages to Owners as it held the compensatory principle barred recovery. Had substantial damages been awarded, it would have put the Owners in a better position than if Charterers had been able and willing to perform their obligations as it was assumed the force majeure event of the dam bursting would have prevented them from doing so.

Court of Appeal’s decision

The Owners appealed on damages, and Charterers cross-appealed on liability under clause 32.

The Court of Appeal addressed the cross appeal on the construction of clause 32 first and, though it took a slightly different route, agreed with the first instance findings on liability. Males LJ, who gave the leading judgment (with which Rose and Haddon-Cave LLJ agreed), noted that characterising clause 32 as an exceptions clause or a contractual frustration clause only took matters so far.

Males LJ also upheld the trial judge’s finding that clause 32 required Charterers to show that they would have performed “but for” the dam burst. Consequently, Charterers could not rely on the clause to excuse themselves of liability for failing to supply the relevant cargoes under the COA.

Males LJ then turned to the application of the compensatory principle. Two key cases were considered: The Golden Victory [2007] UKHL 12 and Bunge SA v Nidera BV [2015] 2 Lloyd’s Rep 469, both of which applied the compensatory principle in circumstances of anticipatory breach. In such cases, it is necessary to consider whether, absent the repudiatory conduct, the defaulting party would have been excused from performance by later events. This affects the value of the defaulting party’s performance and, therefore, the rights which the innocent party has lost.

However, this case was concerned with actual, rather than anticipatory, breach by Charterers of the absolute obligation to supply cargo under the COA. Males LJ confirmed that the comparison the trial judge should have made when assessing damages at first instance was between (1) the value of Charterers’ performance in supplying cargoes to Owners (i.e. freights which would have been earned by Owners less the costs of the voyages) and (2) the actual position Owners were in as a result of Charterers’ breach.

Dismissing the cross appeal and allowing the appeal, Owners were awarded damages of almost US$20 million.

Comment

The Court of Appeal's judgment in Classic Maritime raises several interesting legal issues, not least the application of the “but for” test in the operation of force majeure clauses. It also reinforces that all contractual clauses are to be construed in accordance with ordinary principles of contractual interpretation.

In particular, it highlights that if a clause does not contemplate the termination of the contract as a consequence of the force majeure (a contractual frustration clause), and instead only excuses liability for a failure to perform (an exceptions clause), a “but for” test of causation will apply.

The decision on the application of the compensatory principle has also developed our understanding of that principle. It is understood that the Court of Appeal has refused leave to appeal, but that leave to appeal is being sought directly from the Supreme Court.


Article authors:

Anna Macdonald Leila Peggs