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The compensatory principle (re)applied by the Court of Appeal

18.07.2019 Maritime

William Blagbrough

William Blagbrough Partner

Sophie Henniker-Major

Sophie Henniker-Major Managing Associate

Classic Maritime Inc v. Limbungan Makmur SDN BHD & another [2019] EWCA Civ 1102

The Court of Appeal has upheld a Commercial Court finding that the effect of an exceptions clause in a contract of affreightment (“COA”) depended on its proper construction. It further found that the Commercial Court had misapplied the compensatory principle. The principle, properly applied, was to compare the financial position of the Owners following the Charterers’ breach of the COA with their financial position had the Charterers actually performed the COA, not their financial position had the Charterers been willing but unable to perform.

The background facts 

In brief, Classic Maritime Inc (“Owners”) and Limbungan Makmur SDN BHD (“Charteters”) entered into a long term COA for the carriage of iron ore pellets from Brazil to Malaysia. The 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. 

The Charterers accepted that they had no defence for the first two of the seven missed shipments. However, prior to the third shipment, the Fundao Dam burst, stopping production of iron ore at the relevant mine. 

In relation to the last five shipments, the Charterers argued that they were relieved of liability under Clause 32 of the COA, which read: 

“Exceptions 

Neither the vessel, her master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God,… floods… accidents at the 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.” 

The Commercial Court decision 

The Court found, as a matter of fact, that as a result of the dam burst it was impossible for the Charterers to perform the final five shipments of the COA. However, it also found that had the dam burst not occurred, the Charterers would have failed to provide the shipments in any event. 

As to whether the Charterers could rely on Clause 32 to excuse themselves of liability in these circumstances, the Court held that this was a question of construction: “all must depend upon the wording of the particular clause.” 

The Court found that, based on the language of Clause 32 and its context and purpose, to rely on the clause, the Charterers needed to show that “but for” the dam burst, they would have been able to perform the COA. As the Charterers had not done so, they could not rely on the clause. Accordingly, the Charterers were liable to the Owners for breach of the COA. 

However, the Court awarded the Owners only nominal damages in relation to the final five shipments. This was because, in applying the compensatory principle of damages (i.e. putting the Owners in the same financial position as if the Charterers had performed the COA), it determined that the dam burst could not be ignored. Had the Charterers been willing and able to perform the COA, the final five shipments would not have been provided anyway. In those circumstances, the Charterers could have relied on Clause 32 to excuse themselves of liability. As a result, the Owners suffered no loss as a result of the Charterers’ failure to perform the final five shipments. 

The Owners appealed the Court’s decision on damages, and the Charterers cross-appealed the Court’s decision on liability. 

The Court of Appeal decision 

Liability

The Court of Appeal unanimously dismissed the Charterers’ cross-appeal. It agreed with the Commercial Court’s decision that the question was one of construction. It also agreed with the Commercial Court’s construction of the clause itself: the Charterers could not rely on the clause to excuse themselves of liability. 

Damages 

The Court of Appeal unanimously allowed the Owners’ appeal on damages. It found that the Commercial Court had misapplied the compensatory principle. 

While the value of an innocent party’s contractual rights for a future period following an anticipatory breach of contract may be affected by subsequent events (see, for example, the House of Lords decision in The Golden Victory [2007]), the present case concerned actual breaches of contract. In assessing the level of damages, the Owners’ position following the breach of COA should be compared with their position had the Charterers actually performed the COA. The Commercial Court had misapplied the compensatory principle by comparing the Owners’ actual position with their position had the Charterers been willing to perform the COA. That was not the correct counter-factual scenario. The Charterers had an absolute obligation to supply cargoes subject only to the exceptions in Clause 32. If the Charterers could not rely on that clause to excuse them from liability, whether or not they were willing to perform the COA was irrelevant to the assessment of damages. 

Comment 

The effect of these kinds of clauses depends on their construction; of primary relevance is the language of the clause that the parties have chosen to use, having regard to the context and purpose of the clause. 

This fact highlights the importance of careful drafting. When drafting force majeure clauses or clauses that exclude or limit liability, it is important to set out as clearly as possible what should and should not be covered and what requirements a party relying on the clause should have to satisfy. Small changes make a big difference – in this case, the US$20 million between nominal and substantive damages. 

The decision also shows the differences in how the Commercial Court and Court of Appeal have applied the compensatory principle. Again, this was a US$20 million point. It could also have an impact on the assessment of damages beyond the shipping industry. 

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:

William Blagbrough Sophie Henniker-Major