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Court dismisses defences to non-performance under contract of affreightment

News / / Court dismisses defences to non-performance under contract of affreightment

Classic Maritime Inc v. Limbungan Makmur Sdn Bhd and another company [2020] EWHC 619 (Comm)

This was the latest dispute under a Contract of Affreightment (“COA”) between Classic Maritime Inc (“Owners”) and Limbungan Makmur Sdn Bhd (“Charterers”), with the Owners claiming damages for unperformed shipments under the COA. In reaching its decision, the Court relied closely on an earlier Court of Appeal judgment relating to the Owners’ claim for damages involving seven unperformed shipments.

The background to the majority of the disputes between the parties to the COA was a dam burst in Brazil in November 2015, which led to the Charterers previously attempting to rely, unsuccessfully, on force majeure and a contractual exceptions clause to excuse them from liability for non-performance under the COA.

The background facts

The parties entered into a COA dated 29 June 2009 providing for 51 shipments of iron ore pellets from Brazil to Malaysia. By 2014, the Charterers appeared to be experiencing difficulties in complying with the COA shipment schedule and the parties, therefore, amended the terms. As a result, the number of shipments under the COA was increased to 59 shipments to be performed by the end of 2017. Of these 35 were Scheduled Shipments, 16 were Unscheduled Shipments and 8 were Index Shipments. 

Whilst Scheduled and Index Shipments were subject to timing requirements in the COA, for Unscheduled Shipments it was stated that the Charterers would declare the laycans for these as and when the requirements of the “Lion Group” (i.e. the Charterers’ Group of Companies) for iron ore pellets in bulk could not be satisfied through the performance of: (i) the Scheduled Shipments or; (ii) the performance of other COAs or charterparties into which the Charterers had entered prior to the date of the COA (the “Extra Requirements”). 

The disputed issues

The Owners argued as follows:

  1. The Charterers’ primary obligation under the COA was to provide cargoes for shipment and they were to do so by declaring laycans for the shipment of those cargoes. The Owners contended that the Charterers did not do so in respect of 13 Unscheduled Shipments and 1 Scheduled Shipment (“the Missed Shipment”) in 2013.  The Owners further submitted that unless the Charterers could excuse that failure, they would be liable in damages for that non-performance.
  2. The Owners also argued that if the Charterers’ Group had “Extra Requirements” (which the Owners alleged there were during the period 2013 to 2015), then the Charterers were required to declare laycans for the Unscheduled Shipments. Alternatively, if there were no Extra Requirements, then all 13 Unscheduled Shipments should have been performed in any event by the end of 2017. 

The Charterers were unrepresented in court. However, they had set out defences in their submissions which were taken into account. These included that:

  1. They were only required to perform the Unscheduled Shipments if the Charterers’ Group had Extra Requirements prior to the end of 2017. The Charterers denied that they or the Charterers’ Group had any Extra Requirements.
  2. If they were required to perform any Unscheduled Shipments, then they were required only to perform a maximum of 8 Unscheduled Shipments, which were ‘odd numbered’ shipments alternated with shipments under another COA.
  3. Where Unscheduled Shipments were not required to be performed before the dam burst, the Charterers were not liable to perform them at all under the previously raised Force Majeure defence.  

The Commercial Court decision

The Court held as follows:

  • The COA was clear that the total number of shipments to be performed was 59. The Charterers’ construction that certain shipments were only required if there were Extra Requirements was inconsistent with that provision. The Unscheduled Shipments were intended to be part of the 59 and, therefore, the obligation to make these was no more contingent than the Scheduled Shipments or Index Shipments. 
  • The commercial background to the COA was that it was concluded to settle disputes under earlier COAs and the logic behind it was to increase the number of shipments and increase the period over which they were to be performed. It was unlikely that the Unscheduled Shipments were contingent as this would have in fact reduced the number of definite shipments provided for under the previous COAs. Therefore, even where greater flexibility was given to the Charterers to perform the shipments, the Owners would not have given up the certainty of performance for the number of shipments.
  • As for the Charterers’ argument that they only had to make “alternate” shipments, this could not be right because shipments under contracts with other owners could not be regarded as shipments performed under the COA. A reference to eight in the COA clause was likely to have been a drafting error, given that sixteen unscheduled shipments was repeatedly referred to.
  • Given the Court’s finding that the Unscheduled Shipments were not contingent, it did not have to decide whether or not the Charterers did have Extra Requirements, although it did consider this point in terms of its impact on the performance of the Unscheduled Shipments. It inclined to the view that there were in fact such Extra Requirements.

In relation to the force majeure defence relied on in the previous dispute, the Charterers contended that they did not perform their obligations as a result of the bursting of the Fundão Tailing Dam. The Court, however, followed the earlier judgment and determined that the Charterers were not able to demonstrate that they would have performed the COA but for the collapse of the dam. 

  • In relation to the Missed Shipment, the Court dismissed the Charterers’ argument that the amendments to the COA treated it as cancelled with no right to damages. The amended contract referred to 59 shipments, and this included the Missed Shipment. 

Quantum of Damages

The Court made it clear that the Owners were entitled to substantial damages (albeit it did not decide the final figure at this hearing). On the applicable principles, and with reference to the Court of Appeal judgment in the previous case, the calculation of damages required a comparison between: (1) the freights which the Owners would have earned if the cargoes had been supplied by the Charterers, less the cost of earning them and: (2) the actual position that the Owners found themselves in as a result of the breach. 

The Court considered various principles on the calculations including: 

  1. the date before the assumed laycan that should be taken for the purpose of assessing the market rate (20 days);
  2. as regards rate, that a voyage rather than time charter index should be used;
  3. that the calculation should take account of potential positional advantage of being open at a particular discharge port when using index rates assessed between two fixed points; and
  4. that the assumed cargo size should be based on average historical liftings under the COA that were performed (rather than the contractual provision).  

Comment

Whilst the judgment turns on the terms of the COA and the factual circumstances of this case, there are key takeaways for any party considering entering into a COA or indeed any long-term contract, particularly where there may be uncertainty in the market. In particular, charterers should be clear as to the number of shipments that they are agreeing to perform under any COA and, if there is uncertainty on future performance, clear contingencies should be built into the COA to deal with this. 

Furthermore, any force majeure clause, or other clause which excuses a party from performing their contractual obligation, should be carefully drafted. There is no general defence of force majeure under English law and the scope of any force majeure defence will depend on the contractual wording that has been agreed between the parties.  Careful consideration should be given as to what anticipated events this may need to cover under the specific COA/contract. 

This article was co-authored by Trainee Solicitor at Ince, Katie Summerfield.

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

James Rose

James Rose Managing Associate

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