Classic Maritime Inc -v- (1) Limbungan Makmur SDN BHD & (2) Lion Diversified Holdings BHD [2019] EWCA Civ 1102

The Court of Appeal had to consider whether in order to rely on an exceptions or force majeure clause a party had to show that it would have performed ‘but for’ the excepted event and how the compensatory principle applied in the assessment of damages.

Factual background

The dispute related to non-performance of five shipments under a contract of affreightment (COA) between Classic Maritime Inc (owners) and Limbungan Makmur SDN BHN (charterers). The COA dealing with shipments of iron ore pellets from Brazil to Malaysia provided for the loading ports in Brazil to be Ponta Ubu or Tubarao and included a clause (32) which as relevant stated:

‘Exceptions – neither the vessel, her master or owners, not 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…’

On 5 November 2015 the Fundao dam in Brazil burst, causing catastrophic flooding in the area and stopping production at the iron ore mine owned by Samarco. Shortly afterwards, Samarco suspended its operations and ceased to supply cargo.

Charterers argued that due to the collapse of the dam, they were unable to provide cargo from Ponta Ubu (or from Tubarao due to reasons connected with the supplier there) and therefore they were entitled to rely on clause 32 under the COA in relation to their failure to perform the five shipments. Owners argued that the collapse of the dam had no causative effect on charterers as the shipments would not have been performed in any event.

At first instance, Teare J held that charterers were not entitled to rely on clause 32, because they would not have been ready and willing to provide cargoes for shipment even if the accident had not occurred, and were therefore in breach of an absolute duty to provide such cargoes. Owners, however, were not entitled to recover substantial damages because this would put them in a better financial position than they would have been in if charterers had been ready and willing to provide cargoes. As a result, the judge awarded nominal damages of US $1 for each shipment in issue.

Owners appealed on the issue of damages. Charterers and their parent company (which acted as a guarantor) cross appealed on the issue of liability.

Liability: the ‘but for’ issue

Charterers submitted that clause 32 was a force majeure clause. Like other such clauses, it listed a number of events beyond the parties’ control; it required a causal link between such events and performance of the contract; and it provided for the consequences, which the event was to have on the parties’ obligations. While it depended on the terms of the clause, in general, a force majeure clause operated to qualify a party’s obligations, unlike an exceptions clause, which excluded or limited liability for breach. On the true construction of clause 32, charterers were not required to prove that they could or would have performed the contract but for the force majeure event, as the judge had found; rather, it was sufficient that the force majeure event in fact rendered any performance impossible.

Charterers relied in support on the ‘settled line of authority’ stemming from Bremer -v- Vanden Avenne [1978] 2 Lloyd’s Rep. 109 (Vanden) which was said to establish that it was not necessary for a party to show that, absent the defined force majeure event which prevented the contract or the obligation from being performed, it could and would have performed in any event: the distinction between ‘contractual frustration’ and ‘exceptions’ clauses drawn by the judge was unsupported by authority and unprincipled, and that the language used in clause 32 was typical of force majeure clauses including the clause in question in Vanden.

Owners submitted that the issue was one of construction of clause 32, not one of general legal principle. There was no doubt that the parties could have agreed an exceptions clause which only excused non-performance if the party invoking the clause proved that, but for the occurrence of the relevant event, it could and would have performed. The question was whether clause 32 did so provide. The Vanden line of authority was concerned with a very different kind of clause, a ‘contractual frustration clause’, and was irrelevant.

Males LJ delivering the Court of Appeal’s leading judgment accepted that neither party’s construction would be particularly uncommercial or surprising. Charterers had submitted that it would be harsh and strange to hold charterers liable for failing to supply in circumstances where, whatever their intentions, there was once the dam had burst never any possibility that they would be able to supply any of the five shipments in issue. However, it was hard to see why the dam burst should make any difference to charterers’ liability when they were never going to perform those shipments anyway.

Some of the features of clause 32 which Males LJ regarded as of particular importance were as follows.

First, it was a general exceptions clause of mutual application. Although this was not in any way conclusive, the heading described the clause as an ‘Exceptions’ clause, that heading was part of the parties’ contract as there was no clause providing that headings should be ignored, and examination of the terms of the clause showed that the heading was accurate. He did not accept that the construction of the clause should be approached on the basis that it was a force majeure as distinct from an exceptions clause, or that it was helpful to import into the construction exercise the kind of general considerations which often applied to force majeure clauses.

Second, the words ‘loss or damage to cargo’ necessarily referred to a particular cargo which was in fact lost or damaged as a result of one or more of the events listed in the clause. There was no scope for these words to apply unless, but for the event in question, the cargo would not have been lost or damaged. The use of the definite article (“the” cargo) also suggested that a particular cargo was referred to, namely the cargo which, but for the event in question, would not have been lost or damaged.

Third, the clause covered a very wide range of miscellaneous events. In the case of some of these events, such as “accidents at the mine”, it might be possible to give effect to the clause on either party’s construction. In other cases, however, the clause could only apply if the party invoking the clause would otherwise have performed. An obvious example was “seizure under legal process, provided bond is promptly furnished to release the Vessel or cargo”. This could only refer to a seizure of the performing vessel or of the actual cargo which was loaded or destined to be loaded. The clause had to be construed consistently.

Fourth, the words “resulting from” together with the requirement that the events in question “directly affect the performance of either party” imported a causation requirement. These were not merely “events” which happened to have occurred, but “causes” which impacted on performance. The combined effect of these phrases suggested a more demanding requirement.

Such features of the clause taken in combination persuaded the judge to accept that Teare J’s construction was correct and that the clause imported a ‘but for’ requirement.

As for the Vanden arguments arguments, Males LJ noted that it was immediately obvious that clause 21 of GAFTA 100 considered in Vanden by the House of Lords was very different from clause 32 of the contract in the present case - so much so that Vanden and the numerous GAFTA cases cited did not shed any real light on the issue here concerned, which was the true construction of clause 32.

Damages: the ‘compensatory principle’ issue

Owners submitted that the relevant question in assessing damages required a comparison in financial terms between (1) the innocent party’s actual position as a result of the breach and (2) the position it would have been in if the contract had been performed. The judge had made the wrong comparison. Instead of asking what would have happened if the contract had been performed, he had asked what would have happened if charterers had been ready and willing to perform the contract, and had concluded that (in that event) it would have had a defence under clause 32. Paradoxically, therefore, having held that clause 32 did not provide charterers with a defence, he had concluded that the effect of clause 32 was nevertheless to relieve charterers from having to pay substantial damages.

Charterers submitted that on the judge’s unchallenged findings of fact, the contract could never have been performed as a result of the dam burst which was beyond charterers’ and shipper’s control, which meant that owners could never have earned freight in respect of the five shipments affected. Accordingly the relevant comparison was between the actual position in which the party in breach was unwilling to perform and the ‘non- breach hypothetical counter-factual’ position in which it was assumed that the party in breach was able and willing to perform but for the force majeure event.

The compensatory principle, which is well established, applied to the assessment of damages for breach of contract involved putting the innocent party in the position it would have been in if the contract had been performed.

Males LJ distinguished both the Golden Victory [2007] UKHL 12 and Bunge -v- Nidera [2015] UKSC 43 from the present case as the former were concerned with the assessment of damages for an anticipatory breach by renunciation which required the court to value the innocent party’s right to future performance. In both cases the compensatory principle operated to reduce or extinguish the innocent party’s claim for damages. That was because the value of the performance to which that party was entitled was adversely affected by events, which occurred after the acceptance of the repudiation.

The present case was not concerned with an anticipatory breach, but with actual breaches as a result of charterers’ failure to supply cargoes for each of the five shipments in issue. It was common ground that, subject only to clause 32, charterers’ obligation to supply cargoes was an absolute obligation. Therefore the performance to which owners were entitled, once it was determined that clause 32 did not provide charterers with a defence, was the supply of cargoes. The value of that performance was the freights, which owners would have earned if the cargoes had been supplied less the cost of earning them. In principle, therefore, the comparison which application of the compensatory principle required was between (1) the freights which owners would have earned less the cost of earning them and (2) the actual position in which owners found themselves as a result of the breach. It was agreed between the parties that this comparison would result in a damages award of over US$19 million.

The comparison, which the judge carried out, was between owners’ position if charterers had been ready and willing to perform and owners’ actual position. Teare J had said that undertaking that comparison did not involve ‘an impermissible sleight of hand’. This was not correct. Charterers’ obligation was not to be ready and willing to supply a cargo in each case, but actually to supply one. Charterers were not in breach because they were unwilling to perform, but because they failed to do so.

In cases of anticipatory breach, a party repudiated a contract if it demonstrated an unwillingness to perform, in which case (as in The Golden Victory and Bunge -v- Nidera ) it might be necessary to consider whether, if it had not demonstrated that unwillingness, it would nevertheless have been excused from performance by later events. If so, that would affect the value of the rights, which the innocent party had lost. But that was not so in the case of an actual breach, as in the present case, where there was an absolute obligation to supply a cargo, whether charterers were ready and willing to supply was neither here nor there.

For the above reasons the Court of Appeal dismissed the cross appeal and allowed the appeal.

Comment

It is interesting to note that even though clause 32 listed a number of supervening events beyond the parties’ control, which one would expect to find in a force majeure clause, the Court of Appeal held otherwise. Even more so the finding that the combination of ‘resulting from’ and ‘directly affect the performance of either party’ in the clause wording which imported a ‘but for’ requirement by reference to every event under the clause.

The Court of Appeal judgment suggests that the Vanden line of authorities are more confined to the interpretation of clause 21 of GAFTA 100 and are not of wider application as some of the commentators have suggested.

Further, in relation to the compensatory principle and the assessment of damages, the Court of Appeal appears to have taken a novel approach in making a distinction between circumstances of anticipatory breach as dealt with in cases such as The Golden Victory and Bunge -v- Nidera where future events could excuse performance / affect the assessment of damages and circumstances of actual breach, where future events do not have such an effect.

This case is one to watch as charterers are applying for permission to appeal in the Supreme Court.