Key takeaways
‘But for’ causation
May or may not be relevant to FM clause, depending on facts.
Future events
Irrelevant to damages for actual breach, relevant where anticipatory breach.
FM -v- exceptions clause
Have different consequences, so require care in drafting.
Classic Maritime Inc v Limbungan Makmur SDN BHD & Anor [2019] EWCA Civ 1102 (27 June 2019)
The Court of Appeal decision in this case is significant for clarifying that there is no general principle that the ‘but for’ test of causation is irrelevant in respect of force majeure clauses. Each case will turn on its own facts. In some cases, therefore, the innocent party will be entitled to recover substantial damages even if the counterparty would not have performed in any event.
Furthermore, in considering the impact of future events on the assessment of damages, the Court of Appeal highlighted that these will be irrelevant to actual breach cases but remain relevant to the assessment of damages in anticipatory breach cases.
The background facts
This was a dispute concerning a long-term contract of affreightment (COA) dated June 2009 between shipowners, Classic Maritime Inc (Classic Maritime), and charterers, Limbungan Makmur SDN BHD (Limbungan), for the carriage of iron ore from Tubarao or Ponta Uba (Brazil) to Malaysia.
As of August 2011, all shipments under the contract had been iron ore pellets from Ponta Ubu. A collapse in demand at Malaysian steel mills meant no shipments were made under the contract in the second half of 2015.
On 5 November 2015, the Fundao dam in Brazil burst. Shipments from Tubarao were unaffected but, according to Limbungan, the supplier Vale was unable or unwilling to supply it with iron ore pellets.
The dam burst did impact shipments of iron ore pellets from Ponta Ubu, the dam being operated by Samarco, which was the sole supplier for iron ore pellets to be shipped from Ponto Ubu.
In the circumstances, it was impossible for Limbungan to ship iron ore pellets from Ponta Ubu between November 2015 and June 2016, when shipments under the COA should have taken place. However, even if the dam burst had not occurred, it was likely that Limbungan would have defaulted anyway.
In dispute was Classic Maritime’s claim for damages from Limbungan for losses for five shipments during this period from November 2015 to June 2016. Limbungan denied that Classic Maritime were entitlement to recover these losses, relying on its interpretation of clause 32 of the COA, the Exceptions clause.
Clause 32 read:
‘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 … accidents at the mine or Production facility … or any other causes beyond Owners’ Charterers’ Shippers’ or Receivers’ Control; always provided that any 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 …’
The parties agreed the dam burst was an ‘accident at the mine’. However, they were in dispute over the relevance of causation, in circumstances in which Limbungan failed to perform but its performance would have been impossible regardless of the dam burst.
Classic Maritime argued that for Limbungan to rely on clause 32 it had to show that, but for the dam burst, it could and would have performed its obligations under the COA. Limbungan argued that clause 32 was a force majeure (FM) clause, and it relied on a line of authorities on FM clauses by which a party relying on an FM event did not have to show that, but for the event, it would have performed.
The legal issues
In general terms, where a contract is breached, the innocent party is entitled to damages aimed at compensating it for its loss, in other words to put the claimant in the position it would have been had there been no breach (the compensatory principle).
However, the innocent party does not necessarily recover all losses flowing from the breach – issues such as remoteness, mitigation, and causation are key to quantifying the loss awarded to the claimant. Insofar as causation is concerned, the question generally posed is whether the losses would have been suffered but for the breach.
In this case, the parties were in dispute as to the relevance of the ‘but for’ test in respect of clause 32 of the COA, where Limbungan failed to perform but its performance would have been impossible regardless of the dam burst.
The Court of Appeal decision
In brief, the Court of Appeal decided:
There is no general principle that the ‘but for’ causation test is irrelevant to FM or exceptions clauses.
The key is to construe the wording of the parties’ clause, be it an FM or exceptions clause.
This clause 32 was to be construed as an exceptions clause, one whose features required a causal link between the breach and non-performance.
Limbungan’s failure to perform did not ‘result from’ the dam burst, nor could it fairly be said that the dam burst ‘directly affected’ Limbungan’s performance under the contract.
As to damages, the Court of Appeal held that shipowners were entitled to substantial damages. Comparison was made with cases on anticipatory breach in which future performance could be relevant. However, this case involved an actual (not anticipatory) breach, and the reason for that breach should not alter the usual compensatory approach in awarding damages.
Construction - map to interpreting clause 32
Whether clause 32 is labelled an exceptions clause or an FM clause, it is a question of construing the clause. That involves determining the language of the clause which the parties have chosen, having regard to the context and purpose of the clause.
As to the context, the Court of Appeal referred to Petroleo Brasileiro SA v ENE Kos 1 Ltd [2012] UKSC 17 (2 May 2012), in which the Supreme Court held that ‘Like all questions of causation, this one is sensitive to the legal context in which it arises. It depends on the intended scope of the indemnity as a matter of construction, which is necessarily informed by its purpose’. See our article on the KOS here: Shipping disputes: the Kos – bailment and causation | Hill Dickinson.
As for the purpose of clause 32, this required considering its very terms. The Court of Appeal considered several features of clause 32 to be especially important:
The clause was a general exception clause of mutual application. When it applied, it excused a party from responsibility for breach of an obligation.
The words used in the clause could only refer to a particular cargo which was in fact lost or damaged as a result of an event listed in clause 32 or which, but for the event, would have been loaded, discharged or delivered. Relevant wording included:
‘loss or damage to cargo’, read as referring to a particular cargo lost or damaged
‘failure to …load, discharge or deliver the cargo’, read as referring to cargo which, but for the event in question, would have been loaded, discharged, or delivered.
The clause covered a very wide range of miscellaneous events, and it therefore had to be construed consistently to make sense of it. Since some of the events could only apply when they impacted on performance by one or other party which would otherwise have taken place, that must be true of all events included in the clause.
Other wording also supported the requirement for causation: ‘resulting from’ and ‘directly affect the performance of either party’. These words indicated ‘causes’ which impacted on performance.
The reference to ‘time lost’ (due to such events) in the final sentence could only be meaningful if, but for the event, loading would have taken place during the time in question.
In line with Wood v Capita Insurance Services Ltd [2017] UKSC 24 (29 March 2017), in which the Supreme Court summarised the modern approach to construction of clauses, the Court of Appeal tested its conclusion against the terms of the contract as a whole and the commercial consequences of the proposed construction.
In conclusion, the Court of Appeal preferred the shipowners’ position. As the first instance judge had held, a reasonable and realistic business person “would see the broad common sense of saying that if, but for the dam burst, [the charterer] would not have performed its obligations, its failure to perform cannot fairly be said to have ‘resulted from’ the dam burst and the dam burst cannot fairly be said to have ‘directly affected’ the performance of [the charterers’] obligations”.
Construction – distinction between FM clauses and exceptions clauses
Limbungan had argued that regard also had to be given to authorities on FM clauses (especially those on Gafta FM-type clauses) and which would result in a different outcome on construction.
Notably, the Bremer Handelsgesellschaft mbH -v- Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 line of authorities had considered the then GAFTA ‘prohibition’ clause as one which automatically cancelled the sale of goods contract once the prohibition occurred so that the seller did not need to prove it was ready with its cargo and ship arrangements.
The Court of Appeal understood the attraction of an FM clause worded to have the effect that a contract was immediately and automatically cancelled so that the parties knew quickly where they stood on obligations to perform in the future.
However, the Court of Appeal concluded that the clause 32 wording was very different, where it did not provide for any automatic cancellation of the contract for the future, it contained the features as noted above, and its nature was one of an exceptions clause designed to relieve the parties from liability to pay damages for a past breach.
In this context, the Court of Appeal also usefully summarised a ‘critical distinction’ between an FM clause and an exceptions clause:
FM clause (aka contractual frustration clause) – brings the contract (or the relevant part of the contract) to an end forthwith and automatically once an event occurs, regardless of the wishes of the parties, thereby relieving both parties from any further obligation to perform under the contract or to accept the other’s performance in the future; a similar position under the common law principle of frustration.
Exceptions clause – simply operates to relieve a party from its obligation to pay damages after a breach has occurred.
However, clause 32’s label did not determine the relevance of the ‘but for’ test – the language used remained important, regardless of whether it was an FM or exceptions clause.
Damages – compensatory principle
In applying the compensatory principle, an issue was also raised as to the relevance of future events.
The Court of Appeal considered the decisions in both Golden Strait Corporation v. Nippon Yusen Kubishka Kaisha [2007] UKHL 12 (28 March 2007) (Golden Victory) and Bunge SA v Nidera BV [2015] UKSC 43 (1 July 2015). However, these cases concerned the assessment of damages for an anticipatory breach by renunciation, and which therefore required the Court to value the innocent party’s right to future performance. The compensatory principle meant damages were reduced or extinguished in those cases, the value of the performance being adversely affected by events which occurred after the acceptance of the repudiation.
To recap:
Golden Victory – damages under a long-term time charter (that was prematurely and therefore wrongfully repudiated in reliance on a war clause) could only be claimed up until the war clause could have been used to terminate the contract (ie the outbreak of hostilities with Iraq in March 2003).
Bunge -v- Nidera – only notional damages were awarded when the sale of goods contract was prematurely and therefore wrongfully repudiated in reliance on its prohibition clause and yet the export embargo did in fact continue throughout the shipment period. See our article: Common law compensatory damages -v- contractual default clauses | Hill Dickinson.
In contrast, this case involved an actual breach of contract. The Court of Appeal determined that Limbungan’s oligation was an absolute one to supply cargo, as opposed to being ready and willing to do so. Limbungan was in breach because it failed to supply cargo; for this purpose, the reason for the breach was irrelevant and did not justify a different approach to the compensatory principle.
Shipowners were, therefore, awarded substantial losses with reference to freight for the five shipments.
Comment
The Court of Appeal has usefully highlighted the distinction between FM and exceptions clauses. In general terms,
exceptions clauses limit or exclude losses payable after a breach has occurred, whereas
FM clauses tend to bring a contract to an end, relieving the parties from further obligations.
The Supreme Court refused leave to appeal in this case. The Court of Appeal decision, therefore, remains one of the key authorities on how the Court will apply the principle of compensatory damages.
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