The Court of Appeal judgment in Classic Maritime v. Limbugan Makmur in 2019 attracted commentary suggesting that a different approach ought to be adopted when applying the compensatory principle to the assessment of damages of an actual breach as compared to an anticipatory breach.  We are not convinced that the decision takes matters that far but the decision certainly highlights the importance of the construction of force majeure clauses.  Ian Short and Kaan Polat provide the details here.*

In Classic Maritime Inc v. Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, the Court of Appeal handed down a judgment in June 2019 which looked at two key issues, namely (1) whether it is necessary to show a causal link between an exception or force majeure event and a failure to perform and (2) the correct approach to applying the compensatory principle to actual breaches of contract when assessing the level of damages to be awarded. Since leave to appeal to the Supreme Court has been refused, the Court of Appeal decision is the final word in this case.

Commentary on the decision has suggested that it is important to differentiate between force majeure and exception clauses as well as suggesting that there are now potentially two strands to the compensatory principle when it comes to assessing damages: one for measuring the consequences following an anticipatory breach and another for assessing losses flowing from an actual breach. However, in the authors’ view, whilst there are useful issues arising from the case of which it is important to be aware, the decision primarily highlights the importance of construction of contractual clauses.

Factual Background

The case concerned a contract of affreightment (“COA”) between Classic Maritime (“the Owners”) and Limbungan (“the Charterers”) for the carriage of iron ore from Brazil to Malaysia. The Charterers failed to perform two shipments in 2015 (the consequence of which were not disputed) but thereafter, on 5 November 2015, the Fundão dam at the iron ore mine of the Samarco Mariana Mining Complex suffered a catastrophic failure and halted production at the mine. A further five shipments could not be performed under the COA thereafter.

The COA included a clause, clause 32, which stated as follows:

"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, act of war….accidents at the mine…or any other causes beyond the 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 Charterers sought to rely on the exceptions to excuse themselves from liability in respect of the five remaining shipments after the dam burst.

The first instance decision

Teare J accepted that the dam burst made the performance of the remainder of the COA impossible. However, he held that Charterers could not rely on the exception in Clause 32 as they could not prove that they would have performed but for the collapse of the dam. Looking at the Charterers’ efforts to secure cargo and the production output and sales of the unaffected mines, he found that they would not have performed anyway and were thus in breach of an absolute obligation to provide cargo. In other words, there was no causal link between the dam burst and Charterers’ failure to comply with their absolute obligation to provide cargo for shipment.

However, the judge also held that Owners were not entitled to substantial damages as this would put them in a better financial position than if the Charterers had not defaulted; damages in this case being claimed at close to US$20 million. The judge determined that it would be contrary to the compensatory principle, when assessing damages, to ignore what the Owners’ position would have been had the Charterers been willing and able to perform their obligations but for the dam burst. The judge therefore awarded Owners nominal damages of US$1 per shipment.

Owners appealed on the issue of damages. Charterers appealed on the issue of liability.

The Court of Appeal decision

Lord Justice Males handed down the leading judgment and dealt with the “but for” causation issue first.

Liability: the “but for” causation

The “but for” issue was whether it was necessary for the Charterers to prove that, but for the dam burst, they could and would have performed the contract or, to put it another way, that the dam burst was causative of the failed shipments.

Males LJ was quick to establish that the answer to this question lies in the construction of clause 32 and he performed a thorough examination of the wording of that clause. He accepted that neither party's construction would be particularly uncommercial nor surprising.

The Charterers submitted that it would be harsh to hold them liable for failing to supply in circumstances where, whatever their intentions, there was never any possibility that they would be able to supply any of the five shipments once the dam had burst. On the other side of the same coin it is hard to see why the dam burst should make any difference to the Charterers’ liability when they were never going to perform those shipments in any event. There was already an established failure by the Charterers to supply cargoes to which the dam burst made no difference. Accordingly, the judge approached the construction of clause 32 without any predisposition as to the constructions which should be adopted and without any need to avoid what are said to be the unfair consequences of adopting one or other of the constructions – “it was simply a matter of construing the words of the clause” he said.

Males LJ’s analysis of clause 32 included the fact that the clause was headed as an “exceptions” clause and that the clause applied to a particular cargo, namely the particular cargo that would have been supplied were it not for the event in question. However, particularly instructive was the fact that the words “resulting from” together with the requirement that the events in question “directly affect the performance of either party” import a causation requirement. He went on to say that:

“It is a valid use of language to say that a failure to supply the cargo (or even a cargo) does not “result from” an event if in fact the event makes no difference because the charterer was never going to supply a cargo anyway. Similarly, the proviso refers in my view to the performance which would have been rendered if the event or cause had not occurred. If the accident at the mine did not cause the charterer to do anything different because it had no intention of supplying a cargo anyway, it is fair to say that its performance was not “directly affected”.”

This is not to say that in all cases such a causative aspect must exist but, as Males LJ was keen to point out throughout his judgment, “all must depend upon the wording of the particular clause”. As such, clauses such as the Prohibition clause 21 of GAFTA 100 referred to, operated in a different way. A critical distinction is that a “contractual frustration” clause such as clause 21 brings the contract to an end once an event occurs thereby relieving both parties from any further obligation to perform under the contract. An exceptions clause, such as clause 32, simply operates to relieve a party from paying damages after a breach has occurred.

Neither does clause 32 provide for any automatic cancellation of the contract (or of individual shipments) and, accordingly, the reasoning of the House of Lords in Bremer v Vanden Avenne relied on by the Charterers cannot apply to it said the Court. It was not a “contractual frustration” clause. However, the Court of Appeal was keen to emphasise that putting labels on clauses was not particularly helpful, rather it was the wording of the clause that is most important:

“Ultimately, however, in deciding whether the charterer can rely on clause 32 in circumstances where it would not have performed its obligation anyway, what matters is not whether the clause is labelled a contractual frustration clause, a force majeure clause or an exceptions clause, but the language of the clause. As with most things, what matters is not the label but the content of the tin.”

Labelling clauses as “force majeure” or “exception” clauses is not particularly instructive, rather it is the wording of the clause that is key and here clause 32 operated in a way that provided for a causal link to be proved between the listed event and the failure to provide cargo.

Quantum: Assessing damages and the compensatory principle

The compensatory principle which applies to the assessment of damages for breach of contract involves putting the innocent party in the position it would have been in if the contract had been performed. The issue here was whether Teare J in the High Court had misapplied the compensatory principle by assessing damages on the basis that Charterers were ready and willing to supply.

Males LJ discussed the Golden Victory [2007] UKHL 12 and Bunge v Nidera [2015] UKSC 43 decisions, highlighting that these were concerned with the assessment of damages for anticipatory breach by renunciation which required the court to value the innocent party’s right to future performance. In both cases, the innocent party’s claim for damages was reduced 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, such as a later right to lawfully cancel that would have otherwise been exercised.

However, the present case, the Court said, was not concerned with an anticipatory breach, but with actual breaches as a result of the Charterers’ failure to supply cargoes for each of the five shipments in issue. Since it was common ground that, subject to clause 32, the Charterers’ obligation to supply cargoes was an absolute obligation, the performance to which the Owners’ were entitled was the supply of cargoes and the value of that performance was the freights which the shipowner would have earned if the cargoes had been supplied less the cost of earning them. Males LJ disagreed with Teare J in that the Charterers’ obligation was not to be ready and willing to supply a cargo in each case, but actually to supply one.

As such, the Court of Appeal ruled that the Owners were entitled to just short of US$20 million in damages in respect of the five failed shipments.

Comments

Once a finding was made on liability that the Charterers could not rely on the clause 32 exception in view of the fact that they could not prove that the exceptions being relied upon were causative of the failure to supply cargo which, as a finding of fact, was never to be supplied in any event, it would be paradoxical to subsequently allow the Charterers to rely on the very same clause (or the sentiment contained within it) to limit quantum. This was not a case of anticipatory breach involving the assessment of, in effect, future losses: rather the COA continued. The analysis of each failed shipment would therefore have gone along the following lines:

1.Are the Charterers in breach of their absolute obligation to supply cargo? Yes.

2.Can the Charterers rely on the exceptions in clause 32? No, because the wording of the clause provides that there must be a causal link between the exception and the failure to perform and the Charterers cannot show this.

3.Damages thereafter are to be assessed in the usual way putting the Owners in the position that they would have been in but for the breach, namely by compensating them for their lost freight earnings less the costs that they would have incurred in the process.

Whilst commentary has suggested that the above approach means that the compensatory principle is applied differently depending on whether one is looking at an anticipatory breach scenario or an actual breach, the authors of this article are not entirely convinced that a different result would have been reached had, in this case, the Owners had a right to treat the contract as coming to an end earlier and claim damages; in circumstances where it was decided that the Charterers had no right to cancel in view of the dam burst, the Owners may well have been compensated for their lost future earnings under the COA in much the same way as they were here.

Key to this case overall, therefore, was, simply put, the construction of clause 32 and whether it allowed the Charterers to rely on it to escape liability for the failed shipments or whether they had to show that the exception was causative of their failure to perform. Once this was decided against them, they were faced with an uphill struggle to avoid having to fork out substantial damages. A differently worded clause, such as a force majeure clause enabling the contract to be cancelled upon the happening of certain defined events, would have produced a different result: construction was key.

*This article was contributed by Ian Short and Kaan Polat, Campbell Johnston Clark, to the LMAA Law Review 2020, a publication of the London Maritime Arbitrators Association.