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

The facts

On 5 November 2015, the Fundao dam in Brazil where iron ore is mined, burst, halting production at the mine. Charterers had a long term COA with Owners for shipments of iron ore pellets from two ports in Brazil to two ports in Malaysia. Between July 2015 and June 2016, Charterers failed to provide cargoes under the COA for seven shipments.  While Charterers had no defence in respect of the 1^st and 2^ndshipments, they cited "accidents at the mine" in clause 32 of the COA to excuse themselves from liability in respect of the 3^rd to 7^th shipments.

Clause 32

 "EXCEPTIONS

Neither the Vessel, her Master or Owners, nor the Charterers, . shall be Responsible for loss or damage to, . resulting From: Act of God, .Landslips; .accidents at the mine . or any 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. ."

The High Court

Owners submitted that Charterers could not rely on clause 32 unless they could prove that, but for the dam burst, Charterers could and would have performed the contract. The judge agreed. Having made the factual finding that Charterers had made no arrangements to provide cargo at either load port, the judge held that Charterers were not entitled to rely upon the exceptions clause because they would not have been ready and willing to provide cargoes for shipment even if the dam had not burst. Charterers were therefore held in breach of an absolute duty to provide the cargoes.

The judge nevertheless then decided that Owners were not entitled to substantial damages because this would put Owners in a better financial position than they would have been in had Charterers been ready and willing to provide cargoes. He therefore awarded Owners nominal damages of US $1 for each shipment in issue.

Owners appealed on the issue of damages, and Charterers cross appealed on the question of liability.

The Court of Appeal

On the question of liability, Charterers, relying on a House of Lords decision in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd's Rep 109, had submitted that clause 32 was a force majeure clause which unlike an exceptions clause, operated to qualify a party's obligations. Charterers argued it was sufficient that the force majeure event in fact rendered any performance impossible and there was no need for the party seeking to rely on the clause to prove that they could or would have performed the contract "but for" the force majeure event.

The Court however declined to consider the previous authority pointing out that the clause in that case was very differently worded. Instead, the Court approached clause 32 simply as a matter of construing the words of the clause in whole, ignoring the title or label of the clause and without any predisposition as to the construction which should be adopted.

The Court upheld the High Court judge's conclusion that if, but for the dam burst, Charterers would not have performed their obligations, their failure to perform could not be fairly said to have 'resulted from 'the dam burst' and the dam burst could not then fairly be said to have 'directly affected' the performance of Charterers' obligations. 

The Court therefore dismissed Charterers' cross appeal. 

On the issue of damages, the Court cited the common law principle, ".. where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."  On the facts, had the cargoes been supplied, Owners would have earned freights, less the cost of earning them. Comparing what Owners would have earned with the actual position Owners were in due to Charterers' breach, the Court allowed Owners' appeal and awarded Owners' damages in a sum exceeding US $19 million.

Comments

The Court of Appeal's decision to interpret clause 32 without first deciding if the clause is a contractual frustration clause or an exceptions clause has created uncertainty.  A contractual frustration clause does not require the party seeking to rely on it to show that it would not be in breach but for the frustrating event. In contrast, an exceptions clause does require the party seeking to rely on it to show that it would not have been in breach had the exception relied upon not occurred.  Going forward, it is unclear if the 'but for' test is to be applied to both force majeure and exceptions clauses. The contract may need to have additional provisions added on how the clause is to be interpreted.   

On the issue of damages, the Court of Appeal also distinguished the House of Lords' decision in the Golden Victory [2007]2 A.C.353 and the Supreme Court's decision in Bunge v Nidera [2015]3 All E.R.1082, two cases which took into account events occurring after the breach of contract when assessing damages.  The Court of Appeal justified this on the ground that those two cases were concerned with anticipatory breaches while the current case was concerned with an actual breach.

Charterers are applying for permission to appeal to the Supreme Court. More to follow, perhaps.