Article: Force majeure and failure to present cargo. How is your exceptions clause drafted?

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

Background

A charterer failed to present cargo shipments under a long-term contract of affreightment (COA) for shipments of iron ore pellets from Brazil. When a dam burst at the iron ore mine, the charterer sought to rely on a mutual exceptions / force majeure clause to avoid responsibility for all subsequent shipments. However, the charterer would not have been ready and able to supply these cargoes even if the dam had not collapsed and so it would have defaulted under the COA anyway.

Questions on appeal

​​Could the charterer rely on the exceptions clause to escape a claim for damages even if the charterer would always have defaulted? 

If the charterer could not rely on the exceptions clause, how should the damages be quantified in light of the incident at the mine?

Application of the exception clause

On its face, the exceptions clause was a typical force majeure style clause. Various events, including 'accidents at the mine', could exempt a 'failure to supply', amongst other failures. However, the clause required that the failure '[result] from' the force majeure event. Furthermore, the clause applied

'always provided that any such events directly affect the performance of … this charterparty'.

The words 'resulting from' and 'directly affect' were found to import a requirement for a causal link between the event and failure. Therefore, the charterer could not rely on the exceptions clause if it would never have supplied the cargo anyway.

The clause could be distinguished from what was described as a 'contractual frustration clause'. Such a clause operates to bring the contract immediately to an end such that the parties no longer have obligations to perform. With a contractual frustration clause, it is irrelevant whether the defaulting party would otherwise have performed. However, the Court of Appeal cautioned that what matters is not how the clause is described, but how it is drafted.

Quantification of damages 

At first instance, although Teare J agreed that the exceptions clause could not apply if the charterer would have defaulted anyway, he awarded only nominal (minimal) damages. He said the owner could never have earned freight on future shipments. If the charterer had been ready and willing to supply cargo, the dam collapse would always have prevented it from doing so.

The Court of Appeal described this analysis as a 'sleight of hand'. In applying the compensatory principle, Teare J compared the owner’s actual position with its position had the charterer been ready and willing to perform, instead of comparing its position had the charterer actually performed.

The Court of Appeal held that, if the failure to supply was not exempted, the owner should be awarded full damages for loss of freight on the remaining shipments, ​due to the charterer's underlying breach in failing to perform, and the collapse of the dam should be ignored.

This case was distinguished from authorities such as The Golden Victory on the basis the previous cases concerned anticipatory breaches, ie prior to the time of performance, the performer demonstrated an unwillingness to perform. When assesssing damages for anticipatory breaches, it was said to be appropriate to consider whether the party may later have been excused from performance. On the other hand, when dealing with an actual breach of an absolute obligation, damages should put the innocent party in the position it would have been in had the obligation been performed. Reasons why the party in breach could not perform are not relevant to that assessment unless they afford the party with a defence. In this case, the charterer was held to have no defence under the exceptions clause and so the incident at the dam was not taken into account in assessing damages for its breach.

Takeaways

Whether a party seeking to rely on a force majeure clause needs to demonstrate a causal link between the force majeure event and the failure to perform will depend on the drafting of a clause.

Content of the clause, not its label, is key.

In assessing damages for an actual breach of contract, reasons why the party in breach could not perform are not relevant unless they give that party a substantive defence to the breach.