Author: Simon Rainey KC

Simon Rainey KC is one of the best-known and most highly regarded practitioners at the Commercial Bar with a high reputation for his intellect, advocacy skills, commercial pragmatism and commitment to client care. He has established a broad commercial advisory and advocacy practice spanning substantial commercial contractual disputes, international trade and commodities, energy and natural resources, insurance and reinsurance shipping and maritime law in all its aspects,. He appears in the Commercial Court and Court of Appeal and also the Supreme Court (with two recent landmark victories in NYK v Cargill [2016] UKSC 20 and Bunge SA v Nidera SA [2015] UKSC 43.) He regularly handles Arbitration Act 1996 challenges. He has extensive experience of international arbitration, regularly appearing as advocate under all of the main international arbitral rules (LCIA; SIAC, UNCITRAL; ICC, Swiss Rules etc) and also sitting as arbitrator. Current examples of his work as counsel are in arbitration before the Permanent Court of Arbitration in a US 13billion gas supply dispute; under Nigerian Law and seat in relation to an offshore oilfield redetermination dispute between oil majors, under UNCITRAL Rules in a mining supply take or pay dispute involving one of the world’s leading mine conglomerates; an ICC arbitration concerning a new mine development in Russia and an ICC Dubai seat arbitration involving specialist offshore vessels and in associated s67 and s68 LCIA challenges in the A v B [2017] EWHC 3417 (Comm) litigation in the4 Commercial Court. Recent arbitral appointments include an ICC Paris seat arbitration concerning a power station failure, a French law and seat arbitration relating to an oil rig drilling contract, an offshore construction contract claim under SIAC Rules and a long-term ore supply contract claim under Swiss Rules. He is highly ranked by Chambers and Partners and Legal 500 as a first division international arbitration specialist (“Highly regarded for his expertise in handling high-profile international arbitrations in connection with complex oil and gas, banking and finance and trade issues. He is well known for his prowess in advising and representing clients in disputes in countries as far flung as Turkey, Russia, the USA, China and India” 2018; “Incredibly good, with a particular skill in reducing the complicated to the elegantly simple, which when you're trying to present a case to a tribunal or court is one of the more valuable things you need to have” 2018; “Clearly now one of the top commercial silks and a delight to work with.” 2018; “A mixture of brilliance and brevity, his written submissions are like poetry” 2018), He was nominated for “International Arbitration Silk of the Year 2017” by Legal 500 and has also been awarded “Shipping & Commodities Silk of the Year” 2017 by both Chambers & Partners and Legal 500. He sits as a deputy High Court Judge in the Commercial Court and is Honorary Professor of Law, Business and Economics, Swansea University.

**Misdelivery by the carrier after discharge and the Article III Rule 6 time bar: the ‘Alhani gap’ is filled**

FIMBank p.l.c. v KCH Shipping Co., Ltd [2022] EWHC 2400 (Comm)

The Commercial Court (Sir William Blair) has recently handed down judgment in FIMBank p.l.c. v KCH Shipping Co., Ltd, an appeal under section 69 of the Arbitration Act 1996, holding that the time bar in Article III rule 6 of the Hague-Visby Rules can apply to claims in relation to misdelivery after discharge. The Court’s decision resolves an important question which had not previously been decided by the English courts, and which has divided leading academic commentators as well as judges in other common law jurisdictions.

Background

The appeal relates to a claim brought by FIMBank p.l.c. (“FIMBank”), as the holder of bills of lading, for the alleged misdelivery of cargo by the contractual carrier, KCH Shipping Co., Ltd (“KCH”). The bills were concluded on the Congenbill form, and were subject to the Hague-Visby Rules, including the time bar in Article III r 6 of one year after delivery which applies to claims against carriers.

FIMBank served a Notice of Arbitration on KCH after that time bar expired. Its position was that its claim was nevertheless not caught by the time bar, contending that: (a) on the facts, delivery took place after discharge; and (b) as a matter of law, the time bar did not apply to claims for misdelivery occurring after discharge. In its submission, this was so given that the Hague-Visby Rules do not regulate a carrier’s obligation to deliver cargo (as opposed to the carriage of goods by sea), and only relate to a ‘period of responsibility’ which ends with the discharge of cargo. FIMBank further argued that the parties had, in any event, contractually disapplied the Rules in respect of the period after discharge, insofar as Clause 2(c) of the Congenbill form provided: “The Carrier shall in no case be responsible for loss and damage to the cargo, howsoever arising prior to loading into and after discharge from the Vessel …”.

In an Award on preliminary issues, the arbitral tribunal determined that FIMBank’s claim was time-barred irrespective of whether delivery post-dated discharge on the facts (which remained a matter in dispute). This was because: (i) the Hague[1]Visby Rules time bar can apply to claims relating to misdelivery occurring after discharge; and (ii) Clause 2(c) of the Congenbill form does not disapply the Rules in respect of the period after discharge.

The Court’s reasoning

The Court upheld the tribunal’s decision on both questions, and accordingly dismissed the appeal.

On the first question, it concluded that, on its true construction, Article III r 6 of the Hague-Visby Rules applies to claims for misdelivery of cargo after discharge. The Court noted that this conclusion avoided the need for fine distinctions as to the point at which discharge ended, and accorded with the objective of the rule which was intended to achieve finality and to enable the shipowner to clear its books. It further observed that, although certain common law authorities and commentaries might be said to support the construction of Article III r 6 for which FIMBank contended (including Carver on Charterparties and Voyage Charters), there was no international judicial or academic consensus to that effect.

The Court held that, even if its conclusion above was wrong, the tribunal’s decision was in any event justified by its finding that the bills of lading contained an implied term providing that the Hague-Visby Rules obligations and immunities are to continue after actual discharge and until delivery takes place, in line with the reasoning of the Court of Appeal in The MSC Amsterdam [2007] EWCA Civ 794.

On the second question, the Court held that, on a proper construction, Clause 2(c) did not disapply the Hague-Visby Rules to the period after discharge. Although FIMBank relied in this regard on The MSC Amsterdam, in which the express terms of the bill of lading concerned were held to have disapplied the Hague Rules after discharge, the Judge held that that decision did not warrant a different result, insofar as it featured a bill of lading with materially distinguishable terms.

Simon Rainey K.C. of Quadrant Chambers and Matthew Chan of Twenty Essex acted for KCH, instructed by Kyri Evagora and Thor Maalouf of Reed Smith LLP

Demurrage an exclusive remedy: the Court of Appeal gives judgment in The Eternal Bliss – Simon Rainey QC & Tom Bird

The Court of Appeal has today given judgment in The Eternal Bliss on the availability of general damages in addition to demurrage arising from delay. Allowing the appeal, the Court held that demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime.

The appeal raised a point on which there was no previous binding authority and which has, for almost 100 years, divided eminent judges and commentators. The leadig textbooks were split on the issue.

Scrutton took the position that where the charterer’s breach causes the shipowner damage in addition to the detention of the vessel, losses can be recovered in addition to demurrage. But the authors of Voyage Charters said the better view was that the shipowner could only recover such losses if it could show a separate breach of contract (one other than the failure to load or discharge the cargo within the time allowed).

The dispute in this case arose from a voyage charter for the carriage of soybeans from Brazil to China. The charter was drawn up on an amended Norgrain form, which provided that demurrage, if incurred, was to be paid at a daily rate or pro rata.

After arriving at the discharge port, the vessel was kept at the anchorage for 31 days due to port congestion and lack of storage space ashore. Post discharge, it was said that the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds. The owners commenced arbitration against the charterers seeking to recover the cost of settling the cargo claim. The sole breach of contract relied on was the charterers’ failure to discharge within the laytime. The charterers contended that demurrage was the owners’ exclusive remedy for that breach.

The parties invited the Court to determine this point of law on assumed facts under s.45 of the Arbitration Act 1996. At first instance, Andrew Baker J found for the shipowner. He held that the cargo claim liabilities were a different type of loss to the detention of the vessel and that the shipowner could recover damages without proving a separate breach of contract. The 1991 decision in The Bonde (in which Potter J had reached the opposite conclusion) was, he said, wrongly decided.

Like the first instance judge, the Court of Appeal approached the point as one of principle, noting that distinguished judges have struggled, without success, to discern a ratio on this issue in Reidar v Arcos (the 1926 decision to which the long debate is often traced back). In delivering the Court’s judgment, Males LJ held that the case turned on the proper meaning of the term “demurrage” as it is used in the charterparty. The Court of Appeal concluded that, “in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime” (para 52).

This is a significant judgment on a major point of shipping law. In reversing the first instance decision, the Court of Appeal has given a much broader scope of the meaning of “demurrage” and treated it in much the same way as a standard liquidated damages clause, rather than limiting it to a particular type of loss. But this may not be the last word on the issue, which given the lively debate would benefit from clarification from the Supreme Court.

Simon Rainey QC and Tom Bird acted for the shipowner, instructed by Nick Austin and Mike Adamson of Reed Smith LLP.

“EVER SMART” collision with “ALEXANDRA 1”: The Crossing and Narrow Channel Rules

MAIB Investigation Report: Collision Between Tanker and Containership Off Jebel Ali – gCaptain

On 19 February 2021 the Supreme Court delivered a seminal judgment in the first appeal in a collision to come before the highest court since the mid 1970s and overturned the decisions of both Mr Justice Teare [2017] 1 Ll.R. 66 and of the Court of Appeal [2019] 1 Ll.R. 130.

On 11 February 2015 the outbound Ever Smart, a large container ship, collided with the inbound Alexandra 1, a VLCC, within the pilot boarding area, just outside the dredged entrance/exit channel to the port of Jebel Ali. The appeal concerned two questions relating to the application of the “crossing rules” as set out in rules 15 – 17 of the International Regulations for Preventing Collisions at Sea 1972. The Supreme Court emphasised that the Collision Regulations must be capable of implementation by all vessels as defined in the Rules, irrespective of their technological capabilities [72].

The Questions on the Appeal

The first question for determination was whether the crossing rules are inapplicable or are to be disapplied where an outbound vessel (Ever Smart) is navigating within a narrow channel and has a vessel (Alexandra 1) on a crossing course approaching the narrow channel with the intention of and in preparation for entering it. This question concerned the inter-relationship between the crossing rules and the “narrow channel rules” (rule 9).

The second question was whether it is necessary for the putative give-way vessel to be on a steady course for the crossing rules to be engaged. The “putative give-way vessel” is the vessel which, if the crossing rules apply, would be required by rule 15 to keep out of the way of the other vessel. In practical terms it is the vessel which has the “putative stand-on vessel” on her starboard side.

Both Teare J. and the Court of Appeal answered both questions “yes” with the consequence that the crossing rules were either not engaged at all or, if engaged, were overridden by the narrow channel rules. Teare J. apportioned liability 80% (Ever Smart) and 20% (Alexandra 1) and this was upheld by the Court of Appeal.

The decision of the Supreme Court

The Supreme Court disagreed. Before addressing the two questions the Supreme Court emphasised the international character of the Collision Regulations and their application to “mariners of all nationalities, of all types (professional and amateur), in a wide range of vessels and in worldwide waters”: see [37] – [45]. In this regard the Supreme Court referred to the well-known statement of Lord Wright in The Alcoa Rambler [1949] AC 236 (PC) at p 250 that “wherever possible” the crossing rules “ought to be applied and strictly enforced because they tend to secure safe navigation”. See also Atkin LJ in The Ulrikka (1922) 13 Ll.L.Rep 367 at 368. At [46] – [74] the Supreme Court carried out a detailed analysis of the context and purpose of the crossing rules, addressing the meaning of “heading”, “course” and “bearing” and emphasising the existence of a risk of collision when two vessels are approaching each other on a more or less steady bearing: see rule 7(d)(i).

The Supreme Court also considered the effect of rule 2(a) and (b). Rule 2(a) had been heavily relied upon by the Alexandra 1 interests for the dis-application of the crossing rule but this argument was rejected as “misconceived”: [66]. In essence the Supreme Court held that:

a. The crossing rules were of such importance in the context of collision avoidance that “they should not lightly be treated as inapplicable” [68].

b. Any tension between the obligation of the stand-on vessel to keep her course and speed and to comply with another rule should “be resolved by treating the stand-on obligation as moulded for the purpose of permitting compliance with the other rule” [69]. Teare J. and the Court of Appeal had erred in treating the rules as inconsistent either generally (Teare J.) or on the particular facts (the Court of Appeal).

c. Any ouster of one rule must be limited to the minimum strictly necessary to avoid danger and uncertainty: [70].

The Second Question

The Supreme Court first addressed the second question and held that neither the give-way vessel nor the stand-on vessel had to be on a steady course for the crossing rules to be engaged: [75] – [115]. In essence the Supreme Court held that two crossing vessels may be approaching each other and remain on a steady bearing, (with consequent risk of collision) without either vessel being on a steady course.

“ …. if two vessels, both moving over the ground, are crossing so as to involve risk of collision, the engagement of the crossing rules is not dependent upon the give-way vessel being on a steady course. If it is reasonably apparent to those navigating the two vessels that they are approaching each other on a steady bearing (over time) which is other than head-on, then they are indeed both crossing, and crossing so as to involve a risk of collision, even if the give-way vessel is on an erratic course. In such a case, unless the overtaking rule applies, the crossing rules will apply.” [111]

Although it was in issue on the facts, the Supreme Court also considered that the stand-on vessel need not be on a steady course for the engagement of the crossing rules [112] – [114].

The Supreme Court concluded that, subject to the first question, the crossing rules were engaged even though “ALEXANDRA 1 was not on a steady course, or speed” [115].

The First Question

The Supreme Court identified a number of relevant factual situations where the inter-relationship between the crossing and narrow channel rules needed to be considered. The Supreme Court sought “to determine with clarity and as precisely as possible” [124] the circumstances in which the crossing and narrow channel rules would apply in the vicinity of the entrance to a channel

Three broad groups of cases were identified [134]:

“Group 1 are vessels which are approaching the entrance of the channel, heading across it, on a route between start and finishing points unconnected with the narrow channel. They are approaching the entrance of the channel, but not intending or preparing to enter it at all. Group 2 are vessels which are intending to enter, and on their final approach to the entrance, adjusting their course to arrive at their starboard side of it. ….. Group 3 are approaching vessels which are also intending and preparing to enter, but are waiting to enter rather than entering …. ”

The crossing rules would clearly apply in a Group 1 case. The crossing rules would not apply in relation to Group 2 “because the approaching vessel is both preparing and intending to enter it, and already shaping (ie adjusting her course and speed to do so), on her final approach”. The decisions in The Kaiser Wilhelm Der Grosse [1907] P 36 and 259, The Canberra Star [1962] 1 Lloyd’s Rep 24 and Kulemesin v HKSAR [2013] 16 HKCFA 195 fell within Group 2.

However the present case fell with Group 3 because Alexandra 1 had not yet shaped to enter the narrow channel on her final approach. The Supreme Court held that the crossing rules should continue to apply to a “Group 3 waiting vessel, or any vessel approaching the channel intending to enter it, which has yet to shape her course to enter it on her starboard side of it” [138]. Further there were no reason why the outbound vessel could not comply both with the crossing and narrow channels: [139] – [140].

At [145] the Supreme Court concluded on the first question as follows:

“Where an outbound vessel in a narrow channel is crossing with an approaching vessel so as to involve a risk of collision, the crossing rules are not overridden by the narrow channel rules merely because the approaching vessel is intending and preparing to enter the narrow channel. The crossing rules are only overridden if and when the approaching vessel is shaping to enter, adjusting her course so as to reach the entrance on her starboard side of it, on her final approach.”

Apportionment will now be re-determined by Sir Nigel Teare on the basis that the crossing rules applied from about C-23 and that the Alexandra 1 was the give-way vessel.

Simon Rainey QC and Nigel Jacobs QC represented the successful Ever Smart Interests. They were instructed by Ince Gordon Dadds LLP (Christian Dwyer, Sophie Henniker-Major and James Drummond) in consultation with Stann Law Limited (Faz Peermohamed).

Halliburton v Chubb: Is Timing Everything?

Simon Rainey QC and Gaurav Sharma

On 27 November 2020, the Supreme Court handed down its highly anticipated judgment in Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48, unanimously dismissing Halliburton’s appeal. In doing so, it found that, at the relevant time of assessment, a fair-minded observer would not have considered that the circumstances gave rise to reasonable doubts as to the impartiality of the chairman of the tribunal hearing the parties’ dispute arising out of the Deepwater Horizon incident in 2010.

Critics of the decision will undoubtedly focus on the consequences of the court’s view that the “relevant time” was the time of the hearing to remove chairman under section 24(1)(a) of the Arbitration Act 1996 (the Act), rather than the time of his acceptance of an appointment by Chubb in a separate arbitration – also relating to non-payment by Chubb under an insurance policy related to the Deepwater Horizon incident – around six months after his appointment in the arbitration between Halliburton and Chubb.

However, the decision brings finality to a key issue in the English law of arbitration, namely the existence of a legal duty to disclose an arbitrator’s participation in other arbitrations involving the same subject matter and a common party. In addition, it delivers clarity in relation to certain other aspects of disclosure and arbitral practice more generally – notably including the interaction between the duty of disclosure on one hand and the obligation of confidentiality on the other, and the application of the English rules on disclosure just as equally to party-appointed arbitrators as to tribunal chairs.

The Disputes, The Arbitrations, The Appeals

The Deepwater Horizon was an offshore oil and gas drilling rig leased by BP and operated by Transocean at BP’s Macondo Prospect in the Gulf of Mexico. Cementing and well monitoring services were provided by Halliburton. On 20 April 2010, the rig experienced a major blowout in the course of the temporary abandonment and plugging of a well, resulting in the tragic loss of several rig workers’ lives, significant oil spills and environmental damage, and the sinking of the rig on 22 April 2010.

The US Government brought proceedings against BP, Transocean and Halliburton in relation to the damage caused by the incident. A trial to determine liability before the Federal Court for the Eastern District of Louisiana resulted in a judgment on 4 September 2014 apportioning blame in percentage terms as between the three defendants. Halliburton settled certain of the US Government’s claims against it in the amount of US$1.1 billion, but its liability insurer, Chubb, resisted its subsequent insurance claims on the basis that the settlement amount was not reasonable. Accordingly, Halliburton commenced London arbitration proceedings against Chubb under its Bermuda Form policy, resulting in the High Court’s appointment on 12 June 2015 of Mr Kenneth Rokison QC as chair of the tribunal in default of agreement by the two party-appointed arbitrators.

Mr Rokison subsequently accepted an appointment by Chubb in December 2015 in its separate arbitration with Transocean arising out of the same incident following Transocean’s settlement of claims with the US Government; and an appointment in a third arbitration arising out of the same incident between Transocean and another insurer in August 2016.

At the time, Mr Rokison made no disclosure in the arbitration between Halliburton and Chubb of his appointment in the other two references. In November 2016, Halliburton became aware of these appointments and applied to the court pursuant to section 24(1)(a) of the Act to remove him as chair of the tribunal on the grounds of perceived bias. The High Court dismissed the application following a hearing on 12 January 2017 and Halliburton appealed against this decision. The Court of Appeal dismissed Halliburton’s appeal, resulting in Halliburton’s appeal to the Supreme Court.

The Legal Duty To Disclose Multiple Appointments With A Common Party

The issues before the Supreme Court were (i) whether and to what extent an arbitrator may accept appointments in multiple references concerning the same or overlapping subject matter with only one common party without thereby giving rise to an appearance of bias, and (ii) whether and to what extent the arbitrator may do so without disclosure.

Giving the leading judgment, Lord Hodge made clear that in cases of apparent bias such as the present, the court was not concerned “to ‘make windows into men’s souls’ in search of an animus against a party or any other actual bias, whether conscious or unconscious.” Instead, its task was to examine “how things appear objectively”. [Para. 52]

The analysis was done in the context of section 24(1)(a) of the Act which allows for the removal of an arbitrator where “circumstances exist that give rise to justifiable doubts” as to the arbitrator’s impartiality. The court considered that this could be the case “if the arbitrator at and from the date of his or her appointment had such knowledge of undisclosed circumstances as would, unless the parties waived the obligation, render him or her liable to be removed under section 24 of the 1996 Act”. Agreeing with the Court of Appeal, the Supreme Court affirmed that this gave rise to a legal duty to make a disclosure of such matters which would otherwise cause the arbitrator to be in breach of their “statutory obligation of fairness”. In other words, “an arbitrator who knowingly fails to act in a way which fairness requires to the potential detriment of a party is guilty of partiality”. [Para. 78]

The court accepted the submissions of the ICC, LCIA and CIArb who favoured the recognition of such a legal duty in international arbitration proceedings; and those of the GAFTA and the LMAA to the effect that parties who chose to arbitrate their commodities and shipping disputes under those specialist rules understood that the smaller pool of specialist arbitrators involved might well act in multiple arbitrations arising out of the same subject matter, without needing to disclose that fact. Lady Arden reinforced the importance of having clear evidence of a practice of dispensing with parties’ consent for arbitrators to appear in multiple arbitrations: while the English courts might trust arbitrators to decide cases on the basis of the evidence before them and set aside any inequality of arms and material asymmetry of information, this was something that “may not translate easily for the many parties to arbitrations who are familiar with different legal systems”. [Para 164]

Right Place, Wrong Time

The question therefore arose whether participants in Bermuda Form arbitrations would typically expect disclosure of an arbitrator’s involvement in related arbitrations. The court found no evidence of parties acceding to a general practice of non-disclosure, which was also consistent with the fact that Mr Rokison had made disclosures to the parties in the other two arbitrations that arose out of the present subject matter of his role in the arbitration between Halliburton and Chubb. Accordingly, the court found that Mr Rokison’s appointment in the second and third arbitrations should have been disclosed to Halliburton, and his failure to do so was a breach of legal duty which meant that a fair-minded and informed observer may well have concluded that there was a real possibility of bias. [Para 147]

Ultimately this was of little consequence, however, as the court ruled that the relevant time for the determination of possible bias was not when he was appointed in the second reference (December 2015) – but the date of the hearing of the application to remove him as an arbitrator (January 2017).

This, said the court, was because of section 24(1)(a) of the Act’s use of the present tense requiring an examination of whether circumstances “exist” when the issue of an arbitrator’s removal arises for determination by the court. By the time of the removal hearing concerning Mr Rokison, Halliburton had discovered his appointment in the other arbitrations and questioned him about that in correspondence, resulting in him providing an explanation for his failure to disclose – based on an oversight and belief that there would not be material overlap between the different sets of proceedings. Halliburton accepted this explanation as being truthful, and the court was not persuaded that a fair-minded and informed observer assessing the situation at the date of the removal hearing – having the benefit of Mr Rokison’s explanation for his failure to disclose – would infer that there was a real possibility of bias on Mr Rokison’s part. [Para 149]

So, Arbitrators Have A Statutory Duty to Disclose. But What If They Don’t?

In their judgments, both Lord Hodge and Lady Arden recognised the risk of affirming the existence of the legal duty to make a disclosure which might not lead to an arbitrator’s disqualification or removal if not complied with. Lady Arden acknowledged that “There is a concern that the duty of disclosure carries no sanction if an application is made to the court about a non-disclosure by the arbitrator and fails.” But in her view, this missed the point, which was that “it would still be a breach of the terms of appointment with such consequences, if any, as the law of contract prescribes. In addition, a person may commit a breach of contract but incur no liability as a result, and the situation postulated falls into that category.” [Para 169]

Lord Hodge explained how in circumstances of a breach of the legal duty to disclose, an “arbitrator might, depending on the circumstances, face an order to meet some or all of the costs of the unsuccessful challenger or to bear the costs of his or her own defence.” [Para 111]
In other words, the failure would amount to a breach of a strictly legal obligation with the usual consequences associated with such a breach – though it would have no bearing on the situation obtaining at the date of a removal hearing and the assessment to be carried out then.

Conclusion

The Supreme Court’s decision may cause disquiet in some quarters, especially amongst those who expect a failure to make a material disclosure to have more significant consequences – notably disqualifying an arbitrator from acting, or continuing to act, altogether. The fact that the disclosable information in this case came to light by chance will only reinforce the sense of arbitrariness that some observers may have in the idea of assessing the issue at some point in time after the disclosure should have been made, but was not. This in turn risks perpetuating any concerns participants in international arbitration proceedings may have as to the willingness and ability of English law to police the conduct of those who decide their disputes and their failure to make material disclosures affecting the fairness of proceedings.

More generally, one cannot help but wonder whether the court’s decision might result in some arbitrators showing less concern for their duty to make disclosures of relevant information in English-seated arbitrations in future. This would be a shame, especially in light of the highly confidential nature of commercial arbitration and the difficulty of obtaining credible information as to the reliability and trustworthiness of arbitrators in advance of appointment as things stand.

However, it is not a given, and we must hope that it will not be the case. Further, we should welcome the fact that the court’s decision brings clarity as to the nature of an arbitrator’s legal duty of disclosure, and how and when the examination of apparent bias will fall to be conducted.

Equally, we should be thankful for the court’s clarification as to the interaction between the duty to disclose involvement in multiple proceedings and any duties of confidentiality owed by that arbitrator to the various parties involved across the disputes. Lady Arden explained that “the implied term as to confidentiality is independent of the implied term that the arbitrator should comply with his impartiality duty. It is truly a self-standing term”. [Para 175.] A customary high-level disclosure made on an anonymised basis will usually suffice to provide a party with the necessary information to enable it to assess whether or not it wishes to object to an arbitrator’s appointment. However, if further information that is confidential is reasonably required by a party to make that assessment and would require another party’s consent in order to be divulged, then “if consent is not forthcoming, the arbitrator will have to decline the proposed appointment”. [Para. 188] It is not hard to appreciate the reasonableness of Lady Arden’s logic: arbitrators are, for better or worse, private judges who undertake paid appointments on a commercial and contractual basis. If a request for consent to provide detailed information is made in the context of “the voluntary decision of the arbitrator to pursue a further appointment” (para. 180) and refused, then that is tough luck for the arbitrator in question who will simply “have to decline the proposed appointment”. (Para. 188).

Finally, we should congratulate the Supreme Court for spelling out in terms that party-appointed arbitrators are subject to precisely the same obligations, and precisely the same standards, as tribunal chairs when it comes to impartiality and considerations of fairness. This point was made in passing in reference to Halliburton’s appointment of Mr William Park as its arbitrator in three references against different insurers in insurance claims arising out of the Deepwater Horizon disaster, without any disclosure; juxtaposed with Mr Park’s statement of “profound disquiet about the arbitration’s fairness” made when the award was rendered in the Halliburton v Chubb arbitration, based on Mr Rokison’s non-disclosure of other appointments (Para. 26). The court was, understandably, unimpressed by the suggestion that a party-appointed arbitrator should be afforded greater leniency in respect of his or her choice of disclosures compared with a chair, since “that is not a distinction which English law would recognise as a basis for a party-appointee avoiding the obligation of disclosure. The disagreement among people involved in international arbitration as to the role of the party-appointed arbitrator is a circumstance which points to the disclosure of such multiple nominations; it does not provide a ground for nondisclosure”. (Para 144). This view echoes the position taken by the courts of other major arbitral centres around the world in relation to the strict disclosure obligations of party-appointed arbitrators (see for example the 25 February 2020 decision International Commercial Chamber of the Paris Court of Appeal in Dommo v Barra y Enauta). Moreover, it is hugely reassuring to hear the court reaffirm what all participants in international arbitration proceedings hope and expect to be the case in respect of each and every one of the arbitrators mandated with the resolution of their legal dispute.

Farm-Out Agreements and JOAs: a Joined-Up Approach to Construction

OVERVIEW

Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397

In what circumstances will one contract be construed by reference to another? In the energy sector, the issue will often be an important one, given the prevalence of suites of contracts dealing with different aspects or layers of involvement or activity. The general rule is that “A document executed contemporaneously with, or shortly after, the primary document to be construed may be relied upon as an aid to construction, if it forms part of the same transaction as the primary document”: see Lewison, Interpretation of Contracts, 6th Edn, section 3.03. But this relates to different contracts which are “in truth one transaction” or “as it is called in modern jargon, a ‘composite transaction’” (Lewison). But what if the transactions are different ones, involving the same but also additional parties, but are related transactions?

Apache v Euroil: Summary and Take-Away Points

The Court of Appeal’s decision in Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397 addressed this question in the context of a Farm-Out Agreement (the FOA) between Apache as and Euroil for the sale and purchase of minority interests in respect of a UK Continental Shelf production licence relating to the Val d’Isere block and for Apache’s participation in the associated Val d’Isere Joint Operating Agreement (the JOA) as Operator.

The Court of Appeal (as the Commercial Court before it) held that, on the terms of the specific contracts in issue, it was wrong in principle to treat the FOA and the JOA “as entirely separate contracts with Apache wearing different hats in each” and that would “not reflect the true nature of the parties’ dealings at the time” [39]. The contracts were to be construed together, and “in their proper context as a cohesive whole” [42].

While the Court stressed that it was dealing with the contracts before it and emphasised that it was not setting a “general precedent” for all FOAs and JOAs [70], the decision is significant in demonstrating a realistic approach to construing contracts which are meant to work together. As the Court stated, “Farm-out agreements do not typically exist in a vacuum. Where there is more than one owner, the parties will regulate their relationship in relation to that asset under a joint operating agreement. Farm-out agreements need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.” [2]

**The arguments in Apache v Euroil in the Court of Appeal**

The issue arose out of the incurring of drilling costs by Apache in relation to an exploration “Earn-In Well”, using a drilling rig on a long-term lease. The rate for the drilling rig as incurred by Apache was one which was significantly above market rates at the time of drilling.

Apache sought payment of the drilling costs in full from Euroil in full under the FOA. In the very detailed terms of the FOA drafted, as was common ground and as the Court accepted, by “sophisticated parties represented by experienced lawyers” provision was made for the “Val d’Isere Earn-In Costs” which Euroil agreed to bear: “twenty six point twenty five percent (26.25%) of the total costs (other than the Back Costs) in relation to the Val D’Isere Earn-In Well, whensoever incurred, and in respect of all works undertaken pursuant to the Well Programme in connection with the Val D’Isere Earn-In Well”.

Euroil contended that the recovery was necessarily capped at market rates and relied upon the combination of the payment provisions in the FOA (requiring it to pay all Earn-In Costs “upon receipt of an invoice from [Apache] … in accordance with the relevant JOA within the applicable time periods as set out in the relevant JOA”), read together with provisions in the JOA to which both Apache (as Operator) and Euroil (and another) were parties. Euroil relied upon the usual ‘no gain no loss to the Operator” provision in the JOA and the detailed accounting procedure in the JOA which was used to be used for billing under the FOA, which had no billing procedure of its own. As part of that billing procedure, the cost of equipment leased by the Operator “not exceed rates currently prevailing for like…equipment”.

Apache responded that:

i.   the FOA and the JOA were entirely different contracts with different mechanisms and purposes and separate parties;
ii.   The FOA was a bilateral sale contract with a price agreed which the purchaser is liable to pay. The JOA on the other hand was a multilateral joint venture contract with a joint venturers’ account.
iii.   Apache wore different hats at different times, depending on which contract is being considered.
iv.   To hold otherwise, would be impermissibly to incorporate a joint venture accounting convention in a multilateral joint operating agreement into a bilateral farm-out sale and purchase agreement so as to reduce the price there agreed;
v.   That would be “a significant development for the oil and gas industry, given that joint operating agreements are attached routinely to farm-out agreements by way of appendix”.

The decision in the Court of Appeal

The Court of Appeal rejected Apache’s arguments and held that the recovery of the drilling costs was capped at market rates given the provisions of the JOA. This was essentially for three reasons identified in the judgment of Carr L.J.

First, the artificiality of trying to construe the FOA as if it stood alone and without reference to the JOA. As the Court stated, this was “an ex post facto theoretical argument that does not reflect the true nature of the parties’ dealings at the time” [39] in circumstances where, by the time that the FOA was executed, the terms of the JOA, including the Accounting Procedure, had been negotiated and by the terms of the FOA they were to be deemed to be in full force and effect before and after completion of the FOA. The two contracts were “part of a package” and fell to be read together. As the Court said at the outset, FOAs do not exist in a vacuum and necessarily need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.

Secondly, and building on that, not only was the JOA part of the “Agreement” which made up the FOA (because the JOA was attached by way of schedule to the FOA), but the FOA also contained what the Court described as a “plethora of references throughout the FOA to compliance with the provisions of the JOA” which showed that they were intended to interact with each other.

Thirdly, the argument that the FOA was an entirely separate and self-contained agreement could not sit with the parties’ express agreement for issuing AFEs, invoicing and payment under the FOA “in accordance with the relevant JOA”. The critical factor was that all billing under the FOA was to be done using the JOA accounting procedure and therefore invoicing Euroil for the Earn-In costs was subject, without qualification, to the JOA accounting procedure and the principles set out in it, in particular the ‘fair and equitable’ principle, reflected in market rates, and the ‘no gain no loss’ principle.

Discussion

In one sense, it is difficult to see how the Court could have reached any other conclusion given the express inter-linking of the JOA into the FOA and the use of the JOA provisions for the accounting procedure. Looking at the language of the FOA in isolation, the Court found that Apache’s argument had at least an “initial attraction”. But the decisive factor was the fact that the proper construction of Euroil’s payment obligation fell to be determined on the basis of the text of both the FOA and the JOA, and sense made of each taken together.

The realistic approach of construing multiple contracts used in the energy sector is a continuing one. There are different routes by which the approach can be deployed, for example by treating the other contract or contracts as part of the factual matrix in which the subject contract was made and against which it must be construed, even if not part of the same transaction and even if not directly inter-related (as they were in Apache v Euroil).

The earlier decision of Teesside Gas Transportation v Cats North Sea Ltd [2020] EWCA Civ 503 illustrates this in perhaps an extreme form. In that case, the terms of a cost sharing formula in a Capacity Reservation and Transportation Agreement dated 1990 and relevant to the usage of the pipeline were construed in the light of the concepts found in the later Transportation & Processing Agreements with third party shippers (“TPAs”) were concluded by the CATS Parties and with which it was to be assumed the CRTA was to work in the future. A “separate contracts” / “subsequent contract” argument was rejected by the Court on the basis that “the concepts used in those later contracts (such as “Daily Reserved Capacity Rate”) were within the contemplation of the parties in 1990 even if the names given to them and the detailed terms of the TPAs were not” (per Males LJ at [84]).

Coda: “Precedence Clauses”: any use?

As so often, reliance was placed on a conflicts or inconsistencies precedence clause in the FOA (“If there is any conflict between the provisions [the FOA and the JOA], the provisions of this Agreement shall prevail”). Apache argued that this established that the FOA ‘trumped’ the JOA. Again, as equally so often, the Court emphasised that such clause was only of any utility in the case of true conflict, which would usually not arise once the terms had been construed together and for which, in Carr L.J’s words, it had to be shown that “one clause in one document emasculates another clause in another document”. [36]

Preliminary Issue on A Question of Construction- What Happens Next?

Daewoo Shipbuilding & Marine Engineering v Songa Offshore Equinox Ltd [2020] EWHC 2353 (TCC)

A claimant seeks a preliminary issue on a question of construction. It states that it accepts that if the point is decided against it, then that will be the end of all claims by it in respect of the project in question. The other party on this basis agrees and the tribunal makes a consent order. The claimant loses the preliminary issue and leaves it too late for a s.69 appeal. Can it then amend to run a different legal case on more or less exactly the same facts complained of, which it could have run in the alternative to its primary case, if wrong on its primary case on construction?

Can it resist reliance on res judicata on the basis that that principle cannot apply to amendments in the same set of proceedings as those in which the preliminary issue decision was made?

Or can the other party preclude the claimant from re-opening any claim on those matters, and, in addition, to defending its counterclaim by seeking to rely on the matters as defences?

Indeed can the other party contend that a binding agreement came into effect concerning the preliminary issue which meant that the claimant had contracted out of its rights (if any) to make any other claims if it lost on the issue? These stark facts arose in Daewoo Shipbuilding & Marine Engineering (DSME) v Songa Offshore Equinox Ltd [2020] EWHC 2353 (TCC). The Court (Jefford J.), dismissing DSME’s double-barrelled s.69 and s.68 Arbitration Act 1996 applications, held that DSME was estopped per rem judicatam from trying to relitigate matters which it could and should have raised before, that it made no difference that this all took place in the same set of proceedings rather than in two separate sets of proceedings and that this preclusion extended to relying on the same matters not only as claims in their own right but also as defences to the respondent Songa’s counterclaims.

The judgment contains a detailed and valuable analysis of the circumstances in which it will be an abuse of process to seek to raise new arguments in the same proceedings.

The competing arguments

Songa’s case was that the situation fell exactly into the situation described in Henderson v Henderson (1843) 3 Hare 100: “the court requires the parties to that litigation to bring forward their whole case … and will not permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward”. The result was that the determination of the preliminary issue and of DSME’s responsibility for design (FEED) in respect of the project and delays and costs relating to issues with that design meant that the award decided against DSME all issues of liability arising out of the design and as to which party bore the delay and costs associated with design problems. DSME had put its case on one ground only, had sought a preliminary issue on the basis that if it lost that was the end of the case and could not now re-open the question under a different legal guise. If it had run the case which it now wished to run, there could and would have no possibility of a preliminary issue. It sought such an issue representing that there were no other issues which could make a preliminary issue inappropriate.

Songa submitted that for DSME to try to re-introduce the new alternative factual case was an example of abuse of process res judicata estoppel, analysed by the House of Lords in Johnson v Gore Wood [2002] 2 AC 1. Given the very wide restatement of Henderson v Henderson by the House of Lords (as Lord Bingham put it “one cannot comprehensively list

all possible forms of abuse, so one cannot formulate any hard or fast rule to determine whether, on given facts, abuse is to be found or not”: 31E), Songa submitted that it made no difference that the estoppel was invoked in one set of proceedings to stop an amendment in those proceedings rather than to stop a later separate claim in separate proceedings. The critical question was simply: “Whether in all the circumstances, a party is misusing or abusing the process of the court [or the arbitral tribunal] by seeking to raise before it the issue which could have been raised before”.

DSME advanced various arguments before the Tribunal (Stewart Boyd QC, Sir David Steel, John Marrin QC). But its principal case was that Henderson v Henderson abuse of process estoppel had no place and could not apply to amendments in the same set of proceedings. That was dealt with on ordinary amendment principles which looked at costs and prejudice.

Subject to such matters, it was always open to a party to amend, paying costs. In the present case given that this was an early preliminary issue, amending to run a new alternative case based on the legal findings in the preliminary issue award could hardly be said to be late, or to occasion prejudice.

The battle of the authorities

DSME relied on the decision of Jackson J. in Ruttle Plant Hire Ltd v Secretary of State for the Environment [2007] EWHC 1733 (TCC). He had stated “the rule in Henderson v Henderson cannot be invoked in order to prevent a party from pleading at a later stage in the litigation issues which might have been pleaded earlier” (at [36]). But no reasoning and analysis was given for that view.

In particular the Court in Ruttle did not appear to have been referred to an earlier decision of the Court of Appeal in Tannu v Moosajee [2003] EWCA Civ 815 in which the Court of Appeal had said “Whilst it might be unusual to apply the principle in Henderson v Henderson in relation to separate stages of the same litigation, it is not conceptually impossible” (perArden LJ at [40]). Tannu was relied upon and followed in refusing amendments relating to liability after a “liability hearing” in Seele Austria GmbH v Tokio Marine Europe Insurance [2009] EWHC 255 (TCC)

Other cases, post Ruttle, all at first instance had shown the clear application of Henderson v Henderson in the same litigation: BT Pension Scheme Trustees v BT plc [2011] EWHC 2071 (Ch), a case involving preliminary issues; Gruber v AIG Management France SA [2019] EWHC 1676 (Comm), in which Andrew Baker J. had made clear that it was a “strong

thing” to shut someone out from running a point which had not actually been determined and “even stronger in relation to different stages of a single action” but that determinations within the action, e.g. by way of preliminary issues or a summary judgment on a particular claim could have just such an effect. See also Kensell v Khoury [2020] EWHC 567 (Ch).

The Judgment

Jefford J. concluded that there was no principled basis for the contention that Henderson v Henderson estoppel could not apply within the same proceedings or to different stages and determinations within a single set of proceedings [128]. Accordingly, the Tribunal was right to embark upon a “broad, merits based judgment” of the situation (in Lord Bingham’s words in Johnson v Gore Wood) and there was no error of law.

Interestingly, by a majority, the Tribunal had also held that DSME’s conduct in representing repeatedly that the claim was over if it lost on the preliminary issue which it proposed, in order to induce Songa to agree to it amounted to a contractually binding arrangement under which DSME had given up any other claims, while recognising that a binding

contract springing from a consent order was “less usual but not unknown”. An attempt to argue that the majority had erred in law also failed [95].

Lessons for the future?

When proposing a preliminary issue, parties should have in mind that if it is portrayed as determinative if decided in one way, then that is likely to set the foundation for an argument that later attempts to amend to run a new case amounts to a Henderson v Henderson abuse, and that the party should have brought forward all of its arguments.

When on the receiving end of an application for a liability only hearing or the determination of preliminary issues, a party should consider carefully defining what the result of that will be for the claims and the proceedings generally and tying the applicant down to the dismissal of the claim etc in the event of a particular determination.

COVID-19: When is a pandemic force majeure? And what should new force majeure provisions address?

Simon Rainey QC and Andrew Leung

The COVID-19 outbreak was declared a pandemic by the World Health Organisation on 11 March 2020. Some six weeks before this, on 23 January 2020, China implemented a regime of lockdown measures in Wuhan and other cities in Hubei in an attempt to quarantine the foci of the outbreak. China is edging back to normalcy, while bracing for a second surge of cases. Elsewhere, the clampdown on global economic activity by national governments is widening and intensifying with the spread of the pathogen.

Inevitably, many parties are finding it increasingly difficult if not impossible to perform contracts pre-dating these extraordinary and turbulent times. A question increasingly being asked is whether the outbreak or its consequences amount to a force majeure event. Naturally, there is no one-size-fits-all analysis. All will turn on the specific terms of the force majeure clause, the effects of the relevant event on contractual performance, and whether there are alternative means of performance. In this article Simon Rainey QC and Andrew Leung highlight some of the relevant themes as declarations of force majeure due to COVID-19 proliferate.

Once again, China seems to be ahead of the curve: LNG importer CNOOC has declared force majeure on LNG contracts (see The impact of Covid-19 on the energy & natural resources sector – Chris Smith QC), and the China Council for the Promotion of International Trade has started to issue force majeure certificates. The legal or evidential weight such certificates might bear under English law is a moot question. Certainly, they will not simply supplant the multi-stage enquiry undertaken by English Courts as to force majeure, though whether they might inhibit enforcement in China is another matter.

Force majeure clauses: the basics

A force majeure clause is a contractual term which regulates the consequences of supervening events beyond the parties’ control on the obligations of one or both of the parties to the contract. Such clauses typically require a causal link between such events and performance, and provide for the consequences of the event on the parties’ obligations. The event may result in the cancellation of the contract, excuse non-performance (whether in whole or in part), or entitle a party to an extension of time and/or to suspend performance.

In addition to fulfilling any procedural requirements such as the giving of notice, it is for the party relying upon a force majeure clause to prove the facts bringing it within the clause. The party must prove the following, and this checklist must be applied to any COVID-19 force majeure argument:

The occurrence of an event identified in the clause;
It has been prevented or hindered (as the case may be) from performing the contract by reason of that event;
Its non-performance was due to circumstances beyond its control; and
There were no reasonable steps that could have been taken to mitigate the event or its consequences.

We consider particular problem areas in the light of recent cases and the special challenges which the worldwide sweep of COVID-19 poses. Where does this leave parties entering into new contracts in drafting force majeure provisions?

(1) What is the relevant force majeure event?

“Force majeure” is not a term of art. Whether the viral outbreak falls within a force majeure clause will turn on the proper construction of the wording of the clause.

Contractual provisions commonly enumerate force majeure events, which may include a “pandemic” or “epidemic”, potentially by reference to WHO classification or, more generically, “disease”. It is unlikely that the pandemic in and of itself will have had immediate ramifications on contractual performance. It is the knock-on effects which will be in issue, which gives rise to questions of causation (discussed further below). It is therefore the ripple effect of the disruption caused by the virus which will in almost all cases provide the relevant putative ‘event’. For example, the virus decimates the population of a port and the port is closed by government order, preventing delivery of the contract goods: the ‘event’ is in reality the port closure or government lockdown. Or where the government makes no closure order but recommends port users are to be confined to essential imports only. There is no ban or embargo, just a voluntary self-policing scheme: what is the ‘event’? Is there one at all?

Many force majeure clauses do not expressly include a “pandemic” or similar in the list of named events. They may instead refer to an “Act of God” – a term that has been subject to surprisingly scant attention in the force majeure context – or, more concretely, “quarantine”, “embargo” or “government action”. With daily changes in the legal and regulatory landscape as governments enact outbreak management measures, events of this nature will be invoked under force majeure clauses with increasing frequency.

(2) “Beyond a party’s reasonable control”

Most force majeure clauses contain sweep up language such as “any other cause beyond [the party’s] reasonable control”. The COVID-19 outbreak itself is clearly capable of constituting such a cause. But again, is the secondary or tertiary effect produced by it such a cause, and which is the actual trigger for inability to perform?

In Aviation Holdings Ltd v Aero Toy Store LLC [2010] 2 Lloyd’s Rep 668, which concerned a contract for the sale of a Bombardier executive jet aircraft, Hamblen J stated that a seller unable to deliver the aircraft on time due to a pandemic causing a dearth of delivery pilots would be able to bring itself within the wording of a force majeure clause which provided “any other cause beyond the seller’s reasonable control”.

This type of wording applies to causes beyond the reasonable control of the party or, where relevant, any other party to whom contractual performance of that party’s obligation has been delegated: The Crudesky [2014] 1 Lloyd’s Rep 1 (in which the first-named author appeared). That case involved a string of contracts for the sale and purchase of Nigerian oil, ending with the charterers of the MV “CRUDESKY”. The parties in the string who had delegated their obligation to load the vessel to Total, the terminal operator, were unable to rely on force majeure to avoid liability for a six week delay caused when the vessel was detained due to Total’s failure to obtain official loading clearance. Total was their delegate for the purposes of loading. Its decision not to use official channels to obtain loading clearance was within its reasonable control and, by extension, that of its principals.

It will be relevant to ask in transactions with supply chains interrupted by the pandemic whether the cause of non-performance was beyond the reasonable control of any party to whom performance was delegated. For instance, it may be doubtful whether a factory closure by a vendor acting voluntarily and independently of government diktat would qualify as a force majeure event vis-à-vis a seller who arranged to source goods from that vendor.

(3) Causation: the effect on performance

Once a party has established the occurrence of a force majeure event, the next criterion is establishing that the event had and/or is having the contractually stipulated effect on performance.

Where the clause states that a party is relieved from performance or liability if it is “prevented” from performing its obligations or is “unable” to do so, it is necessary to show physical or legal impossibility, and not merely that performance has become more difficult or unprofitable: Tandrin Aviation Holdings Ltd v Aero Toy Store LLC (supra.). The economic toll of the pandemic will therefore not suffice. Nor will a delay of several months due to a pause in production in the context of a multiple year contract. However, as Tandrin Aviation suggests, a lack of personnel without whom contractual performance cannot occur, e.g. crew to operate an oil rig under a hire contract for an oil rig, could qualify.

Further, a seller will not be entitled to rely on a “prevent” clause where alternative sources of supply remain available. In PJ van der Zijden Wildhandel NV v Tucker & Cross Ltd [1975] 2 Lloyd’s Rep 240, the sellers of frozen Chinese rabbits were not entitled to cancel the contract which provided “should the sellers fail to deliver…or effect shipment in time by reason of war, floor, fire or storm…or any other causes beyond their control”. They had been let down by their Chinese suppliers, but this did not prevent them from performing by other means. By contrast, if it is not possible to perform by any alternative means after the original or intended means for performance becomes impossible, that is a classic force majeure case.

A distinction can be drawn with the less stringent requirement that the force majeure event should “hinder” or “delay” performance. In Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] A.C. 495, a clause in a contract for the sale of magnesium chloride gave the sellers the right to suspend performance due to contingencies beyond their control “preventing or hindering the manufacture or delivery of the article”. The sellers’ principal source of supply in Germany was cut off on the outbreak of the First World War. Though an English source remained available, the sellers were entitled to rely on the clause. A multi-national export prohibition due to the pandemic therefore need not eliminate all possible sources to potentially hinder the performance of a contract for the sale of goods.

(4) But for causation?

A further question which may arise is: what if, though the pandemic indisputably prevents performance, the party claiming the benefit of the clause would not have performed even absent the pandemic? Take an example of a counterparty already in deep financial difficulty who, before Corona, was suspected of being unable to perform the long-term contract or the next obligation when it fell due. Corona intervenes and prevents any performance of the contract, relieving the pressure on the counterparty, who then declares force majeure.

This was the position in Classic Maritime v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102 (in which both authors appeared) (see “But you weren’t going to perform anyway!”: A new hurdle when invoking Force Majeure – Classic Maritime Inc v Limbungan Makmur SDN BHD – Simon Rainey QC and Andrew Leung). The contract was a long term contract of affreightment (“COA”) for the carriage of Brazilian iron ore. The relevant contractual force majeure clause excluded liability for loss or damage “resulting from” a series of specified events, including one applicable on the facts, which “directly affect the performance of either party”. The Samarco tailings dam-burst destroyed all means of the party sourcing Brazilian iron ore and prevented any possible performance of the COA. The non-performing party was in financial difficulties and had missed several shipments just before the dam-burst event as a result. It was held to be unable to rely on this clause despite performance having been rendered wholly impossible because, but for the dam burst, on the facts it would not have performed anyway.

This contrasts with the clause considered in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, which, once triggered, cancelled the affected portion of the contract. Being a “contractual frustration clause”, the House of Lords held that there was no such requirement of “but for” causation as it automatically brought the contract to an end forthwith.

The antithesis between these cases suggests the nature of the remedy conferred by the force majeure clause (i.e. suspension or cancellation) may influence whether or not it is necessary to prove ‘but for’ causation.

(5) Avoidance / mitigation: working round the problem

The existence of reasonable steps the non-performing party could have taken to avoid or mitigate the effects of a force majeure event will preclude reliance on the clause. To take the example given above of the port closed as a result of COVID-19 affecting the population which prevents the normal route of delivering goods to the buyer. If it were possible to deliver at a neighbouring country whose ports were still open, and then carry the goods by rail or road to the delivery place, then reliance on force majeure would not be possible.

The burden on the party claiming force majeure is in this respect a heavy one. For example, in Classic v Limbungan it was held that the non-performing party had no means of avoiding or mitigating the dam-burst and its effect on supplies of Brazilian iron ore, but only after an exhaustive analysis (at summary judgment: [2017] EWHC 867 (QB)) of all possible sources of supply, including going into the market, buying afloat and shipping back to the Brazilian ports to reship and thereby perform the COA by this alternative route and, subsequently, a full debate in expert evidence (at trial) as to market quantities available: see e.g. [2018] EWHC 3489 (Comm). Faced with COVID-19 problems preventing the immediately obvious means or manner of performance, a party may be faced with a much more expensive and inconvenient means of performing. If that is open to it, then it may later be unable to justify its invocation of force majeure. In practical terms, it makes sense to explore and document how there were no other alternative routes. In Classic, the non-performing party had in part laid a proper paper-trail by seeking alternative supplies from the other supplier (Vale) once the supplier it was using (Samarco) closed its operations after the dam-burst and was able to show that Vale refused to make supplies available, preferring to service the needs of its established customers in time of dearth of supply.

Some contracts go further, such as that in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] 2 Lloyd’s Rep. 628 which contained an unusual express term requiring both parties to “use their reasonable endeavours to mitigate, avoid, circumvent, or overcome the circumstances of force majeure”.

In the present COVID-19 context, the unprecedented nature of the measures being introduced by governments internationally is likely to narrow the scope for avoidance or mitigation. But it will not foreclose it altogether and expense and inconvenience are not enough, hence the importance of the focus on the precise wording: ‘prevent’ or ‘hinder’ etc.

(6) Looking ahead… future-proofing new contracts

Even in these troubled times, trade and commerce continue. New contracts face particular challenges in that they are concluded against the backdrop of the pressing current problems but also forecasts of continuing or extended lockdowns into the future and with the spectre of secondary outbreaks and recurrence of the virus next winter.

This calls for a careful review of the force majeure provisions contemplated for the new contract. Simple reliance on the last pre-Corona contract ‘with logical amendments’ or standard terms and boilerplate is unlikely to be sufficient or wise, unless the clause in question is a sophisticated one which covers some or all of the points raised above.

Plainly clauses which refer to “unforeseeable events” will be of scant assistance. To take the example of the NNPC Terms considered in The Crudesky, these provided general wording which qualified the various listed events: “Neither the Seller nor the Buyer shall be held liable for failure or delay in the performance of its obligations under this Contract, if such performance is delayed or hindered by the occurrence of an unforeseeable act or event which is beyond the reasonable control of either party (“Force Majeure”) which shall include, but not [be] limited to…” (emphasis added). COVID-19, its recurrence, and its mutations are now all unfortunately very foreseeable. Similarly clauses which are modelled on the civil law definition of force majeure (imprévisible, irrésistible et extérieur: unforeseeable, unpreventable and external) will leave the parties fully exposed. Thus the ICC Force Majeure Clause 2003, together with the requirements of causation of prevention of performance, the results of which could not reasonably be avoided or mitigated, requires the party invoking force majeure to establish also “that it could not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract”.

Obvious points to consider will include:

Moving away from prevention to hindrance or lesser thresholds for interruption or impedance of contractual performance;
Specific sub-clauses dealing with epidemic and the results of epidemic;
Addressing the threshold for “beyond reasonable control” in the light of the Court of Appeal’s judgment in The Crudesky;
Building on, in addition to the traditional force majeure regime, more sophisticated provisions which can address the economic effect and increased costs of performance and alternative means of performance, such as “material adverse change” (MAC) or “material adverse effect” (MAE) clauses which allow termination of the contract, or suspension or adjustment of contract obligations, where external events impact upon the value of performance (although even these commonly do not extend to pure market or price movements).

Arbitration Hearings… and the Corona ‘New Normal’ Ten Golden Rules: or the easy path to your Virtual Hearing

Simon Rainey QC and Gaurav Sharma

The Covid-19 pandemic places enormous challenges on every aspect of life. Arbitration hearings, almost always with a mixture of parties, representatives, witnesses and tribunal members attending from far and wide and with complex dovetailed ‘availability’ issues, face particular challenges, both from national lockdowns and the disappearance of international (and much domestic) travel.

The initial and immediate reaction, from personal experience and much anecdotal evidence, has been for many parties and tribunals simply to adjourn hearings fixed in the likely affected period. While perhaps understandable as the crisis suddenly changed its perceived severity and impact within hours, we are now in for the long haul, and arbitration hearings (unlike sporting events, music festivals, walking with friends or going to the pub) are in fact very well placed to adapt and ‘carry on’.

Simon Rainey QC and Gaurav Sharma of Quadrant Chambers propose ten easy rules for keeping the current international arbitration diary on the road as much as possible.

Here they are, to cut and paste to your Desktop. For more detail, read on below.

Adjournment should now be the last resort.
Arbitration embraces tools and technology: let’s build on what we already do well.
More realism, please, about ‘seeing the witness’ (etc.)
Using the existing wide procedural powers firmly and creatively
Remember: many useful ‘video-protocols’ are already out there.
Embrace technology as your friend (a.k.a. ‘Use Zoom’)
Electronic hearing bundles really do work.
A new Tribunal Secretary: the Technical Assistant?
Flexibility, flexibility, and more flexibility, in timetabling and everything else…
… including how we handle new disputes in our brave new world.

In more detail, here are our key points to try to make your path to your Virtual Hearing, whether as counsel, in-house adviser or arbitrator an easier one.

Adjournment should be the last resort.

Adjournment simply pushes off the problem. With different jurisdictions on different epidemiological timetables and with second outbreaks wholly unpredictable, let alone ‘resumption of normal services’, never has the term sine die (without a new date being fixed) had such appalling resonance! The norm can and should be, save in the most exceptional cases, to hold the hearing date and to avoid the waste of costs and time which adjournment entails (and the difficulties in rescheduling ‘after Corona’ … whenever that will be). As banking, insurance, legal services and other sectors move over to remote and home-working, it requires a very good explanation why an arbitration hearing cannot take place virtually. If international governmental meetings can do it this way, so can we. The 27th Vis Moot, with 248 teams, is taking place ‘as normal’, online and on Vienna time and in the usual Vienna timeslots (https://vismoot.pace.edu/) The London Business and Property Court has set the lead of ‘business as usual’ wherever possible and by and by whatever virtual means available (see :https://www.judiciary.uk/publications/civil-court-guidance-on-how-to-conduct-remote-hearings ). For a recent example, see Teare J’s robust case management of a two-week trial: https://www.law360.com/articles/1255010/kazakh-row-over-530m-bny-funds-faces-virtual-trial . So, Golden Rule No. 1? Adjournment should now be the absolute exception, not a default option.

Arbitration embraces tools and technology: let’s build on what we already do well.

Is the challenge, while hugely different in scale and complexity, really so different from the day-to-day practical challenges of international arbitration and what we, as counsel and arbitrators, do now, and do well to address those challenges? Arbitration already makes routine and highly effective use of (at least) two virtual tools to cope with dispersed participants and the logistical impossibility of live attendance: (1) the telephone (or video-link) procedural hearing and (2) the taking of witness evidence by video-link. If the hearing is mostly legal argument or part of it is to be taken up with oral addresses or submissions (with or without an accompanying PowerPoint), then why is not (1) just as effective as it is for a hard-fought and important procedural or disclosure battle? And if the hearing is a heavy evidential one, why is (2) not a perfectly acceptable option? If an arbitration may already turn on the evidence by video-link of a key witness, why is it really so different to run the whole hearing in this way?

More realism, please, about ‘seeing the witness’ (etc.)

This is not the time or place to debate the Anglo-Saxon predilection for ‘seeing the witness’ and belief in assessing his or her veracity and credibility based on the tribunal’s acute psychological insight and unerring ability to read every gesture and passage of emotion across a witness’ face. But if the option is to hold off the hearing until better times (when?) and when the matter can be refixed (think of the rescheduling logjam), we need to assess critically whether the importance of this ‘advantage of seeing the witness’ is not very much overstated, when balanced against postponing a hearing indefinitely. Where a good or even passable video-link takes place, the discomfiture or arrogance of a witness (or whatever it is that we as counsel or tribunal members are supposed to be looking for) is almost always readily apparent. Take the example of a politician in a television interview. Other concerns about who is in the room with the witness etc (if he or she is not self-isolating!) can be dealt with either by the nature of the camera used, or just (as in a recent case) asking the witness to rotate his laptop to show the whole of the room in which he is sitting.

Use the wide existing procedural powers firmly and creatively

As with any potentially disruptive event, Covid-19 may regrettably be fastened onto by the party who wants to derail the procedural timetable, put off the hearing timetable and ‘game’ the practical difficulties for perceived tactical advantage. “Seeing the witness in a serious case of this nature is vital”, “the importance of live interaction between counsel and the tribunal and between tribunal members themselves cannot be overstated” are already submissions which are being made. Under all of the main institutional rules (e.g. ICC 2017 Rules, Article 22(2); LCIA 2014 Rules, Article 14.4(ii) etc) and under the general statutory powers in most seats (e.g. sections 33 and 34 of the Arbitration Act 1996) the tribunal will have effective carte blanche to make the hearing happen and counsel and parties must be expected to cooperate (or be made to do so). Cf. the recent approach of the London Commercial Court (cited above): “The court has to be optimistic rather than hesitant. It is a duty of all the parties to seek to cooperate, to ensure that a remote hearing is possible. […] The default position now in all jurisdictions is that hearings must be conducted with one, more than one, or all parties attending remotely.” A watch-word for all of us engaged in arbitration.

Remember: many useful ‘video-protocols’ are already out there.

Building on the video-conferencing of witnesses, there exists an impressive and very useful (but in our experience rather underused) body of protocols and guides to best practice, all recent and topical. These have already grappled with almost all of the practical problems inherent in taking evidence by video-link (including dealing with documentary evidence) and provide excellent templates on which to build in drawing up the procedural format for a virtual hearing with multiple participants. First is the ICC’s Commission Report on Information Technology in International Arbitration of October 2017. Then the ever comprehensive CIArb series of guidelines was joined in April 2019 by the CIArb Guidelines for Witness Conferencing in International Arbitration, with many useful insights. But the Hague Conference Draft Guide to Good Practice on the Use of Video-Links Under the Evidence Convention (March 2019) is outstanding in its foresight and coverage and cannot be too highly recommended. These and other resources (e.g. the Seoul Protocol on Video Conferencing in International Arbitration) all make the tasks of counsel and arbitrators in formulating a virtual hearing protocol for a particular case so much easier. The wheel has already been invented and it is just a case of fitting it to size (and adding one or two more if need be). Here are some of the relevant links:

ICC: https://iccwbo.org/publication/information-technology-international-arbitration-report-icc-commission-arbitration-adr/

CIArb: https://www.ciarb.org/news/ciarb-s-new-guidelines-for-witness-conferencing-in-international-arbitration/

Hague: https://assets.hcch.net/docs/e0bee1ac-7aab-4277-ad03-343a7a23b4d7.pdf

Seoul: www.kcabinternational.or.kr

Embrace technology as your friend (a.k.a. ‘Use Zoom’)

A virtual hearing is only ever going to be as good as the platform which is used to host it. Cometh the hour, cometh the platform! The new home-working environment has been the proving-ground of Zoom (www.zoom.us). Its selling-point, apart from being fantastically easy to use and adaptable (see Golden Rule 7) is that it will “Bring HD video and audio to your meetings with support for up to 1000 video participants and 49 videos on screen”. And what it says, it delivers (see Golden Rule 10). It looks set to be the mainstay of arbitration life, just as it is fast becoming the go-to solution for any virtual meeting, congregation, class or any other ‘socially distanced’ interaction. It can be used really effectively for all procedural steps in arbitration, including witness interviews, drafting sessions, work with experts, preparation for hearing, as well as all aspects of the hearing itself. Coupled with setting up parallel “chat” groups for the various counsel and tribunal teams and their internal communication, a virtual hearing in real time is readily achievable, with appropriate flexibility (see Golden Rule 9), including for example frequent planned breaks. Many other options are available. Skype for Business we have of course grown up with and it is working well so far in the Business and Property Court. The Vis Moot will be run on the virtual mediation / dispute resolution platform Immediation (https://www.immediation.com). But the popularity of Zoom may see it becoming an everyday arbitration tool. See for example: https://www.cnbc.com/2020/03/21/why-zoom-has-become-darling-of-remote-workers-amid-covid-19-outbreak.html

Electronic hearing bundles really do work.

For most of us as counsel (or arbitrator), the electronic bundle is, with apologies to Trollope, “The way we live now”. Epiq and Opus2 have revolutionised document heavy hearings in court and arbitration, in venues around the world. The key (as cross-examiners know) is the Olympian operator who seems, even as one is uttering the runic incantation “[B2/16/ page 345]”or some such, to be already bringing it up telepathically on the multiple screens. Normally present in the room, the main providers have already developed the use of remote operators, themselves using the live video-link and managing the electronic hearing bundle: further developments are under way: https://www.epiqglobal.com/en-us/about/news; and Opus2 has already created new offsite case and technical managers: https://cdn2.hubspot.net/hubfs/5553909/New%20remote%20accessw%20brochure%20-%20vFinal.pdf?hsCtaTracking=2d70e7e7-a694-4dbc-91ba-d0abf96ab4d9%7C68ea0924-808d-41ab-9225-9fd372b8ef85 But there are simpler options for less document heavy cases or where there is only a shared electronic bundle and no Epiq or Opus2 document management in place. Zoom (yes again) allows one to exhibit documents on the shared screen by clicking on a document open on your second screen. And there are other portals and providers, all gearing up for the challenge presented by the disruption to the ‘normal way of doing things’.

A new Tribunal Secretary: the Technical Assistant?

In these times, it may well be necessary to add a new face to the arbitral personnel. The arbitral secretary and his or her role is a familiar one (and continues to give rise to optimistic challenges: as in the recent Yukos case before the Hague Court of Appeal. But understandably the challenges to putting in place and then conducting an effective virtual hearing will in reality be technological and logistical (as much as, for some, an inbuilt adherence to traditional ways of doing things or to a preference for the comfort blanket of the cut-and-paste ten or more page procedural order detailing the minutiae of, and preparatory, for the oral hearing: cf. Golden Rule 9). The leading document management platforms will have this ‘built in’ (as with Opus2’s Virtual Hearing Manager, Case Manager and the somewhat forbidding-sounding “EPE [electronic presentation of evidence] Officer”). But while that may be available and appropriate for larger cases, engaging technical advice and a technical advisor should be a priority in every case in order to avoid the tribunal and/or counsel having to grapple with what will be the inevitable breakdowns, non-compatibilities, sound without vision and vice versa etc. And, pragmatically, why should parties not agree (or be directed to agree) on the use of the IT expertise of one or other firm of lawyers, billed at cost as a cost of the arbitration? In very many cases, any incremental cost will be a very small fraction of the value in dispute. And if that may raise hackles, why not pool or combine the law firms’ IT expertise, or rotate it?

Flexibility, flexibility, and more flexibility in timetabling and everything else…

The demands will initially seem great and, perhaps to some, too difficult. But the alternative of postponing the proceedings indefinitely in the pursuit of some unquantifiable conception of perfection does not serve the interests of the parties who have entrusted the timely and effective resolution of their dispute to the counsel teams they have chosen and the tribunal they have empanelled. The traditional features of a hearing (such as hearing length; the hearing day: its length; its timetabling, order of submissions and witnesses etc) are already handled flexibly by most tribunals with the active support of most arbitration practitioners. The ‘New Normal’ is going to call for even more flexibility and a pragmatic realisation that things will not be the same for an undefined future time. So: hearings and hearing days may have to be shorter; with witness evidence pruned and focused on the things that really matter to make it more manageable to assimilate and test virtually; with greater use of pre-reading in relation to witness evidence with, possibly, counsel showing their hand so that the tribunal can see in advance what the main challenges to a witness’ evidence are, before the live ‘show’ of cross-examination when the documents are put to the witness with a flourish; with the use of telephone only hearings for parts of the arbitration main hearing as appropriate; and timetabling hearings in portions and at mutually uncomfortable times to spread the pain of linking up widely distant participants. If arbitration is anything, it is inherently flexible from a procedural perspective, so as to achieve effective and efficient resolution of the parties’ dispute.

… including how we handle new disputes in our brave new world.

Arbitration serves business needs, not the other way around. As businesses find ways of adjusting their practices to suit the new environment and operate without disruption or interruption, they need to know that their business partners who handle the resolution of their commercial disputes are equally adaptable and ready, and are learning from the challenges we’re all facing together. That includes changing the way in which we handle new disputes arising now, in real time. Counsel should assume that their disputes will be born and live their lives in a world where expensive and diary challenging in-person hearings are neither the norm nor necessarily desirable as a default. We should think carefully about the way in which we draft pleadings, focusing on the issues that really matter, rather than assuming for example that there will be time, utility and patience for the examination of peripheral witnesses on largely immaterial issues. The same goes for an appropriate and judicious evaluation of the evidence – for example, the number and nature of witnesses and experts to be presented or called; the documentary burden to be placed on the tribunal; or the scope and focus of document requests, knowing that any interlocutory applications may not be heard by the tribunal in person. Procedural timetables might similarly assume that hearings and meetings will be conducted by video-conference, and accordingly provide the logistical and technical details in advance. Indeed, all of these things could and should result in shorter overall timetables and lead to quicker awards. If handled responsibly, then who knows: when happier times return we may emerge having all learnt to do things better, more efficiently and more cost-effectively, with long-term advantages for the streamlining and simplification of arbitration hearings.

Virtual hearings will at first undoubtedly have more than their fair share of frustrations and mishaps. But with us all pooling our experiences and knowledge and building on the lead already taken by the major arbitral institutions and venues (and with more from them to come), international arbitration will strengthen and improve its position, where other dispute resolution options may not be able to match its flexibility.

Chipping away at the ‘narrow approach’ to the Court’s powers in aid of arbitration?

A and B v C, D and E [2020] EWCA Civ 409

Simon Rainey QC looks at the Court of Appeal’s decision:

The long-standing controversy as to whether orders made by the Court “for the purposes of and in relation to arbitral proceedings” under s. 44 of the Arbitration Act 1996 can be made against non-parties to the arbitration received at least a partial resolution on Thursday 19th March 2020, when the Court of Appeal handed down its judgment in A and B v C, D and E [2020] EWCA Civ 409.

The case concerned a New York arbitration in relation to a dispute over net balances due under settlement agreements. One issue which arose was whether certain payments to a central Asian government were properly deducted as ‘signature bonuses’ (as the Respondents contended) or were bribes and therefore to be left out of account (as the Appellants submitted). The persons said to be involved in the negotiations for the making of the payments included one E, an English resident. He refused to go to New York to give evidence. With the permission of the Tribunal, the Appellants sought to compel his testimony and applied to the English Court under s. 44(2)(a) for an order under CPR34.8 for the taking of E’s evidence by deposition.

Accordingly, the application centred on the Court’s power as to “the taking of the evidence of witnesses”.

Foxton J. refused the application (with some reluctance) on the basis of accrued first instance Commercial Court authority, making it clear that his view would have been, absent authority, that the particular order sought was one the Court had jurisdiction to make under section 44: see [2020] EWHC 258 (Comm) at [18]. Recognising the controversy over the issue, he granted permission to appeal, notwithstanding the settled first instance view, a course of action which the Court of Appeal considered “obviously sensible”: [55].

On an expedited appeal, the Court of Appeal (Flaux, Newey and Males L.JJ held), with little hesitation, that s.44(2)(a) did give the Court power to make an order for the taking of evidence by way of deposition from a non-party witness in aid of a foreign or domestic arbitration. But the Court declined to go any further than that or to express any concluded view on the position in relation to other s.44(2) powers.

It follows that the controversy remains a very live one, pending review by the Supreme Court or the next piecemeal pronouncement by the Court of Appeal in another s.44(2) case involving a different sub-section (2) power.

The s.44 controversy and the previous Commercial Court decisions

On one view, the controversy might be said to be an arid one. S. 44(1) applies to all English seated arbitrations, unless contracted out of. It provides that, absent such contrary agreement, “the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings”. A straightforward approach might be to conclude that the Court has the same power to make orders against non-parties to an arbitration as it would have in legal proceedings to make orders against non-parties to the litigation because that is what s.44(1) says (see [7] and Foxton J. at [18]). If the parties do not like it, they can opt of the section, in whole or in part.

That approach runs up against the concern that the powers in s.44(2) are solely in aid of a consensual process of arbitration which binds only those who are party to the relevant arbitration agreement. It is argued that it would be odd if the Court were placed in a stronger position than the underlying tribunal itself and were able to exercise jurisdiction and powers over third parties, in support of an arbitration, where the arbitrators themselves would have no such jurisdiction or power. This concern has proved to be the dominant theme in the Commercial Court decisions prior to A&B.

The leading analysis remains that of Males J. (as he then was) in Cruz City 1 Mauritius Holdings v Unitech Ltd [2014] EWHC 3704 (Comm).

That case concerned the Court’s jurisdiction under s.44(2)(e) as to “the granting of an interim injunction or the appointment of a receiver”. The case turned on the application of CPR 62.5(1)(c). However, after a careful examination of the textual indications in other parts of s.44. Males J. concluded obiter at [47] that “the better view is that section 44 does not include any power to grant an injunction against a non-party” to the arbitration. While limited to the grant of an injunction under section 44(2)(e), the Judge’s reasoning was generally expressed (as he acknowledged in A&B: [52]) and was equally applicable to all the different paragraphs of section 44(2), without distinguishing between them. The thrust of his reasoning was that the wording of e.g. ss.44(4) and 44(5) made it unlikely that Parliament had intended to give the English court jurisdiction to make orders against non-parties in support of arbitrations happening anywhere in the world and that “the section is simply not concerned with applications against non-parties” [48(e)].

In the subsequent decision of DTEK Trading SA v Morisov [2017] EWHC 1704 (Comm), the Court had to consider whether it had jurisdiction under section 44(2)(b) to make an order for the preservation and inspection of a document in the possession of a third party in Ukraine. Sara Cockerill QC (as she then was) rejected various commentators’ criticisms of Males J’s approach (i.e. Merkin & Flannery, Arbitration Act 1996, 5th Edn; see now 6th Edn at 44.7.5) and reached the same analysis as Males LJ, taking a general approach (note that the application was unopposed). Thereafter later decisions applied the position as if settled at first instance (see e.g. Foxton J. and before him, Trans-Oil International v Savoy Trading [2020] EWHC 57 (Comm), Moulder J.).

The “wide” and the “narrow” questions in play on the appeal

So lay the land on the appeal.

The Appellant’s primary case was that the appeal had to be determined first and foremost on the “narrow question” of whether the particular s.44(2) power was one which was exercisable against third parties.

This was accepted by the Court, basing itself on the wide words of s.44(2)(a) with its reference to “witnesses”, not to “parties”, in circumstances where given the wide range of potential witnesses who would not be expected to be only “party” witnesses, “there is no justification in the wording of the statute for limiting “witnesses” to those who are in the control of one or other of the parties. If Parliament had intended that limitation, it would have said so” (Flaux LJ at [37]; see also Males LJ at [59]). Further, the nature of the “legal proceedings” referred to in s.44(1), being High Court and County Court proceedings, connoted the power which those Courts had to take evidence on deposition wherever necessary and just to do so: (; [38]; [61]).

The Appellant nevertheless also mounted an attack on the wider front that the s.44 controversy was not to be resolved by looking at the consensual nature of arbitration and that the starting point for section 44 is not the consensual nature of the arbitration agreement but what powers the Court is to have in a defined situation.

The Court of Appeal avoided getting into the debate as to whether Cruz City and DTEK were correctly decided. Given that the position was clear for s.44(2)(a), it was not considered necessary to go any further on different s.44 powers.

The end of the wide Cruz City view?

While the Court of Appeal refrained from tackling the correctness of the Cruz City wide approach, it is difficult to see how that approach can survive its decision. Either s.44 as a section is dealing with powers against parties only (as Males LJ opined in Cruz City) or it is not.

If it is not (as has now been held), then there are only two possible positions: either (a) the wide view that all of the s.44(2) powers are exercisable generally against non-parties is correct or (b) each separate power will turn on its own terms, so that different results may apply; indeed, it may be that only the s.44(2)(a) ‘evidence / witness’ power is a non-party power, while the remainder of s. 44(2) are powers are exercisable against arbitral parties only.

In so far as it is possible to identify the Court of Appeal’s view, this was in favour of the latter, ‘power by power’, approach.

Flaux LJ recognised that the effect of the decision and of the Court’s “narrow approach” was to posit that s.44 (2)(a) applies to non-parties, whereas the other heads of the subsection may not do so, based on the previous decisions. He left the position open by stating that “Any apparent inconsistency between the various heads of subsection (2) may be explained by the different language of those heads.” [44].

Males LJ, who had adopted obiter the wider view in his decision in Cruz City was careful to confine Cruz City to the particular power then before him. Like Flaux LJ he contemplated the possibility that different powers in s.44(2) might lead to different results. In particular, he made it clear that he saw “no reason to doubt” what he carefully referred to as “the actual decisions in in Cruz City and DTEK”(emphasis added) and only went on (at [56]) to “reserve my opinion whether their reasoning on this point is correct as regards the other paragraphs of section 44(2). […] it may be that the position varies as between the various paragraphs of subsection (2).” He however recognised that there were “strong arguments” either way.

So where are we now?

While the Court’s decision on s.44(2(a) make the position clear for that s.44 power, the s.44(2)(b) and (e) powers remain for the present governed by the Cruz City / DTEK decisions, although arguably open to fresh challenge on the basis that the Court of Appeal chose not to endorse the decisions as such. The position for other s.44(2) powers, not yet dealt with by any current Commercial Court or other decision is fully up for grabs. It is perhaps regrettable that the opportunity for at least a much clearer obiter ‘steer’ was not grasped by the Court of Appeal, although if the Court favoured a ‘power by power’ approach (as it appears implicitly to have done) then as it heard no argument on each power, this may not be surprising. No permission to appeal was sought to take the matter further to the Supreme Court, so the s.44 controversy is unfortunately set to rumble on for a little longer yet.

“But you weren’t going to perform anyway!”: A new hurdle when invoking Force Majeure

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

Simon Rainey QC and Andrew Leung

Is it necessary when a party seeks to rely on a force majeure or exceptions clause to show that it would have performed “but for” the force majeure or excepted event? And if the party is liable for failing to perform, but performance would have been impossible in any event, is the innocent party entitled to damages?

These important questions were considered by the Court of Appeal in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. The judgment, which is the sequel to the first instance decision discussed here, clarifies that:

Contrary to what textbooks such as Chitty and Treitel on Frustration and Force Majeure suggest, there is no general principle that it is not necessary to show “but for” causation in order to invoke a force majeure or exceptions clause.

The innocent party is entitled to substantial damages even if it would never have received performance in any event.

The dam burst and the COA

The litigation was fuelled by the Samarco dam burst on 5 November 2015. The charterer under a COA, Limbungan, claimed it was prevented from supplying cargoes for shipment as a result and was excused from having to perform under Clause 32 of the COA, which provided in material part:

“Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for…failure to supply, load…cargo resulting from: Act of God…floods…landslips…accidents at 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.”

The first instance decision

At first instance, Teare J held that though the dam burst had rendered performance impossible, Limbungan could not rely on Clause 32 as it required the charterer to prove that it would have performed but for the collapse of the dam, and Limbungan would have defaulted anyway. However, the owner, Classic, was only entitled to nominal damages. Even if Limbungan had been able and willing to perform, the dam burst would inevitably have prevented performance. The compensatory principle would be breached if Classic was awarded substantial damages when it would never have received freight in any event.

The Court of Appeal’s decision

The Court of Appeal upheld Teare J’s decision that Clause 32 required Limbungan to prove but for causation and reversed his decision in relation to damages.

Limbungan had submitted that the House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 laid down the general principle that a party relying on force majeure need not show it would have performed but for the force majeure event.

However, the Court of Appeal, like Teare J, treated Bremer v Vanden as a case concerning a “contractual frustration” clause (Clause 21 of the GAFTA 100 form), i.e. a clause which automatically discharged the parties from an obligation to perform in the future, much like the common law doctrine of frustration. The automatic cancellation effected by Clause 21 meant it was not necessary to meet the test of but for causation.

Starting from first principles, it was open to the parties to agree a clause which only excused non-performance if that test was met. The Court of Appeal considered that Clause 32 was just such a clause. Unlike the “contractual frustration” clause in Bremer v Vanden, it was an exemption clause which relieved a party of liability for a past breach. It was hard to see why the dam burst should make any difference to Limbungan’s liability when it was never going to perform anyway.

On the issue of damages, what Teare J thought was an orthodox application of the compensatory principle the Court of Appeal viewed as a “sleight of hand”. When assessing Classic’s loss, the Judge should have compared the freights Classic would have earned with the actual position it was in due to Limbungan’s breach. Teare J had instead drawn a comparison between Classic’s actual position and its position if Limbungan had been ready and willing to perform.

The Court of Appeal distinguished the present case from two cases in which events occurring after a breach of contract were taken into account:

In The Golden Victory [2007] 2 A.C. 353, the House of Lords held that the owners could not recover hire for the full-term of a charterparty prematurely cancelled by the charterers. The charterparty would not have run its full course anyway as the charterers would have lawfully cancelled due to the Second Gulf War.

In Bunge v Nidera [2015] 3 All E.R. 1082, the Supreme Court held that a buyer had suffered no loss despite the repudiation of a sale contract by the seller. A subsequent embargo would however have prevented the sale from taking place in any event.

Both cases were however concerned with assessing damages for an anticipatory breach. Contrastingly, the present case was concerned with an actual breach. Since Clause 32 gave Limbungan no defence to liability, Limbungan had to pay damages for failing to perform.

Comment

The Court of Appeal has underlined the fact that, whatever the current understanding of Bremer v Vanden in the textbooks,there is no default position whereby it is unnecessary to prove but for causation in order to rely on a force majeure or exceptions clause. The specific Force Majeure remedy afforded by Clause 21 of GAFTA 100 was held to be the reason that clause did not import a requirement of but for causation. Why this remedy should determine the test for causation is not entirely clear, when the effect of contractual cancellation and an exemption from liability is for practical purposes the same: the non-performing party cannot be successfully sued.

In other respects, this case presents a number of novelties:

The Court of Appeal held that Clause 32 was not even a force majeure clause, but an exemption clause. It was not previously clear that these categories were mutually exclusive (see e.g. Lewison, Interpretation of Contracts, 13.02).

Both Treitel and Lewison suggest in the light of the authorities that a clause which makes provision for the consequences of supervening events which occur without the fault of either party and are beyond their control (i.e. Clause 32) defines the parties’ obligations rather than operating as an exemption clause. This now needs to be reconsidered.

The Court of Appeal’s take on The Golden Victory and Bunge v Nidera is that subsequent events and their potential effect on the parties’ rights and obligations are only relevant when assessing damages caused by an anticipatory breach accepted as terminating the contract. They are not relevant in the case of an actual breach. This is arguably a new development and suggests there is not one compensatory principle, but two.

Permission to appeal was refused by the Court of Appeal but an application for permission to appeal is being made to the Supreme Court. The authors are Counsel for Limbungan and appeared below and in the Court of Appeal.