Another twist in the OWB bunkers saga. Bunker supply contracts are contracts “relating to sale of oil products” under assignment to ING Bank.

 

Cockett Marine Oil v Ing Bank [2019] EWHC 1533 (Comm) involved a a challenge to two arbitration awards pursuant to section 67 of the Arbitration Act 1996 on the grounds that the arbitral tribunal had no jurisdiction. The awards were in respect of bunkers supplied to Cockett Dubai and Cockett Asia in October 2014. ING as OWB’s assignee commenced arbitration in London in respect of the supplies which Cockett challenged on two grounds. First, that their contracts had not been subject to London arbitration so London arbitrators had no jurisdiction. Second, that the assignment by OWB applied only to contracts “relating to the sale of oil products traded by the Group”. As the Supreme Court had held in PST Energy 7 Shipping LLC v OW Bunker Malta [2016] UKSC 23 that OWBG’s supply contracts were not contracts for the sale of goods within the meaning of the Sale of Goods Act, the assignment cannot have been effective.

Teare J found for ING on both grounds.

(1) In 2013 OWBG altered their terms and conditions. Prior to 2011 their terms and conditions provided for Danish law and Danish arbitration. Their 2013 terms and conditions provide for English law and London arbitration. OWBG took steps to inform their customers of the change. In view of the number of customers involved they employed an independent company, Concep, to communicate with their customers, rather than perform the task themselves. There was no evidence from Concep as to the steps they took to inform customers of the change in the terms and conditions. However, OWBG was able to access Concep’s web page and, by use of a password, access information about the “campaign”. That was the method provided by Concep to its customers to enable them to assess the success of the campaign. this contract for the supply of bunkers was on OWBG’s 2013 standard terms and conditions. Both contracts were subject to the 2013 revised OWB terms and therefore the arbitration tribunal had jurisdiction to determine the claim referred to it.

In relation to the second sale it was argued that OWB’s terms provided for variation when the bunkers were physically supplied by a third party who insisted on using its own terms. The bunkers had been supplied by a Greek supplier whose terms provided for Greek law and jurisdiction but the supplier had not insisted that its terms applied and accordingly there had been no variation.

(2) The assignment did cover the supply contracts. The parties to the Omnibus Security Agreement assumed that OWBG’s supply contracts were contracts of sale and intended that the security provisions of the contract applied to them, an assumption reflected in OWBG’s standard terms and conditions. In the Court of Appeal in PST Energy 7 Shipping LLC v OW Bunker Malta [2016] 2 WLR 1072 at paragraphs 44 Longmore LJ had said that there can be agreements which “may ……be described in commercial terms as contracts for the sale of goods but are contracts to which the 1979 Act does not apply.”  The parties to the Omnibus Security Agreement described OWBG’s supply contracts as contracts “relating to the sale of oil products” because in commercial terms they had many of the features or characteristics of a sale, notwithstanding that they were not contracts of sale within the meaning of the Sale of Goods Act because they did not envisage the passing of property before payment was due. As there was a valid assignment in favour of ING Bank the arbitrators had jurisdiction to make an award in its favour.

“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:

  1. 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:

  1. 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:

  1. 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.

Of damages and counterfactuals — again

It’s not often that we can say “You read it first on the IISTL blog.” But it seems we may be able to, following the decision of the Court of Appeal (Males, Rose and Haddon-Cave L.JJ.) in Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102.

The facts briefly recap thus. A charterer signed a CoA promising to come up with vast cargoes of Brazilian iron ore that would have netted the shipowner profits of something like $20 million. It didn’t, and in hindsight it was abundantly clear that it it never could have. The contract was subject to a force majeure clause including floods preventing performance. Floods duly materialised; but (as was held both at first instance and on appeal) the charterer couldn’t invoke the clause, since if it had never had any cargoes in the first place the floods hadn’t prevented it doing anything. Nevertheless Teare J held at first instance that even though there was breach the damages were not $20 million, but zilch (or rather nominal). His argument was that, hindsight having shown that the shipowner wouldn’t have had a right to performance even if the cargoes had been there, the value of the lost rights was zero.

We raised an eyebrow here at the idea that a defendant who hadn’t, and never could have, performed should be able to cut damages from $20 million to zero by pointing to a force majeure clause that might have protected him but in fact didn’t. The Court of Appeal has now made it clear that it thinks the same way, and substituted an award of $20 million. If (it was said) a claimant showed that a defendant had failed to perform and the defendant could not invoke any exculpatory provision, there was no reason why damages should not be substantial. The reasons behind the non-performance were irrelevant, as was the fact that had the defendant been able to perform in the first place he would have had an excuse.

In our view, despite the beguiling advocacy of the Institute’s own Simon Rainey QC, this is sensible and logical. Males LJ hit the nail on the head at [89] when he pithily pointed out that the breach was not inability or unwillingness to supply cargoes, but the simple fact that the cargoes, for whatever reason, were not there. Put that way, everything neatly falls into place. If you don’t perform your contract and can’t point to any excuse, you are liable for substantial damages. End of story.

Carriage contracts mean what they say, OK?

Open any contract textbook at the chapter on exception clauses, and you will come across a long list of cases on the restrictive interpretation of such clauses, saying that (for example) they will not lightly exonerate a party from the consequences of his own fault in the absence of clear words; that if a clause could cover both negligence and strict liability it will presumptively only cover the latter; that ambiguities will be construed contra proferentem; and so on.

As usual, however, things are not as they seem. No doubt such matters have formed the stuff of contract lectures and provided law professors with enjoyment for as long as most of us can remember. Outside academia, however, commercial lawyers today can pretty safely treat them as a mere empty ritual incantation and then go on quietly to ignore them.

The latest demonstration of this point comes in a case decided six weeks ago but only just reported, Aprile SpA v Elin Maritime Ltd [2019] EWHC 1001 (Comm). On the facts as assumed, steel fabrications were carried on deck from Thailand to Algeria under a straight bill stating that they were so carried and continuing: “ The Carrier shall in no case be responsible for loss of or damage to the cargo, howsoever arising prior to loading into or after discharge from the Vessel or while the cargo is in the charge of another Carrier, nor in respect of deck cargo or live animals.” The cargo did not arrive in one piece, and cargo — or its insurers — wanted to bring a claim. Faced with the unpromising terms of the bill of lading (which was unaffected by the Hague Rules because of the statement of deck carriage), they argued, with a touching hope, that for all its wideness the exemption did not cover any damage caused by negligence or unseaworthiness.

The deputy judge, Stephen Hofmeyr QC, was having none of it. In line with a series of recent authorities such as Persimmon Homes Ltd v Ove Arup & Partners [2017] EWCA Civ 373, he held that the exception clause had to be read, like any other contract term, with a view to seeing what it would mean to a reasonable businessperson, taking into account the circumstances surrounding the contract. He saw no reason to interpret the words “howsoever arising” as meaning anything other than what they said, or to regard claims alleging negligence or unseaworthiness as raising any special issue in this connection. He expressed the view that Langley J had been right to suggest as much in The Imvros [1999] 1 Lloyd’s Rep 848, and saw no justification in criticisms later made of that case. Equally he joined in the general tendency to sideline Canada SS v R [1952] AC 192 and its suggestions for cutting down the presumptive meaning of clauses that did not mention negligence in so many words. The argument that there might be strict liability as a common carrier and that the exception clause might have been intended to be limited to that he treated with the disbelief it richly deserved.

In short, in carriage as elsewhere commercial contracts mean what they say; complex rules of interpretation, and outdated presumptions about exoneration for fault, have little part to play. And rightly so. Carriers and cargo interests alike are keen on English law and jurisdiction precisely because they know their contracts will be read in a common sense and businesslike way. The deputy judge here needs, if one may say so, to be commended for approaching this case with a realistic and hard-headed attitude, and not disappointing them.

‘Howsoever caused’ in exception clause in bill of lading covers loss due to negligence and unseaworthiness.  

 

The Elin (Aprile S.PA. v Elin Maritime Ltd) [2019] EWHC [1001] (Comm) involved a claim under a bill of lading for damage to a cargo carried on deck which was stated to be so carried, and was therefore not subject to the Hague Rules. Owners sought to rely on two clauses.

1- the provision on page 1 of the Bill of Lading that “The Carrier shall in no case be responsible for loss of or damage to the cargo, howsoever arising … in respect of deck cargo”

2- the provision on page 2 of the Bill of Lading that the 70 packages identified on the attached list were “loaded on deck at shipper’s and/or consignee’s and/or receiver’s risk; the carrier and/or Owners and/or Vessel being not responsible for loss or damage howsoever arising”.

Owners argued that these two provisions must be interpreted as excluding all liability for carriage of deck cargo, including liability for negligence and unseaworthiness.. The phrase “howsoever arising”, which appeared in each of the clauses referred to all causes of loss or damage. The Owner relied on the decisions of Saville J,  Langley J and Hamblen J in The Danah [1993] 1 Lloyd’s Rep 351, The Imvros [1999] 1 Lloyd’s Rep 848 and The Socol 3 [2010] 2 Lloyd’s Rep 221, respectively.

Stephen Hofmeyr QC, sitting as a Judge of the High Court agreed. Nothing in the authorities to justify departing from that point of construction. The same or similar words of exclusion have been held to be effective to exclude both liability for negligence causing the loss of cargo (Travers v Cooper [1915] 1 K. B. 73 and  [1993] 1 Lloyd’s Rep. 351) and liability for unseaworthiness causing the loss of cargo (The Imvros). It would be difficult to imagine words of exemption which are wider in effect than “howsoever caused”. Over the last 100 years, they had become “the classic phrase” whereby to exclude liability for negligence and unseaworthiness. Accordingly on a true construction of the Bill of Lading, the Owner was not liable for any loss of or damage to any cargo carried on deck, including loss of or damage to any cargo carried on deck caused by the unseaworthiness of the Vessel and/or the Owner’s negligence.

Bareboat charters — keep your paperwork up to date

Life can be demanding for bareboat charterers, whether they are simply chartering in, or using a bareboat charter from a bank as a financing device.

In Silverburn Shipping v Ark Shipping [2019] EWHC 376 (Comm) owners under a Barecon1989 charter had suspicions as to their Korean charterers’ ability and intention to look after the vessel properly, and terminated the charter. One reason they gave was that the charterer had allowed the BV classification to lapse a short time before the vessel went into dry dock, thus breaking its obligation under Clause 9 to “keep the Vessel with unexpired classification of the class … and with other required certificates in force at all times”. Arbitrators refused to order the immediate redelivery of the vessel, holding that the duty to maintain class was not absolute, but rather to renew any expired entry in a reasonable time, and in adition that the duty to maintain the vessel in class was an intermediate term and not a condition.

On a s.69 appeal, Carr J disagreed. She saw no reason to read the obligation to keep the vessel in class as anything other than an absolute duty. Further, while accepting that the oft-emphasised requirement of commercial certainty could be over-used and could not “be deployed as some trump card” (a bon mot at para.[53] that is likely to find its way quickly into textbooks and counsel’s argument), she decided that the duty to keep in class was a condition of the contract, Breach of it could be serious in respect of the tradeability of the ship, and affect insurance, ship mortgage and flag: entry in class was moreover a black-and-white criterion with no shades of grey which was redolent of the idea of a condition.

This is something that needs to be taken seriously by charterers. Although the wording of Clause 13 of Barecon2017 differs slightly from the 1989 version, any discrepancy is minor and Carr J’s reasoning would, we suggest, continue to apply. Moreover, the right to terminate a bareboat charter can have considerable effects, particularly in the case of a financing charter with a purchase option: once the charter goes, so does the option. True, if the grounds for termination were wholly technical, in theory the court would have a right to relieve a bareboat charterer from forfeiture (The Jotunheim [2005] 1 Lloyd’s Rep. 181); but this is a difficult jurisdiction to persuade it to exercise, particularly in the face of an agreement for termination entered into by commercially-savvy parties. Charterers and borrowers, you have been warned.

No implied term qualifying free standing demurrage provision in sale contract

 In Gunvor SA v CruGas Yemen Ltd [2018] EWHC 2061 (Comm) a term contract of sale was made for the sale of  gasoline by 12 monthly consignments cif Hodeidah. The buyer was named as CruGas Ltd but the claimant argued that the contract was made with CruGas Yemen Ltd, and that it had been unaware that within the relevant group there was a Cayman Islands company named CruGas Ltd. The claimant obtained performing vessels from a separate entity within its group of companies, Clearlake Shipping Pte Ltd (Clearlake), under a long-term contract of affreightment on an amended Asbatankvoy form. It claimed demurrage totalling $18m under the sale contract and claimed against CruGas Yemen Ltd and CruGas Ltd in the alternative. The defendants denied liability for demurrage on three grounds. First, the demurrage claims were time-barred by reason of a demurrage time bar provision in the COA. Second, a term should be implied into the sale contract that the claimant was required to prove the demurrage rates claimed were “in line with the market rate”. Third, the claimant had to prove that it paid the demurrage sums it claimed under the sale contract.

Phillips J first found that the contract had been made with CruGas Yemen Ltd, and then proceeded to reject all three of the buyer’s arguments. First, it was established in OK Petroleum AB v Vitol Energy SA [1995] 2 Lloyd’s Rep 160 that words of general incorporation in a sales contract concerning demurrage provisions in a separate charter did not bring in terms ancillary to the accrual of demurrage, such as time bars relating to the presentation of demurrage claims. Second, there was no justification for the implication of the term contended for, which was neither necessary for the business efficacy of the sale contract, nor would give effect to the obvious but unexpressed intentions of the parties at the time they contracted. In any event, expert evidence from a chartering expert, was that the demurrage rates were all consistent with the market, insofar as such a thing could be said. Third, the demurrage provision under the sale contract was free-standing and not an indemnity.

 

Condition Precedents/Warranties in Insurance Contracts

Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC)

Constructing the meaning of words used in insurance contracts is a regular function of courts. In this case, the meaning of various terms, which appeared in the policy that Wheeldon (the assured) had with Millennium Insurance Co Ltd (the insurer), received judicial airing. The assured owned a waste processing plant which was destroyed in a major fire in June 2014. The assured’s claim for indemnity was turned down by the insurer who argued that the assured was in breach of several terms of the policy. The assured brought this action seeking declaratory relief that the insurer is liable under the policy for the loss.

The Deputy Judge, Mr Jonathan Acton Davis QC, first of all sought to identify the cause of fire at the plant. The plant produced solid recovered fuel by removing non-combustible components from inputted waste material transported on conveyor belts. It was discovered that a failed bearing caused a misalignment of one of the conveyor belts which created a gap between it and a trommel (a rotating industrial sieve). Combustible materials which would have been otherwise caught by the sieve, dropped through the gap at the bottom of the conveyor and began to accumulate there. The friction caused by the failed bearing led to hot metal fragments dropping into the accumulated combustible material thus starting a fire.

The insurer, inter alia, argued that the assured was in breach of:

  1. A condition precedent to liability which provided that “combustible waste must be stored at least 6m away from any fixed plant” (storage condition)
  2. A warranty that required “all combustible stocks and/or wastes to be removed from picking station base and/or trommels and/or hopper feeds and balers etc when business is closed.” (combustible materials warranty)
  3. A condition precedent which required the assured “to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines and keep records of all such maintenance” (maintenance condition)

At the plant, there were potentially combustible materials, such as a combination of glass, stones and soils which passed through the sieve, and were kept 6 meters of the fixed plants. Also, combustible materials had accumulated in the gap created by the conveyor belt misalignment. The Deputy Judge held that the presence of such materials did not amount to breach of the “storage condition” in the policy. It was stressed that the word “combustible” should be given the meaning, which would be understood by an ordinary person and not its scientific meaning, which is anything which burns when ignited. On that basis, a layman would not regard a combination of “glass, stones and soils” as combustible. The judge also indicated that the word “store” implied a degree of permanence and a conscious decision by the assured to designate an area to keep a particular material. On that basis, materials accumulated in the gap created by malfunctioning cannot said to be “stored” within the meaning of the condition in the policy.

With regard to (ii), the combustible materials warranty, the assured provided evidence that there was a system requiring employees to undertake a visual inspection and carry out the necessary cleaning each day. The judge held that even though the system, without more, was insufficient, the fact that it was in place and had been adhered to were adequate to comply with the warranty.

On third point, the judge found that the failure of the bearing, without more, did not conclusively mean that there was a breach of this condition. In any event, there was no evidence of any breach. As to the requirement to keep formal records, the judge agreed with the assured that their system of daily and weekly checklist was adequate. Furthermore, the judge stressed that if the insurer required records to be kept in a particular format, this should have been prescribed clearly in the maintenance condition.

Although the focus of the case is construction of certain terms in an insurance contract, it is a reminder to insurers that they need to be clear and specify the particulars carefully in the clause if they want to attribute a specific or scientific meaning to a word or requirement on the part of the assured. Otherwise, any word or requirement in a condition precedent or warranty is likely to be construed by courts as an ordinary person would read them.

It should be noted that request for permission to appeal against this judgment has recently been turned down by the Court of Appeal.

Force Majeure, Alternative Modes of Performance and “Eggs in one Basket” – Simon Rainey QC and Andrew Leung

Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm)

Introduction

A contract contains two modes of performance, A or B. Historically, the obligor has used mode A which becomes unavailable due to a natural disaster. If the obligor can show that it is also impossible to use mode B for reasons beyond its control, can it rely on a force majeure provision to excuse non-performance? Does it need to show it would have performed using mode A but for the mode A-disabling event? Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm) addresses these questions and others in an area of law that is perhaps not as well-settled in all respects as some might think.

Simon Rainey QC, leading Andrew Leung, represented the successful Defendants, instructed by Julian Clark, Winnie Mah and Trudie Protopapas at Hill Dickinson LLP. 

The dam burst and the COA

At 3.45pm on 5 November 2015, the worst environmental disaster in Brazilian history unfolded. A tailings dam operated by Brazilian mining company Samarco Mineracao SA (“Samarco”) collapsed. A tidal wave of 32 to 40 million cubic metres of mining waste swept across green valleys, villages and farmland.

Iron ore production at Samarco’s mine was brought to an abrupt halt. Shipments of Samarco’s iron ore pellets, hitherto shipped through Ponta Ubu in Brazil, were suspended.

Ponta Ubu was one of two ports from which the charterers, Limbungan Makmur SDN BHD (“Limbungan”), had the option to load iron ore pellets on the vessels of Classic Maritime Inc., under a COA for 59 shipments of iron ore pellets from Brazil to Malaysia between 2009 and 2017. The other load port was Tubarao, from which another Brazilian mining company, Vale SA (“Vale”), shipped iron ore pellets.

The parties’ rival positions

In the Samarco aftershock, it was Limbungan’s case that Vale experienced a surge in demand, earmarked its supply to existing customers, and left newcomers such as itself wanting. Limbungan was therefore prevented from shipping from Ponta Ubu and Tubarao due to circumstances beyond its control. This excused its failure to perform post-5 November 2015 under Clause 32 of the COA, a fairly typical force majeure or exceptions clause, which stated inter alia:

“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.”

Classic countered that Limbungan had an absolute and non-delegable obligation to provide cargo and had no arrangements to do so. Instead, it hoped to perform with the gratuitous support of two companies within the same broad corporate family, Lion DRI or Antara. Those companies had asked Limbungan to ship their iron ore pellets to their steel-making plants in Malaysia from Ponta Ubu since 2011, but without any contractual nexus existing between them. The bursting of the dam was thus of no legal relevance. The problem was that the now sole supplier, Vale, would not supply Limbungan or its affiliates, although matters would have been different if Limbungan had made proper efforts and pushed for a long-term supply contract.

What is more, Classic argued that Limbungan would not have performed anyway. It had failed to perform two pre-dam burst shipments as Lion DRI and Antara had not required Limbungan to carry iron ore pellets in a weak market, a state of affairs which would have continued irrespective of the dam burst. The dam burst was not a force majeure event and Classic was entitled to US$20.5 million in damages to compensate it for lost freight.

Against this, Limbungan argued that it had put its eggs in the Samarco/Ponta Ubu basket as it had exclusively shipped Samarco pellets since August 2011. Whether it had enforceable agreements with Samarco, Lion DRI or Antara was not determinative; its settled practice was clear. The obligation after the dam burst was to make new arrangements ex Tubarao, provided it was possible to do so. Clause 32 applied because it was not possible. This was an alternative modes of performance case per Warinco v Mauthner [1978] 2 Lloyd’s Rep 151, 154 in that Limbungan had opted for one mode of performance which had become unavailable. As it could not avail itself of the one remaining mode, it was excused.

Further, it was sufficient that Limbungan was prevented from performing by the dam burst. It was contrary to authority to insist that Limbungan had to show it would have performed had the dam not burst and contrary to the compensatory principle to award damages to Classic in respect of shipments which would never have occurred given the dam burst.

The judgment of Teare J.

The Court rejected Classic’s claim, and in the process made findings of wider legal significance.

  1. First, Classic’s reliance on the principle that a charterer who has been let down by a particular supplier cannot plead force majeure per The Mary Nour [2008] 2 Lloyd’s Rep and The Kriti Rex [1996] Lloyd’s Rep 171 was not on point. Those cases were not concerned with alternative modes of performance, where the required performance was from Port A or Port B, but with performance from a single port (albeit one possibly served by many suppliers).
  2. Second, for the alternative modes of performance principle to apply, it was not necessary for Limbungan to show it had legally binding arrangements to perform from Pontu Ubu rather than Tubarao when the dam burst. What the Court had to assess were Limbungan’s “intentions or arrangements” per Moccatta J in European Grain & Shipping v J.H. Rayner [1970] 2 Lloyd’s Rep. 239, which did not need to display the element of fixity posited by Classic.   
  3. Third, Limbungan had to show that it would have performed but for the dam burst. The House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 and a string of other cases, which Limbungan said supported the general proposition that a party relying on force majeure need not show it would have performed but for the force majeure event were, in Teare J’s judgment, cases about contractual frustration provisions, which are intended to mimic the effect of common law frustration. They had no bearing on Clause 32.
  4. Fourth, the Court concluded that neither Limbungan nor its affiliates could have sourced cargoes from Vale ex Tubarao – a topic on which the parties’ market experts spilt much ink. That said, Limbungan could not show it would have performed but for the dam burst: Lion DRI’s steel-making business had effectively been mothballed due to weak demand, Antara had a cheaper COA of its own, and the arrangement whereby Antara had used the more expensive COA and been compensated for the freight differential by Lion DRI was moribund. 
  5. Fifth, though Limbungan could not rely on Clause 32 and was therefore liable under Clause 32, Classic was not entitled to recover damages. This was because even if Limbungan had been able and willing to perform, the dam burst would have supervened and prevented performance, and Limbungan would have been excused by Clause 32. It would violate the compensatory principle, to award substantial damages to Classic when it would never have received performance in any event.
  6. Sixth, the Court rejected Classic’s case to the effect that if the dam burst was due to faulty construction or maintenance by Samarco, it was an event within the “Shipper’s [i.e. Samarco’s] control”, and thus not within Clause 32. No part of the charterers’ obligation to supply and load cargo extended to responsibility for the dam, making it unlikely the parties intended  poor dam construction or maintenance (if proved) to debar Limbungan from relying on Clause 32. This is an important decision on the typical ‘beyond the control of’ provision, analysed in the sometimes misunderstood decision in The Crude Sky [2013] EWCA Civ 905.

Conclusions

The case is believed to be the first authority since the Bremer line of authorities from the 1970s and early 1980s to consider whether the party relying on a force majeure or exceptions clause has also to show it would have performed but for the event relied upon to be excused from non-performance. The answer given in those cases was “no”. For the time being, the textbooks may need to be rewritten to reflect the affirmative answer to this question given by Teare J.

This gives pause for thought. Had Ponta Ubu and Tubarao both been wiped out by a meteor, so that any performance was unquestionably prevented, on one view, asking whether Limbungan could or wanted to perform would be academic. It might be said the parties intended Clause 32 to excuse Limbungan from liability in precisely such a case, particularly since Clause 32 is intended to deal with frustrating and force majeure events, and in the context of frustration, but for causation has always been irrelevant. Not only that: asking whether Limbungan would have performed but for the dam burst is conducive to a doubtful and speculative examination of what Limbungan’s intentions and arrangements would have been in a counter-factual setting, which Megaw LJ Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329 cautioned against.

This also appears to be the first case where the argument has been made (by Classic) – and rejected – that the arrangements necessary to activate the alternative modes of performance principle need to be legally binding. They do not: the arrangements can have a looser, more informal character.

Finally, this case exemplifies the compensatory principle at work: if Limbungan had performed instead of breaching the COA, it would have performed with Samarco out of Ponta Ubu. The problem from Classic’s perspective is that with the intervention of the dam burst, Limbungan would have been able to claim force majeure under Clause 32 (as on this hypothesis it would have performed but for the dam burst). The outcome in both the breach and non-breach positions is therefore that Classic would not have enjoyed the benefit of contractual performance. Classic cannot be put in a better position than if the breach had not occurred.

Teare J refused permission to appeal on the ground that Classic’s proposed appeal on the application of the compensatory principle (or perhaps more accurately Classic’s case that the principle allowed it to recover substantial damages to represent loss of charter freights which in fact it could never have earned assuming Limbungan performed rather than breached the COA) had no realistic prospect of success.

A copy of the Judgment, can be found here

Rotterdam Rules in Cameroon’s hat-trick of international trade conventions.

 

Just over a year ago on 11 October 2017 Cameroon ratified or acceded to three UNCITRAL Conventions.

  1. Cameroon ratified the Rotterdam Rules. There are now four states that have ratified. Sixteen more to go before the Convention comes into force. At the current rate we’ll be there in 2058.
  2. Cameroon acceded to the he United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) which comes into force for Cameroon on 1 November 2018.
  3. Cameron acceded to the United Nations Convention on the Use of Electronic Communications in International Contracts (2005) which came into force for Cameroon on 1 May 2018.