Covid-19 and Business Interruption Policies- Courts Are Expected to Be Called into Action Soon

More than 300 small and medium sized businesses have formed an action group (Hiscox Action Group) with a view to bringing a class action against Hiscox’s decision to refuse payment under its commercial business interruption policies. It now looks like the Financial Conduct Authority (FCA) will also be involved in the ongoing debate by seeking clarity from the courts about whether the wording of some business interruption insurance policies should provide cover as a result of the pandemic. Although this particular class action might involve Hiscox, there is no doubt that other insurers, such as AXA, Allianz, RSA, QBE and Zurich, might face potential multi-million pound lawsuits from businesses such as hotels, pubs, restaurants and leisure groups that allege legitimate business interruption claims have been rejected by their insurers.

covid19-business-interruptions

The legal issue at stake here is a matter of construing the scope of such policies. Several assureds claim that their policies specifically provide cover for the “inability to use the insured premises due to restrictions imposed by a public authority following an occurrence of any human infectious or human contagious disease.” However, Hiscox and other insurers are arguing that cover is only available under such policies if “there is an incident within a mile radius of the insured building” and therefore unless the businesses are closed by authorities due to outbreak of the disease at the premises, the relevant business interruption policy will not respond.

On several occasions, courts have adopted purposive interpretation techniques when construing terms in commercial contracts. Lord Clarke, famously, in Rainy Sky S.A. and others v. Kookmin Bank [2011] UKSC 50 stipulated [at 14]: “The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant”.

On that basis, taking into account the wording in question, it will be hard to say that a reasonable person would not have understood the parties to have meant that cover would not be available if the commercial activities of a business are restricted due to restrictions imposed by authorities following an occurrence of any human infectious or human contagious disease. That said, more recently the Supreme Court seemed to be trending back towards the literal approach moving away from the contextual approach. See, for example, Arnold v. Britton [2015] UKSC 36 where Lord Neuberger [at 17] stated that “the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed.”

The Supreme Court in Wood v. Capita Insurance Services Ltd [2017] UKSC 24 attempted to reconcile these authorities by confirming the validity of both literal and contextual approaches to contract construction. Lord Hodge [at 13] explained the appropriate approach in the following fashion:

“The extent to which [textualism or contextualism] will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. …”

This approach indicates that a more contextual approach can be adopted in construing some commercial contracts. The key question will be whether standard business interruption policies sold to small and medium sized businesses can be viewed as sophisticated contracts negotiated and prepared with the assistance of skilled professionals? That is highly doubtful! So, there might be room for the courts to adopt a more contextual approach when it comes to construing such contracts bearing in mind the factual matrix. Defining the factual matrix in this context will not be an easy task but the approach taken by courts when construing the scope of professional indemnity policies in actions brought by those who suffered from mesothelioma or their families (Employers’ Liability Policy Trigger Litigation Durham v. BAI [2012] UKSC 14) might give clues as to the likely direction of travel in this context as well.

On the other hand, one appreciates the genuine concerns of insurers- providing indemnity for losses they did not intend to cover- will have implications on their businesses and also their re-insurance arrangements. They can plausibly argue that higher rate of premium would have been charged if they were expected to cover the financial losses emerging from a global pandemic.

One feels that a lengthy and tough legal battle lies ahead!

Demand guarantees: interpretations and paradoxes.

Cases about letters of credit and performance bonds often raise points of intellectual interest in commercial law. Waksman J’s decision in Técnicas Reunidas Saudia Ltd v Korea Development Bank [2020] EWHC 968 (TCC), decided 12 weeks ago but only up on BAILII this week, is a case in point. It raised nice issues of contractual interpretation, and also discussed the old chestnut of what to do about non-documentary conditions. And in both cases it got the answer right: a good thing, given that quite big money (something like £8 million) turned on it.

TRS were a big construction company involved in a mega-project in Saudi Arabia. One of its subcontractors was S. The bank, a Korean corporation, issued TRS with what was effectively an advance payment guarantee, operable on first written demand by TRS, to cover TRS’s cash-flow advances to S. The guarantee, which was subject to URDG758, went on to say: “It is a condition for any claim and payment under this guarantee to be made that the funds paid as advance payments subject to the terms of the subcontract must have been received by the sub-contractor on its account number 042-117994-03 held with HSBC.”

S ceased work in circumstances at best murky. TRS called on the guarantee and provided evidence of advances made to the named account number at SABB, a Saudi associate of HSBC which traded on the connection and indeed used the HSBC logo. Meanwhile a court in Korea was asked to issue an injunction preventing the bank from paying. Caught between a rock and a hard place (it being clear that the English court would ignore any Korean court order, Korea being the place neither of the governing law nor of payment), the bank thrashed around for a reason not to pay. It eventually refused on the basis that, payment to an account at SABB was not payment to HSBC and hence the condition was unsatisfied. Waksman J was unimpressed and gave summary judgment for TRS. This he did for two reasons.

First, he said that the generic reference to “HSBC” had to be interpreted to mean HSBC or its associated banks. Not only was this what a reasonable man present at the time of contracting would have understood; it also avoided the awkwardness that would follow from any other answer, which was that the guarantee would have been waste paper from the beginning because it was subject to a condition that could not be complied with. He also added a reference to a further point, often forgotten by busy lawyers, known as the principle of misnomer. If a document referred to an entity by an incorrect name and the reference was not ambivalent between two separate entities, extrinsic evidence was admissible to show which entity was meant. This was the case here.

More interestingly, his Lordship also took the point that the condition in the guarantee was non-documentary, and said that TRS could invoke Art.7 of the URDG, equivalent to Art.14.h of the UCP600, which provides that “[i]f a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it”. The non-documentary condition, he held, simply fell to be excised; from which it followed that even if TRS had failed to comply with it this was irrelevant.

This has always been a matter of controversy, raising the same sort of paradoxical issue as Odysseus’s order to his crew to tie him to the mast as they sailed past the Sirens and to ignore any subsequent commands he might give (they duly disobeyed a subsequent order to untie him, thus assuring his safe arrival in Ithaca). On one argument, parties inserting a non-documentary condition are to that extent contracting out of Art.7 and so the condition still takes effect; but although accepted in Singapore (see Kumagai-Zenecon v Arab Bank [1997] 3 S.L.R. 770), this solution does have the disadvantage of leaving the provision like Cinderella: all dressed up, but with nowhere to go. In the present case Waksman J emphatically rejected it. Even if the UCP and URDG technically became binding on traders by contractual incorporation and were in no way legislative, they were a special kind of instrument not necessarily subject to the ordinary rules of contractual interpretation. And, whatever the logical problems, a court should interpret them so as to give effect as far as possible to all their provisions.

This may not be the last word, especially on Art.7 and its UCP equivalent. It is nevertheless a very sensible word. We at IISTL hope future courts will take it up, amplify and confirm it.

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:

  1. The occurrence of an event identified in the clause;
  2. It has been prevented or hindered (as the case may be) from performing the contract by reason of that event;
  3. Its non-performance was due to circumstances beyond its control; and
  4. 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:

  1. Moving away from prevention to hindrance or lesser thresholds for interruption or impedance of contractual performance;
  2. Specific sub-clauses dealing with epidemic and the results of epidemic;
  3. Addressing the threshold for “beyond reasonable control” in the light of the Court of Appeal’s judgment in The Crudesky;
  4. 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).

Exceptions to the Running of Laytime- “Wording” is the Key (Bad Weather?)- London Arbitration 21/19

Ship1

In commercial contracts, exclusion clauses are often construed narrowly. In the context of voyage charterparties, this could create significant difficulties for charterers who attempt to rely on an exclusion clause to stop the running of laytime or demurrage.

In the contract in question, it was expressly stipulated that … if … loading… [was] … suspended: [a] due to bad weather (including… storms, high winds…) or [b] for other reasons not attributable to charterers or their shippers/receivers, laytime and demurrage would not count.

At the port of loading, the laytime period started on 25 August. A tropical storm was approaching to the loading port but loading continued and the terminal indicated at 13.00 hours on 26 August that there was no present intention to shut-down due to the fact that the approaching hurricane’s land fall remained uncertain. However, at 15.30 hours on the same day, the terminal stopped loading and the vessel was advised to leave for anchorage. The terminal informed the vessel that they had no alternative but to vacate the vessel as weather conditions would make anchorages scarce and they had to consider the safety of their docks, fleet and terminal. The port remained closed for the next few days and on 29 August the vessel re-berthed and completed loading. The main legal issue was whether laytime stopped when the vessel was ordered off the berth.

It was held that the laytime was not suspended when the vessel left the berth on 26 August as for laytime to be suspended under a clause of this nature it was necessary to show that time was lost due to bad weather. The tribunal observed that it was impossible to calibrate the imminence and nature of bad weather when the vessel sailed away on 26 August but was adamant that the facts did not suggest that loading as suspended due to bad weather. What led tribunal to this conclusion was the fact that the hurricane was still at least 2 days away and there was no immediate danger to shipping. The terminal’s decision to close the facility was based on its desire to ensure the safety of its barges and there was also concern that vessels would find it difficult to find anchorages if they stayed any longer in the terminal.

However, the charterers managed to convince the tribunal that the running of laytime was suspended for “reasons not attributable to charterers or their shippers/receivers”. They got the decision of the tribunal in their favour on this point as they successfully argued that they had no connection with the terminal so the actions of the terminal were not attributable to them. It was stressed by the tribunal that shippers and the terminal were separate legal entities with no agency relationship.

The first part of the decision is in line with the precedent set in a number of authorities most notably Compania Crystal de Vapores v. Herman [1958] 2 QB 196 where the chartered vessel ordered from the berth by harbour master due to threat of bad weather. There, it was held that time lost as a result of measures taken for safety of the ship as a result of bad weather does not count. It is vital that bad weather should potentially prevent the loading/discharge. Therefore, to suspend the running of laytime in a case like this, charterers would need to show that the relevant clause refers not only to “bad weather” but also to “steps taken due to bad weather”. The finding on the second part of the clause was fact based and the decision went in favour of the charterer as the owner failed to show that there was any organic relationship between the charterers/shippers and the terminal. However, it is evident that the wording adopted makes this a very broad exception and could potentially provide relief to charters in most instances.

Asymmetric jurisdiction clauses — financiers can indeed breathe freely

Most people think of an exclusive jurisdiction clause as a clause requiring all disputes to be heard in one forum, whoever raises them. But this is over-simplified. A jurisdiction clause may also be asymmetrically exclusive, allowing one party to sue in any court it can sweet-talk into taking the case but limiting the other to suing in a single jurisdiction. Financiers love these clauses, which protect them from litigation in uncongenial courts while at the same time preserving maximum freedom to pursue the borrower wherever he has assets or the courts have creditor-friendly judges.

There is no doubt that these clauses are enforceable as a matter of English law, but do they count as exclusive jurisdiction clauses? The point matters because of Art.31 of Brussels I Recast. This says that where two courts in the EU are hearing the same dispute, the second seised must give way, unless there is an exclusive jurisdiction clause in its favour (Art.31.2). Will an asymmetric clause do to invoke the exception? A resounding Yes came from Jacobs J yesterday in Etihad Airways PJSC v Flother [2019] EWHC 3107 (Comm).

Etihad had in happier times agreed to prop up the ailing airline Berlinair to the tune of several hundred million dollars, though in the event without success (it collapsed definitively in 2017). The agreement contained an asymmetrical jurisdiction clause requiring Berlinair to sue only in England but allowing Etihad to sue anywhere.

Berlinair’s German liquidator sued Etihad in Germany for allegedly failing to come up with the promised rescue monies. Etihad in turn sued the liquidator in London for what was effectively a declaration of non-liability; the liquidator sought to stay the action on the basis that the German courts were first seised; Etihad retorted that their action was protected by Art.31.2.

Having decided that the liquidator’s proceedings were covered by the exclusive jurisdiction clause and had been brought contrary to it, Jacobs J had no doubt, in common with Cranston J in Commerzbank AG v Liquimar Tankers Management Inc [2017] EWHC 161 (Comm) , that they were indeed protected by Art.31.2. Any other solution, he said, would lead to anomalous results and greatly limit the effect of the reforms to the original Brussels I introduced by the revised Art.31. And, in the view of this blog, he was right to decide the way he did. In any case, it gives the law a useful degree of certainty: from now on, only a decision of the CJEU or a peculiarly contrary one by the Court of Appeal is likely to be able to upset the accepted position.

Negotiating damages — maritime-style

Guest blogpost from James M Turner QC, Quadrant Chambers

In Priyanka Shipping Ltd v Glory Bulk Carriers Pte Limited (“The Lory”) [2019] EWHC 2804 (Comm), David Edwards QC (sitting as a Judge of the Commercial Court) dismissed a common law claim for negotiating damages for the breach of a memorandum of agreement (MOA) for the sale of a ship.

The decision is one of the first to grapple with the recent Supreme Court decision in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2019] AC 649. In that case Lord Reed’s majority judgment issued a corrective to jurisprudence which, since the House of Lords’ decision in AG v Blake [2001] 1 AC 268, had seen the award of negotiating damages at common law “on a wider and less certain basis” than had been the case before Blake.

What are “negotiating damages”? Negotiating damages “represent such a sum of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the continuation of the breach of covenant or other invasion of right]”: see One Step at [4]). They are “assessed by reference to a hypothetical negotiation between the parties, for such amount as might reasonably have been demanded by the claimant for releasing the defendants from their obligations” (One Step at [25]).

Negotiating damages are commonly encountered in two situations: so-called user damages in tort; and damages awarded under Lord Cairns’ Act.

A claim for user damages arises where the defendant has used or invaded the claimant’s property without causing direct financial loss: an example commonly given is riding a horse without permission. The defendant, having taken something for nothing, is required to pay a reasonable fee for the use made of the claimant’s property.

As for Lord Cairns’ Act: historically, the Common Law Courts could only award damages for past breaches, i.e., where the cause of action was complete at the date the writ was issued. For the future, litigants had to look to the Courts of Equity for orders for specific performance and injunction etc. However, the latter had no power to award damages. That inconvenience was remedied by Lord Cairns’ Act 1858, section 2 of which (now s. 50 of the Senior Courts Act 1981) allowed the Courts of Equity to award damages as well as or instead of an injunction.

Damages may be awarded under Lord Cairns’ Act for past breaches, but are assessed on the same basis as damages at common law.

Damages in lieu of an injunction for future breaches, on the other hand, cannot be assessed on the same basis as damages at common law, as by definition such damages cannot be awarded at common law. Instead, negotiating damages may be awarded.

The Issue. As will be seen, the issue in The Lory was whether negotiating damages were available at common law for past breaches of the relevant term of the MOA.

The Facts. The Defendant Seller sold the Claimant Buyer its vessel on terms that included clause 19, by which the Buyer undertook that it would not trade the vessel and would sell it only for demolition. However, the Buyer traded the vessel. By the time of the trial, the vessel was completing discharge under her second fixture and was fixed for a third. The Seller claimed damages for or an injunction to restrain breach of clause 19 of the MOA (or both).

The Outcome. The Judge awarded an injunction restraining future trading of the vessel (expressly including the third fixture). Damages could in principle be claimed for the first and second fixtures, but – because they were now in the past – only at common law.

The Judge noted that, once the vessel had been sold and delivered, the Seller no longer had any proprietary interest in it, “no right or ability to use the Vessel to trade, and no right or ability to profit from the Vessel’s use … ”. Although the Seller was entitled to be placed in the position it would have been if the contract had not been breached, “it is not obvious how any further trading of the Vessel by the Buyer … could cause the Seller any loss.” [163].

It was “no doubt” for this reason that no conventional damages claim had been made, but only a claim for a hypothetical release fee. The “critical question”, so far as that claim was concerned, was whether the Seller could bring itself within [95(10)] of Lord Reed’s judgment in One Step and show that “ … the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset.” [189]

Lord Reed had made clear that “that such an approach is not available in the case of a breach of any contractual right, but only where:… the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed.The paragraph implicitly regards the relevant asset not as the contractual right itself but as something else, a valuable asset “created or protected by the right”.” [190]

The “valuable assets” that Lord Reed had in mind were essentially proprietary rights and analogous rights such as intellectual property and rights of confidence [193]. The Judge rejected the Seller’s submission that its right under clause 19 was within the same class [196]. The Judge regarded the right under clause 19 as more closely analogous to the non-compete obligation at issue in One Step, which Lord Reed did not consider fell within “the category of cases where negotiating damages were available as a measure of the Seller’s loss” [199].

The claim therefore failed. The Judge did, however, grant permission to appeal. We may not, therefore, have heard the last word on this topic.

James M. Turner QC appeared for the Buyers in this case on the instruction of Alex Andrews and Claire Don of Reed Smith.

Watch your email signature

The definition of what counts as a “signature” isn’t of enormous importance to shipping lawyers most of the time: they don’t tend to deal in real estate or declare themselves trustees of land. But in one case it does matter: guarantees, whether of charter obligations, settlements or any other obligation need to be signed under s.4 of the Statute of Frauds 1677. Imagine you send an email on a client’s instructions guaranteeing a debt. If you type in your name like so — “Best wishes, Barry” — no problem. But what if you just type “Agreed” under the terms of the guarantee, and your email program appends at the foot of the email: “From Barry X at ABC Solicitors LLP. This email is confidential etc etc …”? Signed or not? The Chancery Division last week said Yes in Neocleous v Rees [2019] EWHC 2462 (Ch). A settlement of a real estate dispute was held enforceable in these circumstances under the LP(MP) Act 1989; it seems pretty clear that s.4 cases will be decided the same way. Moral: good news for those wishing to uphold guarantees. And if you are thinking of raising the pettifogger’s defence under s.4, look carefully at your email settings. You have been warned.

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.