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.

Force majeure and counterfactuals

A nice force majeure issue — and one of considerable importance — came up before Teare J yesterday in Classic Maritime v Limbungan [2018] EWHC 2389 (Comm), argued by IISTL stalwart Simon Rainey QC. Imagine you conclude a contract (in this case a CoA under which you have to provide a number of iron ore cargoes) which in the event you can’t and don’t perform, and never could have performed. An exemption clause in the contract says that if you could have performed it but a force majeure event X (inundations in Brazilian iron ore mines) then occurs that stops you performing it, you are not liable for breach. Event X occurs. Are you (a) in breach of contract, (b) on the hook for substantial damages?

On (a) the answer is Yes. You promised to perform, you haven’t performed, and because you never could have performed in any case you can’t shelter behind the exemption clause.

But what about (b)? There are two ways to look at this. One is to say: this is a simple case of unexcused non-performance, and hence you must be liable to the shipowner for his lost profits on the carriage, a figure amounting to many millions. The other point of view runs thus. If, counterfactually, you could have performed but for X, the shipowner would in the event have had no claim to performance because of the exemption clause. Hence hence it’s no skin off his nose that you didn’t perform, and damages are nominal only. Teare J plumped for the second: nominals only.

This view is highly plausible and for the moment clearly represents the law. It also dovetails quite nicely with the general rule in cases such as The Golden Victory [2007] UKHL 12, [2007] 2 A.C. 353 and Bunge v Nidera [2015] UKSC 43, [2015] 2 CLC 120, that in assessing damages we take into account later events that would have taken away the right to demand performance.

But this case, or the issue in it, may go further. There is a respectable argument, that certainly can’t be dismissed summarily, which suggests a different answer. In so far as the inability to rely on a force majeure clause is due to a party’s own default, which was the case in Classic Maritime, should it be open to that party to argue that if he had acted differently he would have been able to invoke that very same clause? Suppose a force majeure clause requires notice to be given within 7 days after the force majeure event; a party prevented by force majeure nevertheless fails to give notice for 10 days, and thus loses the protection of the clause. Is it really open to the party then to say that if he had given the proper contractual 7 days notice he would have been protected by the clause, the counterparty would have had no right to demand performance, and hence damages are nominal only? I’m doubtful. And I’m equally not sure that this scenario is that different from what happened in Classic Maritime.  It’s just a thought. Whether it’s a good one, only time will tell.

Maritime or non-maritime? The status of oilfield contracts in Louisiana

 

 

On 8 January 2018 the Fifth Circuit  en banc (In re Larry Doiron, Inc., http://caselaw.findlaw.com/us-5th-circuit/1885307.html (5th Cir. Jan. 8, 2018 No. 16-30217)) reworked the test for determining whether oilfield contracts are maritime or non-maritime in nature. Under maritime law knock for knock indemnity clauses in oil field service contracts are valid, but under anti-indemnity statutes in some states, such as Louisiana and Texas, they are invalid.

 

The case involved flowback operations performed in state waters on a fixed platform. The master service contract for the flowback work did not call for any vessel involvement. However, during the job the flowback contractor, STS, found a crane was needed to manipulate some of the flowback equipment. A tug and barge were needed to get the crane to the platform and the platform owner had to charter in vessels to allow the flowback contractor to do its work. required the platform owner (Apache) to subcontract with Larry Doiron Inc to charter in the necessary vessels to allow STS to do its work under the MSC.   During the ensuing operations, an STS technician was injured, and LDI sought indemnity from STS under the terms of the Apache-STS MSC (which provided for indemnity from STS to Apache and any of Apache’s subcontractors).

 

The Fifth Circuit set out a new two part test to determine whether or not the contract is maritime in nature. First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract? If so, the contract is maritime in nature.

 

Applying this new test to this case, the oral work order called for STS to perform downhole work on a gas well that had access only from a platform. After the STS crew began work down hole, the crew encountered an unexpected problem that required a vessel and a crane to lift equipment needed to resolve this problem. The use of the vessel to lift the equipment was an insubstantial part of the job and not work the parties expected to be performed. Therefore, the contract was non maritime and controlled by Louisiana law which barred the indemnity under Louisiana Oilfield Indemnity Act.

Lending $150 million to an oil company? Don’t worry too much about UCTA.

The decision in African Export-Import Bank & Ors v Shebah Exploration & Production Co Ltd & Ors [2017] EWCA Civ 845 , dismissing an appeal from Phillips J (noted here in this blog), contains few surprises and much relief. A syndicate of three banks, one Egyptian and two Nigerian, lent $150 million or so to a speculative Nigerian oil exploration company which — surprise, surprise — failed to pay most of it back. The lenders did the obvious thing, accelerated the loan and filled in the form asking for summary judgment. Hoping to stave off the evil day, the company and its two guarantors raised what looked like a fairly speculative set-off of a cool $1 billion, essentially suggesting that one bank had wrongfully dragged its feet over making the loan, and that another had broken the terms of a different, earlier, facility. The lenders sought to shut out this effort to muddy the waters by invoking an explicit anti-set-off clause. The borrower for its part argued that it had dealt on the lenders’ written standard terms of business and that the clause was clearly unreasonable under s.3 of the Unfair Contract Terms Act 1977(!). Phillips J disagreed and gave judgment in short order, pointing out that the terms, standard ones drafted by the Loan Market Association, had been extensively negotiated, and that it would be rare indeed for a party to be able to argue that a standard set of conditions like this was used so inflexibly as to attract the operation of s.3.

The Court of Appeal agreed wholeheartedly. They pointed out that the borrowers, who had to prove the use of written standard terms of business, had not even called any evidence to that effect. This would not do: as Longmore LJ drily put it at [33],

“A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. … It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.”

Although he accepted that inflexible use of a third party’s standard terms might theoretically trigger s.33, he also pointed out that any substantial degree of negotiation would negative this, and also that the negotiation need not necessarily relate to the terms potentially caught by the 1977 Act.

As I said, a result which will be welcomed in the Square Mile. It will rightly reassure lenders that they can make their loans subject to English law safe in the knowledge that the courts here will give short shrift to snivelling arguments based on an Act which was never intended, one suspects, to protect highly commercial borrowers like this.

Of course, to make assurance doubly certain, there might be something to be said for strengthening the blanket exception to the 1977 Act in s.26 so as to encompass not only international supply contracts but contracts for loans or financial services between corporations with places in different jurisdictions. With the Queen’s Speech reduced this Parliament to about the length of a fireside chat, an under-occupied Government might even find Parliamentary time for the necessary change.

Exemption clauses mean what they say — and so does the Misrepresentation Act 1967

Common sense in spades yesterday from the CA, in one of Moore-Bick LJ’s last judgments, contained in the financial misinformation case of Taberna Europe CDO II Plc v Selskabet AF [2016] EWCA Civ 1262. Taberna bought loan notes issued by Roskilde, a thoroughly bad Danish bank. They bought them not directly but on the secondary market from Deutsche Bank, allegedly on the basis of negligent misrepresentations by Roskilde. In due course, having lost their money, they claimed under the Misrepresentation Act 1967, s.2(1), against the successor body to Roskilde, which it was arguable under Danish law had to pick up the tab for misrepresentation claims. Three interesting issues arose:

(1) Roskilde’s pitch included two exemptions: “No liability whatsoever is accepted as to any errors, omissions or misstatements contained herein”, and “Neither the Bank nor any officers or employees accepts any liability whatsoever arising directly or indirectly from the use of this presentation for any purpose.” Eder J held them inapplicable to Taberna’s claim on the basis of contra proferentem and Canada SS Lines v R [1952] AC 192. The CA disagreed, downplaying the supposed presumption against exoneration for negligence, and saying (at [23]): “In the past judges have tended to invoke the contra proferentem rule as a useful means of controlling unreasonable exclusion clauses. The modern view, however, is to recognise that commercial parties (which these were) are entitled to make their own bargains and that the task of the court is to interpret fairly the words they have used.” This adds to a line of recent cases (and in our view a very sound one) to similar effect, most recently Transocean Drilling v Providence Resources [2016] EWCA Civ 372, noted here in this blog.

(2) Did s.2(1) of the Misrepresentation Act apply at all, since Taberna bought from Deutsche Bank and not Roskilde? Eder J had held that the Act applied, because by buying the notes Taberna came into contractual relations with Roskilde, presumably by assignment. This holding looked odd at the time, and the CA specifically discountenanced it: the 1967 Act applies only to contracts directly induced between representor and representee.

(3) Was contributory negligence pleadable against a claim under s.2(1) of the 1967 Act? The answer, again sensibly, was said to be Yes, though the question didn’t arise since (a) Roskilde wasn’t liable anyway and (b) Taberna hadn’t been negligent.

Altogether a good day for down-to-earth contract lawyers. We congratulate Sir Martin and wish him a happy retirement.

The meaning of “consequential damages” – as always, it depends on the context

Further evidence that English courts are taking a thoroughly pragmatic line with commercial exemption clauses comes from Sir Jeremy Cooke’s decision a few days ago in the shipbuilding case of Star Polaris LLC v HHIC-PHIL Inc [2016] EWHC 2941 (Comm). A new-built vessel still under guarantee suffered engine failure, found to be partly due to construction defects which were the yard’s responsibility. In the light of this finding the yard’s liability for the cost of rectification was not in issue, this being expressly allowed under the terms of its builder’s guarantee. What was disputed was a further claim by the buyers for a residual diminution in value of the vessel allegedly caused by the construction problems. The building was under the venerable SAJ form, which had it been left unaltered would under Art.IX have answered the question unequivocally in the yard’s favour (“The guarantee contained as hereinabove … replaces and excludes any other liability, guarantee, warranty and/or condition imposed or implied by the law …”). But, for reasons unclear, this clause did not appear. The yard, therefore, was thrown back on another provision in Art.IX, excluding liability for “consequential or special losses, damages or expenses”. The yard said that the alleged diminution in value was clearly consequential on the damage directly suffered and was therefore still excluded.

The buyers riposted with a mention of a number of other cases in a non-shipbuilding context, which had construed references to consequential losses as covering merely damages not immediately foreseeable and thus outside the first limb of Hadley v Baxendale (1854) 9 Ex 341. Since in the present case diminution in value had been eminently foreseeable (their argument went), it followed that there was no objection to the present claim.

The arbitrators were not impressed, and neither was the judge. Even with the stripped-down version of the SAJ that the parties had chosen to use, and even accepting the potential applicability of the contra proferentem rule in the context of commercial contracts, the context of the contract made it clear that the guarantee provision was intended to provide a complete code for the determination of the parties’ rights and liabilities, and thus that any further liabilities were to be excluded. And quite rightly too, in our respectful submission. The intention evident in a contract as a whole, rather than any minute interpretation of the words the parties chose to include or exclude, still less any mechanical exercise in substitution of words, ought to govern where interpretation is in issue.

Niggling points in ship-repair contracts

A few potentially important points in a case decided last week for the benefit of those practising in the recondite but potentially big-money area of shipbuilding and ship-repair. In Saga Cruises BDF Ltd v Fincantieri SpA [2016] EWHC 1875 (Comm), the Saga Sapphire was an elderly cruise liner owned by SC and bareboat chartered to associated company A, who operated her. She went in to Italian repairers for inspection and possible repair of luboil coolers. The repair contract was between SC and the yard. Having come out and recommenced cruising, she suffered a failure of the port cooler: the cruise had to be abandoned, as did a subsequent one. SC assigned its cause of action to A, who claimed damages from the yard. The actual holding was that the yard had been in breach, but nearly all the damages claims failed on causation grounds. Nevertheless the following points are worth a note:

(1) The repair contract, unlike many such contracts such as BIMCO’s excellent Repaircon, contained no term explicitly excluding liability for post-redelivery losses and throwing the owner back on the terms of the guarantee. But the vessel was handed back under a protocol of redelivery saying The Contractor has today completed the Works and the Owner has accepted that the requirements of the Agreement have been complied with pursuant to the provisions of Clause 9 of the Agreement in all respects except as outlined herein.….Each party confirms that, with the exception of the above described matters … it has no other requests or claims against the other party whatsoever. Sara Cockerill QC rightly decided that such losses were therefore recoverable at common law, rejecting a rather desperate argument from the yard that the protocol was sufficient to make up for the lack of a general exclusion.

(2) In so far as the yard accepted a duty to advise on defects in, and necessary repairs to, the coolers, this was a concurrent contract-tort duty and hence susceptible to a contributory negligence deduction in so far as SC had been at fault. This holding, that duties to advise are potentially subject to the contributory negligence legislation, is potentially a very useful weapon in a yard’s armoury.

(3) Even though any loss of profit had been suffered by A and not SC, A could claim as assignee under Offer-Hoar v Larkstore [2006] 1 WLR 2926. In addition it was probable that in any case SC could have sued under the principle in Darlington v Wiltshier Northern [1995] 1 WLR 68.

Small points perhaps, but then it’s attention to small details like this that marks the line between lawyers who are merely competent and those truly excellent.

Third party claims against insurers

The venerable Third Parties (Rights against Insurers) Act 1930 was meant to be suppressed no less than six years ago and supplanted  by its namesake, the Third Parties (Rights against Insurers) Act 2010. Unfortunately, owing to a drafting glitch connected with insolvency law, the 2010 Act could not be brought into force; and so we still have the 1930 Act. But not for much longer. The glitch has now been cured by amendments brought in under the 2015 Insurance Act, and the shiny new 2010 Act comes into force on 1 August this year. A few changes (apart from length: the old Act made do with 5 sections, whereas the new model has 21 and 4 schedules, but that’s life). One is the obviation of the need to raise long-defunct companies from the dead, so as to be able technically to sue the corporate zombie and get judgment against it, so as to be able then to say that it could sue the insurer. Another is the abolition of “pay-to-be-paid”, except in the case of non-personal-injury marine insurance claims; yet another, the curtailment of the right of the insurer to rely on lack of notification by its own insured, provided such notification is given by the claimant.

The new Act makes it clear that it applies to insurance and not to reinsurance.

Details in brief from Clyde & Co’s ever-useful updating service.