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

OW Bunkers — common sense prevails, and a few answers given

The appeal in the OW Bunkers case, previously noted in this blog, was dismissed today by the UK Supreme Court. To recap (and simplify), what happened was that OW contracted to supply, and supplied, bunkers to a vessel in a Russian port. The bunkers were supplied on 60-day credit and reservation of title terms, and it was expected that by the time the 60 days were up they would have been consumed. OW had obtained the bunkers from Rosneft, again on reservation of title terms. OW then became insolvent. Rosneft argued that the shipowners owed them the value of the bunkers, since OW had never had any title to them and hance had had none to pass to the shipowners. At the same time OW, or rather its bank as assignee of its claims, sought payment under OW’s supply contract with the shipowners. The shipowners, wishing to guard against having to pay twice, said they didn’t have to pay OW because of s.12 of the Sale of Goods Act and also because, whatever the contract between them and OW said, s.49 of the same Act precluded a claim for the price of goods to which no property had passed except in the limited circumstances of s.49(2). Males J and the CA disagreed. The contract between OW and the owners was not, they said, a contract of sale, since the parties envisaged that no property in the fuel would ever pass (since it would have been consumed by the time the price became payable). Thus ss.12 and 49 did not apply.

The Supreme Court essentially agreed. The contract between OW and the owners was sui generis, a licence to use followed by an agreement to pass title to any bunkers left after 60 days. It followed that ss.12 and 49 were irrelevant. The only implied term related to title was a promise by OW that the shipowners would have a valid licence to burn the bunkers. But Lord Mance (who gave the only judgment) also went on to say that even if the contract had been for the sale of goods the result would have been the same because s.49 did not preclude agreements to make the price payable outside the circumstances it mentioned, as was the case here. The section was not, he said, a complete code: in so far as F G Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2014] 1 WLR 2365 said it was, it was wrong.

So the owners had to pay OW. What of Rosneft’s claim? Nothing definite was said of that, but reading between the lines the SC seems to indicate that it might well fail on the basis that by selling the bunkers to OW on the terms they did, Rosneft had acquiesced in their consumption.

Overall, this seems the sensible  result (though there is still something odd about the idea that sales for consumption morph into something else as soon as you introduce a reservation of title clause).

One further thought. One simple piece of legislation would have avoided all this, and also a great many other problems related to reservation of title. What about a provision that no reservation of title clause can be asserted against a third party obtaining, using or consuming goods in the ordinary course of business, whether or not the latter knows of the clause concerned? If we want to encourage the retention of English law as the system of choice for supply contracts of this sort, we need to keep ahead of the game. Does anyone in the Dept for Business, Innovation and Skills follow this blog, and if not might someone point it out to them?

Remoteness restated

In an otherwise rather boring solicitors’ negligence case, the CA have included a useful nugget. All three of their Lordships accepted that where a person such as a professional can be liable either in contract or in tort — in other words, where there is concurrent liability — the relevant test for remoteness of damage is that in contract, namely the rule in Hadley v Baxendale. And quite right too.

See Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, November 11, 2015.

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Insolvency and anticipatory breach. More from Singapore

In The STX Mumbai [2015] SGCA 3; [2016] 1 Lloyd’s Rep 157, the Singapore Court of Appeal has held that the doctrine of anticipatory breach does apply to executed contracts and in appropriate circumstances a party’s insolvency is capable of amounting to an anticipatory breach. Bunkers had been supplied to a vessel with payment to be made within 30 days. A company in the corporate group of which the shipowning company was a part had become insolvent and the bunker supplier took the view that payment was unlikely to be made. Accordingly, three days before the due date for payment, they demanded immediate payment by the close of business, and when that was not forthcoming, arrested the vessel the following day. At first instance the in rem proceedings were struck out as legally unsustainable as the insolvency of an associated company in the shipowner’s corporate group did not amount to an anticipatory breach by the shipowner. Futhermore, the Judge expressed the view that the doctrine of anticipatory breach applied only to executory contracts and not to an executed contract such as the present.

The Court of Appeal disagreed. The doctrine could apply to executed contracts. Although insolvency in itself would not constitute an anticipatory breach, it might well do so in the proper context. Much would depend on the precise facts, which could only be adduced if the action went to trial. The evidence showed some plausible connection between the insolvent company and the shipowner such that it was not completely unarguable that the former’s insolvency could well have made it impossible for the latter to make timely payment under the bunker supply contract in respect of the vessel. Accordingly, the bunker supplier’s case was not legally unsustainable and its claim would not be struck out.

Penalty clauses revamped

The law on penalty clauses, a bugbear to commercial lawyers for some time, has been re-written by the Supreme Court. The court declined to abolish the doctrine — mainly for the rather unconvincing reason that other European jurisdictions all had restrictions on liquidated damages stipulations, that English lawyers shouldn’t be bad Europeans, and that the Council of Europe thought them a Good Thing.

But the court did rationalise the law, saying that essentially the question is whether the amount stipulated for is wholly disproportionate to the interest of the claimant in protecting his right to performance. If it isn’t, then the clause has the green light. This should be a relief to commercial lawyers, who provided they don’t go completely bananas in setting the amount payable now have some guarantee that the courts won’t allow the other party to come snivelling that the provision is a technical penalty.

Hence in one case a seller of a business can validly forfeit a goodly proportion of the selling price if he breaks a noncompete agreement; and in the other (more homely) case a parking operator can set a substantial charge for overstaying. Neither is an objectionable penalty.

See Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (4 November 2015), available on BAILII.

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