“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.

Inherent Vice: Who proves what and how?

Volcafe Ltd v Compania Sud Americana de Vapores SA (“CSAV”) [2016] EWCA Civ 1103.

It’s indeed a good day for carriers as the CA has now restored the balance between carriers’ and cargo owners’ interests by reversing the controversial first instance judgement in Volcafe Ltd  v CSAV [2015] EWHC 516 (Comm).

This case arose out of condensate damage to nine consignments of coffee, which were carried in unventilated containers from Buanaventura in Colombia to destinations in North Germany. The High Court (Mr David Donaldson) rendered a judgement in favour of the cargo owners on the basis that, although the cargo damage was attributed to inherent vice of the goods carried, the carrier had not disproved his negligence. The carrier had failed to establish that he had adopted a sound system as underpinned by a theoretical calculation or empirical study.

The CA (Lady Justice Gloster, Lady Justice King and Mr Justice Flaux, sitting in the Court of Appeal) allowed the carrier’s appeal in respect of his defences of inherent vice.

Flaux J, who delivered the leading judgement, ruled that that once the carrier had established the inherent vice exception, the burden of proof shifted to the cargo owners to show that there had been negligence on the part of the carrier. He further held that such an approach is consistent with the weight of the authorities, which have applied the principles enunciated in The Glendarroch, even where the contract of carriage is governed by the Hague Rules, as well as with the principle that “he who alleges must prove”. In addition, he found that the adopted approach is supported by the wording of the “catch all exception” which is the only excepted peril that expressly requires the carrier to disprove his negligence before relying on this exception.

In addition, Flaux J rejected trial judge’s analysis of ‘complete circularity’ between Hague Rules, art. III, r.2 and art. IV, r. 2(m) because this approach deprives the exception in paragraph (m) of its force and that it has been long recognised as an excepted peril. Furthermore, he rejected trial judge’s approach to a “sound system” and in particular his requirement for a scientific calculation or empirical study. He held that such an interpretation imposes a standard beyond what the law requires. He also reiterated the well-established position that one of the indicia of a sound system is that it is in accordance with general industry practice.

The CA decision in Volcafe is welcome not only because it strikes a fair balance between carriers’ and cargo owners’ competing interests but also because it promotes the uniform application of the Hague and in turn the Hague-Visby Rules. In particular, the CA decision brings English case law in line with authorities in the United States and New Zealand who have held that, in case of inherent vice or other excepted perils (excluding the q defence), it is the shipper who bears the burden of showing that the damage resulted from negligence or fault caused by the carrier (See for example, Quaker Oats Co. v. M/V TORVANGER, 734 F.2d 238, 1984 AMC 2943 (5th Cir. 1984), U.S. v. Ocean Bulk Ships, Inc. 248 F.3d 331 (5th Cir. 2001), Terman Foods, Inc.v. Omega Lines 707 F.2d 1225 (11th Cir. 1983) and Shaw Savill & Albion Company Ltd v Powley & Co [1949] N.Z.L.R. 668).

As a final remark, one should not underestimate the impact of Volcafe on the approach to the burden of proof in all of the defences (except from the “catchall exception”) enumerated in Hague and Hague-Visby Rules, art. IV, r.2. Flaux J found the wording of the “catchall exception” as supporting the analysis that, in the case of all other exceptions, the carrier’s reliance on any excepted peril is not dependent upon the carrier disproving his negligence.

Shot by both sides? Interpleader proceedings in the OWB saga.

 

The bankruptcy of OW Bunkers in November 2014 has led to many shipowners facing competing claims for the supply of bunkers from ING as assignee of OWB and from physical bunker suppliers. In Hapag-Lloyd Aktiengesellschaft v. U.S. Oil Trading LLC, http://law.justia.com/cases/federal/appellate-courts/ca2/15-97/15-97-2016-02-24.html, an interpleader was filed on behalf of shipowners and an injunction obtained preventing the imminent arrests of three of vessels by U.S. Oil Trading LLC, the physical supplier of bunkers. The Second Circuit has now rejected U.S. Oil Trading’s appeal. This contrasts with the position in Singapore last year where the Court of Appeal denied interpleader proceedings in similar circumstances. It reasoned that the suppliers’ in rem claims did not compete with ING’s contractual, in personam, claims. In the UK the shipping world awaits with bated breath the decision of the Supreme Court on whether the Sale of Goods Act applies to contracts for the supply of bunkers.

Peripatetic seamen and the Pensions Act 2008

In The Queen (on the application of Fleet Maritime Services (Bermuda) Ltd) v The Pensions Regulator [2015] EWHC 3744 (Admin) it has been held that the Pensions Act 2008, requiring automatic enrolment of workers into a pension scheme, does not apply to seafarers who began and ended their tours of duty outside the UK, and who spent most if not all of those tours of duty outside the UK, although they travelled to and from the UK at the start and end of their tours of duty .

Latest instalment of the Prestige saga — over to Madrid

Nearly 14 years ago the tanker Prestige sank, grievously sullying the coasts of France and Spain. The vessel’s P & I club (London SS) was understandably concerned. But it had taken care in granting cover to make sure that the contract was governed by English law; that its exposure was clearly restricted to CLC limits; that any dispute as to cover was to be arbitrated in London; and that there was a “pay to be paid” provision. There were good reasons for this. Many civil law courts take an impatient view of the English attitude that insurers’ liability is an aspect of the contract to indemnify, preferring the view that the liability is a direct one to the victim. The club rightly wanted to avoid the prospect of a court in an affected country giving large judgments against it on the basis of this civil law doctrine (accompanied, no doubt, by a disdain for such niceties as arbitration clauses and the small print in the P & I cover, not to mention in certain cases a large degree of national amour propre). The point was, of course, that if these were EEA courts, then however cavalier or misguided those judgments were, they would be enforceable under Brussels I or Lugano.

The club were right, in spades. Criminal Spanish proceedings, carrying with them under Spanish law the possibility of civil-law-style partie civile liability, were started. To forestall the giving of an enforceable judgment against it, the club demanded arbitration, got an arbitration award saying that the Spanish and French governments could only enforce the cover subject to the terms of the contract — including the arbitration clause, of course — and then successfully got that award translated into an English judgment (see London SS Mutual v Kingdom of Spain, etc [2015] EWCA Civ 333; [2015] 2 Lloyd’s Rep. 33). In fact the original criminal proceedings failed. But a few days ago the Spanish supreme court (Tribunal Supremo) reversed that decision and gave judgment against the master of the Prestige (he got two years in clink) and, more importantly, directly against the club as a matter of civil liability. The news report is here; the judgment text (unfortunately only in Spanish) here.

With conflicting judgments from London and Madrid we now have the irresistible force meeting the immovable object. One suspects we haven’t heard the last of this saga.

AT

Temporal scope of Hague Rules

Volcafe v CSAV [2015] EWHC 516 (Comm); [2015] 1 Lloyd’s Rep 639.

Loading of a cargo of coffee inland by the carrier into its containers has been held to fall within the temporal scope of the Hague Rules. This may seem somewhat surprising in the light of Article 1 (e) of the Rules which provides: “(e) “Carriage of goods” covers the period from the time when the goods are loaded on to the time they are discharged from the ship.” However, David Donaldson QC in the London Mercantile Court has held that the initial loading into the carrier’s containers and the subsequent loading of the container onto the vessel were to be regarded as part of a single loading process. Even if this were not the case, the parties had exercised their freedom to agree what constituted loading under art 1. (e) which they had done by providing that the carrier would stuff the cargo into its own containers.

Simon Baughen

Free in/ Free out clauses and cargo claims

SDTM-CI v Continental Lines N.V. [2015] EWHC 1747 (Comm)

Cargo claims were brought against the shipowner under two bills of lading incorporating the terms of a charterparty which contained a clause providing “Cargo shall be loaded, spout trimmed and/or stowed at the expenses and risk of Shippers/Charterers … Cargo shall be discharged at the expenses and risk of Receivers/Charterers at the average rate of 1,500 metric tons per weather working day ……Stowage shall be under Master’s direction and responsibility…” Flaux J has held that the incorporated provision has the effect of transferring responsibility for loading and discharging away from the shipowner. To the extent that it was established that the cargo was damaged by bad loading and/or discharge, as opposed to bad stowage, the cargo interests could not recover such damages from the shipowner.

Simon Baughen

Receivables Financing

LLM Credit and security students might care to note s.1 of the Small Business, Enterprise and Employment Act 2015. This gives the right to pass regulations disallowing anti-assignment clauses where the interests of receivables financiers are concerned. This effectively reversing Helstan v Herts CC [1978] 3 All ER 262.

Andrew Tettenborn

See http://www.legislation.gov.uk/ukpga/2015/26/contents/enacted/data.htm