Tag: force majeure

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).

“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.

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.