English principle of compensation stops Owner being awarded damages

In Classic Maritime v Limbungan [2018] EWHC 3489 (Comm) Constantin von Hirsch, Syndicate Executive, Eastern Syndicate, Steamship Mutual, reported “a reminder that the compensatory principle that underpins any award of damages under English law can produce unanticipated results when applied to the particular facts of a case”.

The Owner in this case won the legal argument against the Charterer, but the Court held that the Owner was not entitled to any damages.

The Club said that the case would also be of interest for its discussion of different types of force majeure clauses, with the High Court drawing a distinction between frustration clauses and exception clauses, and outlining the different requirements as to causation for a party seeking to rely on such clauses.

On November 5th 2015, the Fundao dam in Brazil burst, causing catastrophic environmental damage and loss of life.

An Owner and a Charterer had entered into a contract of affreightment (COA) for the carriage of iron ore pellets from Brazil to Malaysia. The dispute arose after the Charterer, Limbungan Makmur, failed to perform five shipments as required under the COA. The Charterer blamed this on the bursting of the dam.

Under the COA, the Charterer had the option of shipping iron ore pellets from one of two ports: Ponta Ubu and Tubarao. The Charterer claimed that the bursting of the dam had made it impossible to ship cargo from either of these ports.

Ponta Ubu was the port from which the operator of the Fundao dam (Samarco) had shipped its iron ore pellets, but production at the mine was stopped following the bursting of the dam, with the result that there was no longer any cargo available for shipment. Tubarao, on the other hand, was the port from which another Brazilian mining company, Vale, shipped its iron ore pellets. Vale, though, was apparently unwilling to supply the Charterer with cargo as it decided to prioritise supply to its existing customers in the wake of increased demand, following Samarco’s decision to stop production.

The Owner brought a claim against the Charterer for failure to provide cargoes as required under the COA. The Charterer sought to rely on an exceptions clause which absolved either party of liability in the event of an accident at the mine.

The issues in the case were:

  1. a) Whether the Charterer could rely on the exceptions clause

The Owner argued that the clause required a causal connection between an accident at the mine and Charterer’s failure to perform, maintaining that the Charterer would have been unable to perform its obligations even if the dam had not burst. Accordingly, the Owner argued that the Charterer could not avail itself of the exceptions clause.

A key issue in the case was therefore whether the exceptions clause imposed a ‘but for’ test of causation. Did the Charterer have to prove that ‘but for’ the dam bursting it would have performed its obligations?

Teare J held that the relevant Clause did impose such a causation requirement. In doing so, he distinguished the present case from a line of authority that established that it was not necessary for a party seeking to rely on force majeure to show that it would have performed its obligations but for the force majeure event.

This distinction was justified by pointing to an important difference between exception clauses (such as Clause 32 in this case) and contractual frustration clauses, the latter of which bring the contract to an end, such that the parties no longer have any obligations to perform. An examination of whether a party would have performed its obligations ‘but for’ the force majeure event was therefore not required in those cases.

Exceptions clauses, on the other hand, were concerned with excusing a party from liability for a breach of contract at a time when the contract remained in existence and the parties were still required to perform their obligations.

In that context, the judge explained that “it would be a surprise that a party could be excused from liability where, although an event within the clause had occurred which made performance impossible, the party would not have performed in any event for different reasons”.

Teare J then had to decide whether the Charterer could satisfy the causation requirement. Although he accepted the Charterer’s arguments that the bursting of the dam had made performance impossible, he found that, even if the dam had not burst, it was more likely than not that the Charterer would have failed to perform its obligations, essentially because of commercial decisions taken by the group of companies to which the Charterer.

Accordingly, the Charterer was not entitled to rely on Clause 32 to excuse its non-performance.

  1. b) Whether the Owner was entitled to substantial damages

As the Charterer could not avail itself of the exceptions clause to exclude liability, the question of whether the Owner could claim substantial damages arose.

It was here that the fundamental principle underlying the recoverability of damages under English law – the compensatory principle – had an unexpected and, for the Owner, unfortunate implication. Any award of damages will, so far as is possible, try to compensate a claimant by restoring him to the position he would have been in had the other party not breached the contract.

The breach in this case was the Charterer’s unwillingness or inability to perform its obligations, which predated the bursting of the dam. When it came to applying the compensatory principle, the proper comparison was therefore between the position the Owners was now in and the position the Owner would have been in had Charterer been willing and able, but for the dam bursting, to perform the contract.

It became clear that the Owner would not actually have been any better off if Charterer had been willing and able to perform the contract, because even then no cargoes would have been shipped because of the bursting of the dam; and, in that event, the Charterer would have been excused for its failure to make the required shipments, by virtue of Clause 32 of the COA.

Awarding damages in those circumstances would therefore have put the Owner in a better position than it would have been in had the Charterer not breached the contract.

Teare J held therefore that the Owner was not entitled to substantial damages, notwithstanding the fact that Charterer could not rely on Clause 32 to excuse its failure to perform the contract.

Von Hirsch wrote that the case provided welcome guidance on the difference between two different types of force majeure clauses: exception and frustration clauses.

In the case of a frustration clause that operates to bring the contract to an end, a party would not have to establish that it would have performed the contract but for the force majeure event. Whereas in the case of an exceptions clause that excuses liability for non-performance but that does not bring the contract to an end, the party seeking to rely on the clause would have to establish that it would have performed its obligations under the contract had it not been for the force majeure event.

Steamship Mutual said that the case should also serve as a sobering reminder to Members – and indeed their legal advisors – of the need to focus their minds on the availability of any remedies before deciding to commence legal action. For although the compensatory principle is well known , its application to the facts of a particular case could still produce results that might not have been anticipated at the outset. “A failure to take stock of the availability of any remedies at the outset could lead to a claimant finding themselves in the unfortunate situation in which Owners found themselves in this case: they may have won the legal argument, but they were not entitled to substantial damages.”

https://www.steamshipmutual.com/publications/Articles/beware-pyrrhic-victories.htm