TT Talk – Legal eagle: force majeure

In a recent TT Club publication on loss prevention, the Club looked at the nature of force majeure. The case in the English High Court – Classic Maritime Inc v Limbungan Sdn Bhd & Another [2018] EWHC 2389 (Comm) –related to a contract of affreightment entered into between a shipowner and a charterer for the carriage of iron ore pellets from Brazil to Malaysia.

Following the catastrophic failure of the Fundao dam in the Brazilian iron ore mine complex, production ceased. The charterer sought to rely on a force majeure clause to resist a claim from the shipowner for failure to supply five shipments.

The clause read:

Neither [party] shall be responsible for … failure to supply, load … cargo resulting from: Act of God, … floods, … accidents at the mine or production facility … or any other causes beyond [their] control; always provided that such events directly affect [emphasis added] the performance of either party under this Charter Party.

The claim was increased because freight rates had been agreed before a collapse in demand had caused a massive fall in market rates.

The shipowner counter-argued that the charterer had, firstly, failed to make alternative arrangements and, secondly, already missed two shipments before the failure of the dam, due to the collapse in demand. Consequently, said the shipowner, the charterer would not have fulfilled its obligations irrespective of the failure of the dam. This threw up two basic principles of force majeure: “alternative arrangements” and “but for”.

In the judgement the charterer successfully established that it had alternative arrangements in place, and took reasonable steps to implement them. There was a non-contractual arrangement with an alternative supplier, but in the event this alternative supplier was unable or unwilling for commercial reasons to supply the cargoes. The court found that it was not necessary for alternative arrangements to be contractual.

However. the charterer’s defence failed the “but for” test, because it could not show that, but for the failure of the dam, the cargo would have been supplied in accordance with the contract.

The court defined the force majeure clause as an exceptions clause, which leaves the contract in existence while exempting a party from liability for breach. This was distinguished from a frustration clause which terminates the contract, thereby leaving the parties with no obligations to perform, and making the “but for” test irrelevant.

To an important extent, the court was influenced by the words “directly affect” in the force majeure clause. The charterer could not show that its breach was directly affected by the dam failure, because, on the balance of probabilities, and in spite of an improving market, it would have been unable or unwilling to make the five shipments even if the dam had not failed.

The shipowner was denied substantial damages because of the court’s interpretation of the compensatory principle, requiring comparison between the wronged party’s position as a result of the breach of contract, and the position it would have been in had the contract been performed without the breach. In this instance, even if, but for the dam failure, the charterer had been willing and able to ship the cargoes, no cargoes would in fact have been shipped because of the dam failure, as well as the failure of the alternative arrangements. The charterer would then have avoided liability.

TT Club commented that as was often the case, this decision was heavily fact dependent.

The Club said that attention should be paid to the wording of contractual force majeure clauses.

There remained some uncertainty about the status of the “but for” rule in respect of the many standard force majeure clauses, which both operate as an exceptions clause to suspend a continuing contract and provide for termination if an event continues, thereby assuming the appearance of a frustration clause.

TT Club observed that some commentators were uncomfortable with this result which, in spite of its underlying logic, arguably allowed the charterer to benefit from its own default.

This was characterised by counsel for the shipowner as a “sleight of hand”. The approach which it reflects is novel, and tends to make the “but for” test redundant. The Club noted that an appeal was likely.

https://www.ttclub.com/loss-prevention/tt-talk/article/tt-talk-legal-eagle-force-majeure-146592/?dm_i=2RU,60I72,9G2CZ,NKNRD,1