Force majeure clauses and causation: Court of Appeal guidance  

United Kingdom

A Court of Appeal decision last week has considered the extent to which a force majeure clause requires a party to prove that it would otherwise have performed its obligations in the absence of any force majeure event. In dismissing the appeal and upholding such a requirement, known as the “but for” test, the Court emphasised the terms of the clause over the use of general categorisations. The judgment provides helpful guidance as to the types of language more likely to lead to such a result for other force majeure clauses and may signal an increase in requests for claiming parties to show their ability to perform in the absence of any force majeure event.

Classic Maritime Inc v Limbungan: A recap

Classic, a ship owner, entered into a long term contract of affreightment with Limbungan for the carriage of iron ore pellets from Brazil to Malaysia. Limbungan intended make shipments under the contract using iron ore pellets obtained from an iron ore mine in Brazil. On 5 November 2015 a tailings dam forming part of the mine burst, leading to the cessation of production.

Classic sued Limbungan for failing to make shipments under the contract. As the freight rates were agreed prior to the collapse in demand for steel in 2009, they were more than seven times the market rate at the time the dam burst, giving a sizeable claim for damages.

Limbungan defended the claim on the basis of a force majeure clause in the contract providing that: “… the Charterers … shall [not] be Responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: … accidents at the mine or Production facility… always provided that such events directly affect the performance of either party under this Charter Party…"

Both parties accepted that an “accident at the mine” had occurred. However, Classic argued that due to the collapse in demand for steel, Limbungan would not have been in a position to meet the required shipments under the contract even if the dam hadn’t burst. On the facts, the court agreed with Classic and found that Limbungan would not have made the shipments regardless of the production stoppage. This raised an issue as to whether the force majeure clause applied in such circumstances.

Limbungan relied on a previous line of English cases (including a decision of the House of Lords) deciding that force majeure clauses which reflect the common law doctrine of frustration and provide for the immediate termination of a contract (referred to as “contractual frustration clauses”) do not require the “but for" test for causation to be satisfied. This mirrors how the doctrine of frustration operates at common law.

Although acknowledging the similarity between the clauses considered by these cases and the clause relied on by Limbungan, the Commercial Court emphasised that the clause fell to be considered on its own terms and that the cases relied upon were in any event limited to contractual frustration clauses which brought about the immediate termination of a contract. The clause under consideration was not a contractual frustration clause and the application of the “but for” test was indicated by the references to a failure to supply “resulting from” events which “directly affect the performance of either party”. Somewhat paradoxically, however, the Commercial Court only awarded Classic nominal damages on the basis that if Limbungan had been ready, willing and able to make the shipments, it would have been excused from liability under the force majeure clause, meaning that Classic would never have earned the freight.

For a more detailed review of the Commercial Court’s decision, please see our original Law-Now here.

Court of Appeal

Appeals were brought by both parties as to the causation and quantum aspects of the Commercial Court’s decision respectively. As regards causation, the Court of Appeal agreed with the Commercial Court and eschewed the use of categorisation as an aid to interpretation:

“in deciding whether the charterer can rely on clause 32 in circumstances where it would not have performed its obligation anyway, what matters is not whether the clause is labelled a contractual frustration clause, a force majeure clause or an exceptions clause, but the language of the clause. As with most things, what matters is not the label but the content of the tin.”

The Court of Appeal also found it difficult to say that either party’s interpretation was more or less commercial than the other’s. Accordingly, the Court approached the interpretation of the clause “without any predisposition as to the construction which should be adopted and without any need to avoid what are said to be the unfair consequences of adopting one or other of the rival constructions. It is simply a matter of construing the words of the clause.”

In considering the language of the clause, the Court agreed that use of the phrases “resulting from” and “directly affect the performance of either party” were supportive of the “but for” test. The Court identified four other aspects of the clause which also supported this conclusion:

  • The reference to a “failure to supply” was to be read consistently with other failures covered by the clause i.e. failures to “load, discharge or deliver the cargo”. These other failures can only have referred to cargo which, but for the event in question, would actually have been loaded, discharged or delivered.
  • The clause contained a large list of force majeure events and it was apparent that some of them were only consistent with the application of the “but for” test such as “seizure under legal process” and “accidents of navigation”.
  • The events were referred to within the clause as “causes” which supported the impression given from the phrases “resulting from” and “directly affect the performance of either party” that the “but for” test was to apply.
  • The clause also provided (after the passage quoted above) that if “any time is lost due to such events or causes”, it would not count as Laytime or demurrage. Previous cases had held that time would not be “lost” in such circumstances unless the party in question would have performed in the absence of such an event. This supported the application of the “but for” test to the clause as a whole, as it would be illogical for this part of the clause to provide for a different causation criterion to the rest of the clause.

In relation to quantum, the Court overturned the Commercial Court’s decision. As noted in our original Law-Now: “The suggestion that damages should be assessed by reference to the reasons why a party is in breach, rather than solely by reference to the breach itself and its consequences, appears to be novel.” The Court of Appeal reached a similar view:

“Although the judge described his approach as an application of the compensatory principle which was realistic because it took account of the reason why the charterer was in breach of its duty to supply the cargoes, this was in my judgment an irrelevant consideration in the assessment of damages. There is no case, or at any rate none which was cited to us, in which the reason why a party is in breach of contract has been held to justify, let alone require, a different approach to the compensatory principle.”

Conclusion and implications

The Court of Appeal’s decision provides authoritative guidance as to the interpretation of force majeure clauses and is likely to have an impact on the drafting of force majeure clauses in the future. The reversal of the Commercial Court’s findings as to quantum, mean that the application of the “but for” test to such clauses will be of considerable significance. In the result, Classic was awarded damages of just under US $20 million in circumstances where Limbungan would have otherwise been excused from performance due to the dam failure had it been ready, willing and able to perform.

The Court of Appeal’s decision provides a number of drafting observations which are likely to carry over to other clauses. The phrases “resulting from” and “directly affecting performance” are commonly used in force majeure clauses and are now likely to point toward the application of the “but for” test. So will references to “causes” or “time lost” and the enumeration of events or circumstances which are only consistent with the application of the “but for” test. Parties intending a broader application of such clauses will need to pay careful attention their drafting.

The case may also result in greater scrutiny of force majeure claims by parties looking to excuse non-performance. Where the “but for” test is likely to apply, claiming parties may now be faced with early requests to show that absent the force majeure event relied upon, they would have otherwise been ready, willing and able to perform.

Whilst the Court of Appeal’s emphasis on the wording of individual clauses is clear, a question may remain as to the correct approach to hybrid clauses which allow a party to terminate a contract due to a force majeure event (whether immediately or after a period of time) in addition to being relieved of liability or the obligation to perform. The relevance of the line of cases dealing with contractual frustration clauses may be argued to be greater in such cases.

References:

Classic Maritime Inc. v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm).

Classic Maritime Inc v Limbungan Makmur SDN BHD & Anor [2019] EWCA Civ 1102.