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Court of Appeal considers the compensatory damages principle and contractual interpretation

A charterer was not otherwise 'ready and willing' to make shipments and so could not rely on an exceptions clause to avoid liability for substantial damages for non-performance due to a burst dam. This was the Court of Appeal ruling in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019].

Background

Under a Contract of Affeightment (COA), the charterers, Limbungan Makmur SDN BHD (Limbungan), were obliged to load iron ore pellets onto the vessels of Classic Maritime Inc (Classic) for shipping from Brazil to Malaysia.

Historically almost all of the shipments under the COA had been shipped from Ponta Uba.

The issues in the case arose out of a burst dam which stopped production at the iron ore mine which was the sole supplier for the port from which most of the shipments had been made. As a result, it was impossible to ship iron ore pellets between November 2015 and June 2016, a period during which 5 shipments should have taken place.

Limbungan's defence was that it was protected from liability for breach of the duty to supply by clause 32 of the COA, the "Exceptions" clause which provided that:

"Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From: Act of God,…. floods; frosts; …. earthquakes; Landslips; explosions;…. accidents at the mine;… or any other causes beyond the Owners', Charterers', Shippers' or Receivers' Control; always provided that any such events directly affect the performance of either party under This Charter Party. "

It was established and accepted that the burst dam was an accident at the mine which was beyond the parties' control. The judge also found that even if the dam had not burst, it was likely that Limbungan would not have been able and willing to supply the shipments, having already failed to deliver two shipments before the dam burst.

First Instance Decision

At first instance the judge held that Limbungan could not rely on clause 32 because it was unable to prove that "but for" the dam burst, it could and would have performed its obligations. Limbungan would have defaulted anyway.

However, it was held that although Limbungan was liable (as it could not rely on clause 32) Classic was not entitled to substantial damages. It reasoned that even if Limbungan had been able and willing to perform, the dam burst would have inevitably prevented performance. In these circumstances the first instance judge held that the compensatory principle would be breached if Classic were to be put in a better position than if the breach had not occurred. The burst dam meant that Classic wouldn’t have received the shipments anyway and it was only entitled to nominal damages.

Classic appealed on the issue of damages and Limbungan cross appealed on the causation point.

Arguments

Limbungan submitted that the exceptions clause was a force majeure clause, it operates to qualify a party's obligations (unlike an exceptions clause which excludes or limits liability for breach). Limbungan reasoned that "Force majeure clauses are typically concerned with events which have an impact on a party's ability to perform, and do not require the party affected to prove that, but for the force majeure event, it would in fact have performed. That was the position here. On the true construction of clause 32, the charterer is not required to prove that it could or would have performed the contract but for the force majeure event; rather, it is sufficient that the force majeure event in fact rendered any performance impossible". Limbungan raised authorities in support of the argument that there is a general principle that it is not necessary to prove  'but for' causation in order to invoke a force majeure clause.

Classic argued that clause 32 was not a force majeure clause and that the issue was one of construction. It further argued that Classic had misapplied the compensatory damages principle.

Judgment

Upholding the first instance decision in relation to causation, the Court of Appeal held that clause 32 required Limbungan to prove that but for the dam burst it would have performed. It was not able to do so and Limbungan was therefore liable.  Reversing the first instance decision on the point of damages, the Court of Appeal held that Classic was entitled to substantial damages.

Males LJ agreed that clause 32 had some features of a force majeure clause but dismissed the approach of labelling the type of clause (whether an exceptions clause or a force majeure clause). He stated that ultimately "the question is one of construction of clause 32 in this contract, and the answer to that question is determined by the language of the clause which the parties have chosen, having regard to the context and purpose of the clause". Construing the language of the clause, amongst other considerations, the words "resulting from" combined with the requirement that the event "directly affect" performance, indicated a causal requirement. Limbungan could not therefore rely on clause 32 and was liable for non performance.

In relation to damages, it was held that the compensatory principle required the innocent party to be put in the position it would have been in had the contract been properly performed. Clause 32 could not be relied on and the obligation to perform was absolute. Limbungan had not supplied the cargo, clause 32 did not provide a defence and so Limbungan was liable for substantial damages. The Court of Appeal ruled that the first instance judge's approach of comparing Classic's actual position with that it would have been in had Limbungan been ready and willing to perform, was incorrect.

Permission to appeal was refused by the Court of Appeal but an application for permission to appeal to the Supreme Court is being made.

Comment

The case is a further example of the modern approach to contractual interpretation. The Court of Appeal highlighted that the outcome of the case hinged on how the clause should be interpreted, with reference to the language of the provision and an awareness of its context and purpose. It was acknowledged that had the parties wanted to explicitly draft an exception that relieved Limbungan of its obligations on the occurrence of an event (regardless of whether Limbungan would otherwise been able and willing to perform), they could have done so. This was not, however, what had been achieved by clause 32 as drafted. Once again, the message for those drafting contracts is to ensure that the language clearly reflects the parties' intentions.

The Court of Appeal's illustration of the correct application of the compensatory principle is also interesting. The High Court decision that Classic was only entitled to nominal damages because even if Limbungan had been ready and willing to perform, this would have been prevented by the burst dam, was described as a distortion of the compensatory principle. The principle aims to put the innocent party in the position it would have been in had the contract been properly performed. Where there is an absolute obligation to perform, the impossibility of performance was not relevant.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.

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