Force majeure events affecting the traders’ businesses do not excuse failure to perform a sales contract or a charter party, no matter how severe the disruptions caused are. The recent case of Classic Maritime Inc. v Limbungan Makmur SDN BHD & Lion Diversified Holdings BHD reminds us the importance of proving causation in order to rely on a force majeure clause. It is specifically recommended to document any attempts made to avoid the default.
Extreme weather events are becoming more frequent. A recent example of such events is the heavy rains in Malaga a couple of weeks ago, which have caused flash floods and severe damage to companies’ facilities, roads, etc. In many cases such events will likely cause major disruptions to traders’ logistics and might well prevent a shipper or a charterer from delivering the cargo onboard the vessel within the agreed period, forcing them to a default. Force majeure clauses are normally inserted in both sales contracts and charter parties to avoid the consequences of such default, by exempting the defaulter from liability in certain cases that are outside its control.
In the recent case of Classic Maritime Inc. v Limbungan Makmur SDN BHD & Lion Diversified Holdings BHD, Mr. Justice Teare has revisited this area of law to explain how causation works when relying on a force majeure clause. The case arose out of the devastating effects caused by the burst of the Fundao dam, in the Brazilian industrial complex of Germano, operated by Samarco, which occurred back in November 2015.
The case concerns a long-term contract of affreightment (COA) between claimants and shipowners, Classic Maritime, and charterers, Limbungan, signed on 2009, for the carriage of iron ore pellets from the Brazilian ports of Punta Ubu and Tubarao to Malaysia.
The said contract included a force majeure clause (named as “exception” clause), which provided as follows:
“Neither the vessel, her master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God, …. floods …. accidents at the 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…”
After the collapse of the dam, the mining company Samarco ceased to produce iron ore at that site, and Limbungan relied on the said event as a force majeure to excuse themselves for failing to provide iron ore pellets in accordance with the COA. The shipowners argued that the charterers were not entitled to rely upon the said clause and claimed about US$ 20m of damages, as the difference between the contractual freight and the market rate.
The main issues subject to debate were the following: (i) Whether Limbungan had failed to make alternative arrangements to supply cargoes, and, if not, whether it had discharged the burden to prove that it could not obtain such other cargoes; (ii) Whether the dam collapse was the true cause of the charterers’ default; and (iii) Whether Classic Maritime was entitled to recover substantial damages.
After a careful assessment of the evidence and arguments submitted, Teare J concluded that Limbungan could not rely on the force majeure clause in order to avoid liability for non-performance of the COA. In reaching his decision, Teare J applies two principles settled by previous case law, which he revisits and clarifies:
- “Alternative modes of performance” principle.
Normally, when shipping commodities, the party relying on a force majeure clause must prove that it has made reasonable attempts to avoid non-fulfillment of the contract by seeking alternative arrangements to facilitate performance. Those arrangements need not be legally binding, in Teare J’s opinion, but regard must also be had to the intentions of the party seeking relief.
This principle goes to causation, so that if the party seeking relief from liability is able to establish that those reasonable efforts were made to no avail, then the force majeure event can be regarded as the cause of its failure to perform.
In this instance, Teare J considered, on the facts of the case, that, following the dam burst, Limbungan could not have obtained iron ore pellets from Vale, the alternative supplier, for shipment via Tubarao. Yet, Limbungan failed the “but for” test (see below) and was therefore unable to establish causation.
- “But for” test.
According to the “but for” test of causation, the party seeking relief is required to prove not only that the impediment rendered performance impossible, but also that, but for the impediment, it could and would have performed its obligations under the contract.
However the said test is not always applicable; actually a frustration clause –different from a exceptions or force majeure clause, in that the latter does not bring the contract to an end, but merely excuses a party from liability for breach of a contract that remains alive– does not require the satisfaction of the said test according to authorities. But when dealing with exceptions clauses, all depends upon the wording. In this case, Teare J concluded that because of the words “resulting from” and “directly affect” the clause did import the requirement to satisfy the “but for” test; so Limbungan had to establish that, but for the dam burst, it would have supplied cargo in accordance with the COA. Limbungan failed to do so –shipments had been interrupted before the dam collapse because of a fall in its main client’s demand of iron ore pellets– and that prevented it from successfully relying upon the force majeure clause.
Despite Limbungan’s liability for the breach, Teare J did not allow Classic Maritime to recover substantial damages because of the operation of the compensatory principle. The said principle requires a comparison between the innocent party’s position as a result of the breach and its position had the defaulter performed its obligation. In this instance, Teare J concluded that even if the charterers had been able and willing to supply the cargo, because of the dam burst and Vale’s inability to supply alternative cargo, no cargoes would, in fact, have been shipped, and Limbungan would have been excused from its non-fulfillment.
This judgment highlights the relevance of the parties’ intentions, both prior to and after the impediment when a force majeure clause is to be relied upon. Parties need to establish that they are willing and able to perform but for the force majeure event, and also a genuine effort to enter into alternative arrangements to avoid non-fulfillment.