Brexit fears – Force Majeure clauses

A standard force majeure clause exempts the contracting parties from fulfilling their contractual obligations for reasons that either could not be anticipated or are beyond their control. The application of force majeure clauses is limited to the events specified in the clause. Given the unpredictable character of Brexit, and its possible standing as a force majeure event, it would be wise for many contracting parties to review their force majeure clauses to ensure they include Brexit, or even a certain type of Brexit.

First Instance Decision

In Classic Maritime v Limbungan [2018] EWHC 3489 (Comm), Teare J held at first instance that a force majeure clause should be construed in a particular way to determine the contract, and if the innocent party intends to claim damages arising from the breach rather than from a force majeure event, then the burden of proof in relation to causation is on the innocent party.

In this case, a contract of affreightment (“COA”) was concluded for the carriage of iron ore pellets from Brazil to Malaysia.

Clause 32 of the COA provided:

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…

About a year after the commencement of the contract, the Tailing dam burst, destroying the structures of the mine, alternative supplies were unavailable, and Charterers failed to fulfil their shipment obligations under the COA. However, months before the dam burst, the purchasers had stopped buying pellets because there had been no demand for them, and thus, Charterers had defaulted on their obligations prior to the force majeure event. After the dam burst, the demand for pellets resumed but Charterers were then unable to perform the contract because of the force majeure event. Owners sued them for damages for this breach.

Teare J held that Charterers could not rely on the force majeure clause to terminate the contract because Clause 32 (above) called for a ‘but for’ test for causation. In other words, if the dam burst was the only cause for failure to ship the pellets, Charterers would have been able to terminate the contract. The words “resulting from” invoked the causation test requiring the force majeure event to ‘directly affect the performance’. On the facts, Teare J held that Charterers would not have fulfilled their obligations even if the dam had not burst, and thus, could not rely on the force majeure clause to terminate the contract.

However, Teare J rejected Owners’ claim for substantial damages arising after the dam burst because Charterers were able and willing to ship the cargo after the dam burst, but the burst prevented them from doing so. The compensatory principle, therefore, debarred recovery of substantial damages after the force majeure event, but substantial damages in respect of the two missed shipments before the dam burst were awarded.

The compensatory principle, as applied in this decision, requires that an innocent party should not be put in a better position than they would have been if the event had not occurred. In this case, Charterers were ready to supply the cargo for shipment after the demand resumed but the dam burst prevented them from doing so, and in the Court’s view, Owners should not have found themselves in the same position as if it had not burst.

The Court of Appeal’s Decision

The Court of Appeal upheld Teare’s J’s decision that Charterers had to prove that “but for” the dam burst, they would have been supplying the pellets for shipments from Brazil to Malaysia.

In the leading judgment, Males LJ relied on the wording of Clause 32 (above), confirming that the words “resulting from” together with “or any other causes” and “directly affected the performance” contained a causation requirement.

However, the Court of Appeal reversed Teare’s J decision in relation to damages and awarded Owners almost $20M in damages for the whole contract. The Court of Appeal held that “the correct application of the compensatory principle in this case needed to take account of the reason why the charterer was in breach of its duty to supply the cargoes” [para 23]. In other words, the compensatory principle meant that Owners’ damages should be assessed on the basis of comparing Owners’ position if Charterers had complied with all their obligations in this case and were ready and willing to perform the contract but for the dam burst.

In other words, Charterers’ failure to provide pellets prior to the dam burst, entitled Owners for the compensation of all damages arising from Charterers’ failure to perform the contract.

Conclusion

In preparation for Brexit, parties should check force majeure clauses in their contracts, and be prepared to demonstrate not only that the performance of the contract has been prevented by an unexpected type of Brexit, but also that they would have performed the contract but for Brexit.

Parties may find it difficult to terminate a contract if other events, absent from the clause and not necessarily connected to Brexit, interfere. This will be subject, of course, to the wording of your clause invoking the application of the “but for” test.

If such other events interfere and one of the parties fails to comply with the contract before Brexit, the innocent party may be entitled to compensation of damages on the basis of the total value of the contract, regardless of the disastrous consequences of Brexit.

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