The implications of the Court of Appeal’s decision in Classic Maritime Inc v Limbungan Makmur SDN BHD
The Court of Appeal recently gave its decision in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1002. The case concerned the interpretation of an exceptions or force majeure clause and provides guidance on how correctly to apply the compensatory principle of damages.
BACKGROUND
The ship-owner, Classic Maritime, was engaged in a long contract of affreightment (“COA”) for the carriage of iron ore pellets from Brazil to Malaysia with Limbungan, the charterer. An addendum to the COA in 2014 stated that Limbungan agreed to ship iron ore pellets from either the ports of Tubarao or Ponta Ubu in Brazil to either Kelang or Labuan in Malaysia. Iron ore, supplied by Samarco, was shipped through Ponta Ubu and iron ore supplied by Vale through Tubarao.
On 5 November 2015, Samarco suspended its mining operations and ceased to supply iron ore given the bursting of a dam. Alternative and/or additional supplies from Vale were unavailable. As a result, Limbungan was unable to fulfil its shipment obligations. Limbungan claimed to be excused from these obligations citing that the dam burst fell under the exceptions clause of the contract. Classic Maritime sued for damages for breach of the COA.
FIRST INSTANCE DECISION
The trial judge found that while the dam burst made it impossible for Limbungan to perform the contract, even if it had not burst, the charterer would have defaulted anyway as there had been a collapse in the Malaysian iron ore market. Limbungan was unable to prove that ‘but for’ the dam bursting, it could and would have fulfilled the COA, and as such the judge held that it could not therefore rely on the exceptions clause.
The judge accepted that the applicable principle for assessing damages was the compensatory principle. In doing so, he took into account the reasons why the charterer was in breach of its obligations based on his previous finding. He assessed damages by comparing Classic Maritime’s position as a result of the breach, with the position it would have been in had Limbungan been able and willing, but for the dam burst, to fulfil its shipment obligations. As Limbungan would not have been able and willing to supply the cargoes regardless of the dam burst, the judge found that Classic Maritime was only entitled to nominal damages of $1 per shipment.
Following this judgement, Limbungan appealed on liability and Classic Maritime appealed the damages awarded.
COURT OF APPEAL DECISION
Regarding liability, the Court of Appeal decision upheld the interpretation of the exceptions clause and the first trial judge's finding on liability. It said there was no basis for approaching the clause as though it were a force majeure clause, and that Limbungan’s failure to perform did not ‘result from’ the dam burst: the dam burst could not fairly be said to have ‘directly affected’ the performance of Limbungan’s obligations.
The Court of Appeal also noted that the parties could have included a clause in the COA that excluded the ‘but for’ test, but that they had chosen not to. The original decision at first instance was therefore upheld.
Regarding the damages awarded, the Court of Appeal held that the correct approach required a comparison in financial terms between Classic Maritime’s actual position as a result of the breach and the position it would have been in had the contract been fulfilled. In assessing the value to Classic Maritime of the performance of the COA (regardless of why it was not carried out), the Court of Appeal held that Classic Maritime was in fact entitled to almost US$20 million in damages.
IMPACT OF THIS DECISION
This decision demonstrates that although the doctrine of frustration, force majeure and exceptions clauses share many similarities, where a provision is clearly intended as an exceptions clause, it must be interpreted on its own terms in accordance with the usual rules of contractual construction.
It also shows that although in cases of anticipatory breach it may be appropriate to take into account a party’s willingness to perform and whether, even if willing, it would have been excused from performance by particular events, in cases of an actual breach of an absolute obligation, the reason for failure to perform or subsequent impossibility are irrelevant when calculating damages.
Overall, this case is a clear warning of the need for clarity when drafting contractual clauses; parties need to ensure that the clauses that they agree and include in their contracts make their intentions explicit and cover the eventualities they require.
Limbungan is making an application for permission to appeal to the Supreme Court.
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