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  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.
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.
The End is Nigh for the Non-Dom Regime
Published in ThoughtLeaders4 Private Client Magazine, Helen McGhee expert analysis of the current state of non-dom tax regime and it's future.
HMRC Makes Changes to COP9
On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Helen McGhee and Megan Durnford set out the key changes implemented as a result of this publication.
Pandora Papers: HMRC issues nudge letters
The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.