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Court delivers warning blow to parties seeking to rely on force majeure clauses

The English High Court has ruled that a charter company was in breach of contract when it failed to provide cargoes to a ship owner – but that the contract’s ‘force majeure’ clause means it escapes paying damages.24 Sep 2018

Force majeure clauses excuse a party from performing its contractual obligations if one or more of the force majeure events, such as a natural disaster, prevents it from performing. To be excused by the force majeure clause the party must show that it would have been able to perform its obligations by the usual method if the force majeure event had not happened.

In this case the force majeure event was a massive dam burst in Brazil which halted production of iron ore pellets at a mine in the area. Ship owner Classic Maritime sued Malaysian company Limbungan Makmur for breach of contract after Limbungan failed to provide cargoes of iron ore pellets for shipment after the disaster.

Limbungan tried to rely on the force majeure, or ‘Chance Occurrence’ clause in its contract of affreightment (COA) with Classic Maritime for its failure to deliver the cargo.

However it had also failed to ship two cargoes before the mine burst as its owners had not wanted it to ship iron ore pellets in weak economic conditions. Therefore the court found that it would not have shipped the cargo even if the dam had not burst.

In order for Limbungan to have relied on the force majeure clause, it would have had to show that it had “arrangements” in place to perform its duties under the contract. In this case the charterers did not have such arrangements, and this was more to do with the state of the market for iron ore than the disaster. 

Nevertheless the judge ruled that because of the disaster, even if Limbungan had been willing to ship the cargoes it would have been unable to. As a result, Classic Maritime was not entitled to substantial damages for the cargoes missed after the dam burst.

In coming to this conclusion the court applied the “compensatory principle” that damages should put the claimant in the position it would have been in had the breach not happened. In this case, had the charterers been able to ship the five cargoes, the charterers would have been entitled to rely on the force majeure clause following the disaster, and would therefore have been excused from performing.

Classic Maritime was entitled to damages for the two shipments missed before the dam burst.

Litigation and international trade expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said: “It is difficult to fault the judge’s logic but equally difficult to resist the impression that the charterers were benefiting from their own wrong, something the court usually seeks to prevent."

“As counsel for the owners said, this argument ‘was an impermissible sleight of hand, from not being ready to perform the COA when liability was being assessed to being ready to perform when damages are being assessed’,” Dickman said. However, the judge firmly rejected that characterisation.

Dickman said the case could serve as a wider warning over the effectiveness of force majeure clauses.

“Force majeure clauses are often used to seek to excuse performance where extraneous events prevent a party from performing or affect its performance. In the event of a no-deal Brexit, for example, we can expect to see parties affected by changes in customs arrangements seeking to rely on force majeure,” Dickman said.

“Whether they can do that will depend on a number of factors, not least the wording of the relevant clause,” he said.

“The next challenge is to show that the alleged force majeure event in fact prevented or affected performance, which can be difficult where there are alternative ways of performing. The party alleging force majeure must also show that it would have been willing and able to perform had the force majeure event not occurred. This case provides helpful guidance on these issues,” Dickman said. 

“There are typically strict notice requirements which are often not complied with, particularly where the possibility of claiming force majeure is an afterthought. Finally, for those seeking to resist a claim to force majeure, the fact that the other party was not willing or able to perform anyway may not be enough to secure a damages award if the other party would in fact have been prevented from performing by the force majeure event,” Dickman said.