In the recent case of Classic Maritime Inc v Limbungan Makmur Sdn Bhd  EWCA Civ 1102 the Court of Appeal explored the distinction between exception and force majeure clauses, whilst also providing clarity on the principle of compensatory damages.
The case concerned a contract between a shipowner and a charterer for the carriage of iron ore from Brazil to Malaysia. A dam burst in Brazil, which halted production at the iron ore mine and prevented the charterer from providing five cargoes for shipment.
The contract contained a clause which stated that the charterer shall not be responsible for a failure to deliver cargo resulting from accidents at the mine, always provided that such accidents directly affect the charterer’s ability to deliver the cargo (the “Clause”).
The dispute centred around the fact that the charterer would not have been willing and able to provide the cargoes for shipment even if production at the mine had not been halted, as there had been a collapse in Malaysia’s demand.
The Court of Appeal decision
Exception or force majeure?
In determining whether the trial judge had correctly decided that the charterer was liable for non-performance, the Court of Appeal had to determine whether the Clause was (a) an exception clause requiring the charterer to establish that “but for” the accidents at the mine it would have been able to supply the cargoes; or (b) whether it could be interpreted as a force majeure clause, excusing the charterer from non-performance by the mere fact that a specified event had occurred.
The Clause was headed as an “Exception Clause”. This by itself was not conclusive, but the Court of Appeal did comment that the there was no clause stating that headings should be ignored.
Further, the Clause referred to particular undelivered cargo and the wording: "resulting from" an event which "directly affect[s]" contractual performance, created a causation requirement. The Clause was consequently deemed to be an exception clause and the trial judge’s finding as to liability was upheld.
The Court of Appeal held that the trial judge had drawn an incorrect comparison when applying the compensatory damages principle.
The trial judge had compared the shipowner’s actual position with the position it would have been in if the dam had not burst. As the charterer would have been unable to deliver the cargo irrespective of the dam bursting, the court had only awarded nominal damages of $1 per cargo.
Instead, the comparison should have been between (a) the shipowner’s actual position; and (b) the position it would have been in if the charterer had performed its contractual obligations. This led to a finding of substantial damages (of over $19million) in favour of the shipowner.
- The importance of making your intentions clear: Contract parties should decide whether they intend for a clause to exclude liability only if a specified event is the cause of non-performance. Alternatively do the parties intend to remove the need to prove causation, such that the clause can be relied upon just because a specified event has occurred?
- The need for clear drafting: The parties’ intentions should then be clearly reflected in the drafting. Categorising the clause with the appropriate heading will not by itself be sufficient. That said, if the parties do not intend for headings to be taken into account when interpreting a contract, they should include an interpretation clause to this effect.
- A breach is a breach: When awarding damages for an established actual breach of contract, the court will simply assess the value of the non-performance to the claimant. It will not consider the reason for the breach.