UK: Court Of Appeal Decision Illustrates Proper Application Of Compensatory Principle Of Damages, As Well As Modern Approach To Contractual Interpretation

Last Updated: 25 July 2019
Article by Anna Pertoldi, Maura McIntosh and Jan O'Neill

The Court of Appeal has held that a charterer was liable for substantial damages for its failure to make shipments of iron ore pellets under a shipping contract, where the charterer was unable to perform the contract due to a dam burst: Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102.

The court held that the charterer could not rely on an "exceptions" clause in the contract to avoid liability. On the proper interpretation of the clause, the charterer was required to show that it could and would have performed the contract but for the dam burst, and it could not meet this requirement. The court rejected arguments based on authorities which, the charterer argued, showed there was no need to prove "but for" causation where a party relied on a contractual frustration or force majeure clause.

The Court of Appeal emphasised that the question was not how the clause should be labelled (whether as an exceptions clause or a force majeure clause) but rather how it should be interpreted, based on its language and having regard to its context and purpose. The decision does suggest that, in cases of uncertainty, the court's approach may be influenced by whether the effect of a clause is to relieve a party of liability for past performance (in which case it may be more likely to find that the party must prove it would have been willing and able to perform) or to relieve a party of obligations to perform in future (where the focus may be simply on whether the relevant event makes performance impossible). But the practical message for those drafting or entering into contracts is to ensure the parties' intentions are made clear in the language of the clause.

The decision is also of interest in illustrating the proper approach to applying the compensatory principle of damages. The High Court had held that the charterer was liable for only nominal damages since, even if it had been willing and able to perform, it would have been prevented from doing so due to the dam burst. The Court of Appeal said this was a misapplication of the compensatory principle, under which the innocent party must be put in the position it would have been in if the contract had been performed. The charterer's obligation to make shipments was absolute, subject only to the exceptions clause which the court had found it could not rely on. Accordingly, the shipowner was entitled to be put in the position it would have been in if the charterer had in fact made the shipments as contracted – not simply the position it would have been in if the charterer had been willing and able to do so absent the dam burst.

Background

The claimant shipowner and the defendant charterer entered into a long-term contract for shipments of iron ore pellets from Brazil to Malaysia. The present action arose out of the charterer's failure to provide a cargo for seven shipments which should have taken place between July 2015 and June 2016.

In respect of the first two shipments, the charterer accepted it had no defence. However, before the next five shipments were due to take place, there was a dam burst which stopped production at the relevant mine. The trial judge (Teare J) found that:

  • as a result of the dam burst, it was impossible for the charterer to perform the contract in respect of the five shipments; and
  • if the dam burst had not occured, it was more likely than not that the charterer would have defaulted anyway.

The charterer's defence was that it was protected from liability by clause 32 of the contract, which provided:

"EXCEPTIONS

Neither the... Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From: Act of God, act of war, act of public enemies, pirates or assailing thieves;... accidents at the mine...; or any other causes beyond the Owners', Charterers', Shippers' or Receivers' Control; always provided that any such events directly affect the performance of either party under This Charter Party..."

It was common ground that the dam burst was an "accident at the mine" for the purposes of this clause, and the judge found that it was beyond the charterer's control.

The judge held that the charterer could not rely on clause 32 because the charterer could not prove that, but for the dam burst, it could and would have performed the contract. It therefore could not be said that its failure to perform had "resulted from" the dam burst, or that the dam burst had "directly affected" its performance, as required by the clause.

The judge rejected the charterer's submission, based on authorities relating to contractual frustration clauses (including Bremer v Vanden Avenne [1978] 2 Lloyd's Rep 109), that in such cases there is no need to establish "but for" causation – ie that but for the dam burst, the charterer would have performed. The judge said the present case was not a contractual frustration clause, but rather an exceptions clause, and that "in such a context it would be a surprise that a party could be excused from liability where, although an event within the clause had occurred which made performance impossible, the party would not have performed in any event for different reasons."

However, the judge went on to conclude that the shipowner was not entitled to substantial damages, applying the compensatory principle of damages. This was on the basis that, if the charterer had been able and willing to ship the five cargoes, no cargoes would in fact have been shipped because of the dam burst. As the judge put it, it would be contrary to the compensatory principle, when assessing damages, to ignore what the shipowner's position would have been if the charterer was ready and willing to perform its obligations. The judge therefore awarded nominal damages of US$1 for each shipment.

The shipowner appealed on the question of damages and the charterer cross-appealed on causation.

Decision

The Court of Appeal allowed the appeal and dismissed the cross-appeal (Haddon-Cave, Males and Rose LJJ, with Males LJ giving the lead judgment).

Cross-appeal on causation

The court first dealt with the issue of causation. It noted the charterer's submission that clause 32 was a force majeure clause, and that such clauses are typically concerned with events which have an impact on a party's ability to perform, and do not require proof that the party would in fact have performed but for the force majeure event (relying on Bremer and similar authorities).

The court accepted that, although clause 32 was referred to as an "Exceptions" clause, it shared some of the features of a typical force majeure clause. However, the court had to construe clause 32 in this particular contract, which was not a matter of labels (whether a contractual frustration, force majeure or exceptions clause) but rather the language the parties had chosen, having regard to the context and purpose of the clause. As Males LJ put it: "As with most things, what matters is not the label but the content of the tin."

Here, the court said, neither party's construction would be particularly uncommercial or surprising. Accordingly, the court's task was simply to construe the words of the clause. A number of factors, including use of the words "resulting from" together with the requirement that the events in question "directly affect the performance of either party", suggested a more demanding causation requirement.

While emphasising that labels are not determinative, the court did comment that, where the effect of a clause is to discharge the parties from an obligation to perform in future, rather than merely relieving them of liability for a past breach, that may have a bearing on the nature of the causation requirement. Where both parties need to know whether they are discharged from future obligations, the court said, there is much to be said for a simple requirement of an event which makes performance impossible, without the need to investigate matters known only to one party, such as whether it was able and willing to perform but for that event. That sort of consideration has less force after the event, when the only question is whether a party is liable for damages.

Appeal on damages

The court then addressed the issue of damages, and whether the judge had misapplied the compensatory principle, as reinstated and applied for example in The Golden Victory [2007] UKHL 12 and Bunge SA v Nidera BV [2015] UKSC 43 (considered here). The Court of Appeal concluded that he did.

As the court noted, the compensatory principle involves putting the innocent party in the position it would have been in if the contract had been performed. In The Golden Victory, the House of Lords held that the damages recoverable by the innocent party for anticipatory breach of a long-term charter party must be reduced because, by the time damages were assessed, it was known that the contract would have been lawfully cancelled before its full term due to the outbreak of the Second Gulf war. In Bunge v Nidera, the Supreme Court concluded that the buyer had suffered no loss on the seller's renunciation of a contract for the supply of Russian wheat, because the seller would have been entitled to cancel the contract without penalty on the imposition of an embargo of wheat exports before the contractual date of performance.

In the present case, unlike the two cases above, the court was not concerned with an anticipatory breach, but with actual breaches by the charterer. It was common ground that, subject only to clause 32, the charterer's obligation to supply cargoes was absolute. In order to apply the compensatory principle, the judge had to compare the shipowner's position with the position it would have been in if the charterer had performed – ie if the charterer had supplied the cargoes as contracted. Instead, the judge had compared the shipowner's position with the position it would have been in if the charterer had been ready and willing to perform. This was a misapplication of the compensatory principle. As Males LJ explained:

"In the case of an anticipatory breach..., a party repudiates a contract if it demonstrates an unwillingness to perform, in which case (as in The Golden Victory and Bunge v Nidera) it may be necessary to consider whether, if it had not demonstrated that unwillingness, it would nevertheless have been excused from performance by later events. ... But that is not so in the case of an actual breach.... In the present case, where there is an absolute obligation to supply a cargo, whether the charterer was ready and willing to supply is neither here nor there."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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