Classic Maritime Inc v Limbungan Makmur SDN BHD & Anor

An exceptions clause excuses contractual non-performance only on the conditions established by its language, read in its contractual context. A clause requiring failure to result from an event which directly affects performance may require proof that the party would have performed but for that event.

Where an absolute obligation is actually breached and no contractual defence applies, damages place the innocent party in the position it would have occupied had the promised performance occurred. The counterfactual assumes performance, not merely that the contract-breaker was ready and willing to perform. The reason for the breach, including an external event which made performance impossible, does not reduce damages unless it provides a recognised defence.

A long-term contract of affreightment required the charterer to supply iron ore cargoes for shipment from Brazil to Malaysia. A dam burst stopped production at the charterer’s usual source. The charterer would not, however, have supplied the five cargoes in question even without the accident.

Teare J held in [2018] EWHC 2389 (Comm) that clause 32, an exceptions clause covering accidents at the mine, required the charterer to prove that it would have performed but for the accident. The charterer therefore remained liable. The judge nevertheless awarded only nominal damages because the dam burst would have prevented shipment even if the charterer had been ready and willing to perform.

The shipowner appealed against the damages award. The charterer and its guarantor cross-appealed on liability. The central questions were whether clause 32 imposed but-for causation and whether the compensatory principle required substantial damages for the actual breaches.

1. Appeal allowed and cross-appeal dismissed. Clause 32 required the charterer to show that, but for the relevant excepted event, it would have supplied the cargoes. The charterer could not satisfy that requirement and was liable for the five failures to supply. The shipowner was entitled to agreed damages of US $19,869,573.

2. Per Males LJ, with whom Rose and Haddon-Cave LJJ agreed, the operation of an exceptions or force majeure provision depends on the language chosen by the parties, read in context and as a whole. Clause 32 exempted responsibility for failures “resulting from” listed events which “directly affect” performance. Its references to particular cargoes, events affecting the performing vessel, causation and time lost all indicated that the event had to make a difference to performance which would otherwise have occurred.

3. The authorities concerning clause 21 of GAFTA 100 did not establish a general rule for force majeure provisions. That clause automatically cancelled the affected contractual obligations for the future. The parties therefore needed to know immediately whether continuing obligations remained, and the seller did not have to prove that it would otherwise have performed. Clause 32 neither cancelled future obligations nor shared the material features of that provision. It relieved a party from responsibility for breach only if its own conditions were satisfied.

4. The judge misapplied the compensatory principle. After clause 32 had been found inapplicable, the performance owed under the charterer’s absolute obligation was the actual supply of cargoes, rather than readiness or willingness to supply them. The correct comparison was between the shipowner’s actual position and the position it would have occupied if the cargoes had been supplied. The agreed value was the lost freight less the cost of earning it.

5. The reason for an actual breach does not alter that comparison. Cases involving anticipatory repudiation may require later events to be considered when valuing the innocent party’s right to future performance. This case concerned completed breaches of an absolute obligation. In the absence of a defence such as frustration or illegality, impossibility did not excuse performance or reduce the secondary obligation to pay compensation.

1. Court of Appeal (Civil Division): The shipowner’s appeal was allowed and the charterer’s cross-appeal was dismissed. The nominal award was replaced by agreed damages of US $19,869,573 for the five disputed shipments: [2019] EWCA Civ 1102.
2. High Court, Commercial Court: Teare J held that the charterer could not rely on clause 32 because it would not have supplied the cargoes but for the dam burst. He nevertheless awarded nominal damages of US $1 for each disputed shipment: [2018] EWHC 2389 (Comm).