Classic Maritime v Limbungan Makmur & Lion Diversified Holdings
Classic Maritime Inc v Limbungan Makmur Sdn Bhd and Lion Diversified Holdings Bdn
English Court of Appeal: Males, Rose and Haddon-Cave LLJ:  EWCA Civ 1102: 27 June 2019
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWCA/Civ/2019/1102.html
Richard Southern QC and Andrew Pearson (instructed by Winter Scott LLP) for Classic (Owners/Appellants)
Simon Rainey QC and Andrew Leung (instructed by Hill Dickinson LLP) for Limbungan and Lion (Charterers and Guarantors/Respondents)
APPEALS ON QUESTIONS OF LAW UNDER SECTION 69 OF THE ARBITRATION ACT 1996: CONTRACT OF AFFREIGHTMENT: WHETHER CHARTERERS WHO WOULD HAVE DEFAULTED ON THEIR CONTRACTUAL COMMITMENTS IN ANY EVENT WERE ENTITLED TO RELY UPON MUTUAL EXCEPTIONS CLAUSE FOR “ACCIDENTS AT THE MINE” AS DEFENCE TO LIABILITY FOR BREACH OF ABSOLUTE OBLIGATION TO PROVIDE CARGOES FOR SHIPMENT: WHETHER OWNERS ENTITLED TO RECOVER SUBSTANTIAL DAMAGES FOR SUCH BREACH BY CHARTERERS WHERE THE SHIPMENTS IN QUESTION COULD NOT HAVE BEEN PERFORMED IN ANY EVENT
The Court of Appeal, in dismissing the cross-appeal and in allowing the appeal against the High Court’s decision, held that:
Charterers (on their cross-appeal) were unable to rely on clause 32 in defence because their failure to supply or ship the five cargoes in issue was unrelated to the bursting of the dam at the mine that supplied the loadport; and
Owners (on their appeal) were entitled to recover substantial damages because the factual impossibility to perform the COA due to the dam burst was not a defence to Charterers where they were unable to rely on clause 32.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member and International Contributor to DMC’s Case Notes
The contract was a long-term contract of affreightment (“COA”) providing for shipments of iron ore pellets from Tubarao or Ponta Ubu in Brazil to Port Kelang or Labuan in Malaysia. The present action concerned seven shipments which should have taken place between July 2015 and June 2016. The trial and the appeal addressed what should have been the third to seventh shipments. The issues arose out of a dam burst which occurred on 5 November 2015. The dam burst stopped production at the iron ore mine which meant no shipments were possible from Ponta Ubu during the shipment period in question. As for the possibility of shipments from Tubarao, the sole supplier of cargo for shipment from that port was unwilling to supply cargo to Charterers during the same period.
The High Court held that, as a result of the dam burst, it was impossible for Charterers to perform the COA in respect of the five shipments in issue but, even if the dam burst had not occurred, Charterers would have defaulted anyway, due to a collapse in demand at the Malaysian steel mills for which the cargoes were intended.
Charterers sought to rely on the mutual exceptions provision at clause 32 (fn.1) of the COA by way of defence. The parties agreed that the dam burst qualified as an “accident at the mine” and the High Court also found that the dam burst was “beyond … Shippers’ control” (which finding was not challenged on appeal). As Charterers would not have performed the COA anyway, the High Court concluded that the inability of Charterers to ship cargo had not “resulted from” the dam burst and that the dam burst did not “directly affect the performance of either party” under the COA, so Charterers could not rely on clause 32.
So, the High Court had found for Owners on liability. However, in addressing the issue of quantum, where had substantial damages been awarded, they would have amounted to about USD20M, the High Court only awarded nominal damages of USD1 for each shipment. The reason for this was that, in applying the compensatory principle, the High Court considered that it would have been wrong to ignore Owners’ position had Charterers been ready and willing to perform their obligations but for the dam burst. As such, the High Court’s view was that Owners could not be put in a better position than they would have been in, had Charterers been able and willing, but for the dam burst, to ship the cargoes.
Accordingly, Owners appealed (on damages) and Charterers cross-appealed (on clause 32) to the Court of Appeal.
Males LJ (with whom Rose and Haddon-Cave LJJ agreed) gave the opinion of the Court of Appeal on the appeal and the cross-appeal.
Cross-Appeal – Clause 32 & “But For” Causation
Males LJ addressed the cross-appeal first because if this went against Owners the appeal itself would not arise for decision.
Males LJ considered that the question to be answered concerned the true construction of clause 32. The answer to the question was to be determined by the language of the clause having regard to its context and purpose. As such, to examine the various cases on which the parties relied would not have been worthwhile in Males LJ’s view. The features of clause 32 which Males LJ regarded to be of importance were:
First, clause 32 was a general exceptions clause of mutual application which, on its face, exempted a party from responsibility for a breach of an obligation. As such, its construction should not be approached on the basis that it was a force majeure clause. It was also not helpful to import into the construction exercise the kind of general considerations that often applied to force majeure clauses, which, in Males LJ’s view, did not apply in the same way to exceptions clauses.
Second, the words “loss or damage to cargo” necessarily referred to a particular cargo that was in fact lost or damaged as a result of one or more of the events listed in clause 32. There was no scope for these words to apply unless, but for the event in question, the cargo would not have been lost or damaged. The same consideration applied to the words “failure to supply, load, discharge or deliver the cargo”. These must, in Males LJ’s view, refer to a cargo that, but for the event in question, would have been supplied, loaded, discharged or delivered.
Third, clause 32 covered a very wide range of miscellaneous events, which “lacked intellectual coherence”. The fact that some events could only apply when they impacted on performance by one or other party which would otherwise have taken place suggested, in Males LJ’s view, that this must be true of clause 32 as a whole, to ensure the clause was construed consistently.
Fourth, the words “resulting from” together with the requirement that the events in question “directly affect the performance of either party” imported a causation requirement. That was confirmed by the words “any other causes” in the concluding part of the first sentence, and the reference to “such events or causes” in the second sentence. This was not necessarily conclusive, as the causation requirement could be merely that the event rendered performance impossible. However, the combined effect of the phrases suggested, to Males LJ, a more demanding requirement. It was a valid use of language to say that a failure to supply the cargo (or even a cargo) did not “result from” an event if in fact the event made no difference because the charterer was never going to supply a cargo anyway.
Fifth, the “time lost” provision in the concluding sentence of clause 32 was significant. Time could not be lost due to an event or cause listed in the clause unless, but for the event, loading would have taken place during the time in question.
In view of the above, Males LJ considered that the features of clause 32 taken in combination pointed persuasively to the judge’s acceptance of Owners’ construction being correct. He also agreed with the judge’s conclusion at  that a reasonable and realistic businessman “would see the broad common sense of saying that if, but for the dam burst, [the charterer] would not have performed its obligations, its failure to perform cannot fairly be said to have ‘resulted from’ the dam burst and the dam burst cannot fairly be said to have ‘directly affected’ the performance of [the charterer’s] obligations”.
Since, as the judge rightly, in Males LJ’s view, said at , “All must depend upon the wording of the particular clause”, he also considered that this should have been enough to determine the causation issue in Owners’ favour. As such, he held that the judge was right not to be deflected from his view of the true construction of clause 32 by reference to a supposedly settled line of authority as to the construction of force majeure clauses. Accordingly, having dismissed the cross-appeal, Males LJ turned to consider Owners’ appeal on damages.
Appeal – Substantial or Nominal Damages?
Males LJ identified that the question to be answered was whether or not the judge misapplied the compensatory principle. The compensatory principle, which applies to the assessment of damages for breach of contract, involves putting the innocent party in the position it would have been in if the contract had been performed. Males LJ considered that citing two recent cases at the highest level was sufficient at this stage.
Both The “Golden Victory” (fn.2) and Bunge v Nidera (fn.3) were concerned with the assessment of damages for an anticipatory breach by renunciation which required the court to value the innocent party’s right to future performance. In the former case, that right was the right to performance of what was in effect an instalment contract with monthly hire payments. In the latter case, that right was the right to performance of a single supply of goods. In both cases the compensatory principle operated to reduce or extinguish the innocent party’s claim for damages. That was because the value of the performance to which that party was entitled was adversely affected by events which occurred after the acceptance of the repudiation. However, the fundamental principle was, in Males LJ’s view, clear.
The present case was not concerned with an anticipatory breach, but with actual breaches as a result of Charterers’ failure to supply cargoes for each of the five shipments. It was common ground that, subject only to clause 32, Charterers’ obligation to supply cargoes was absolute (fn.4). Thus, the performance to which Owners were entitled, once it was determined that clause 32 did not provide Charterers with a defence, was the supply of cargoes. The value of that performance was the freights that Owners would have earned if the cargoes had been supplied less the cost of earning them. In principle, therefore, the comparison, which application of the compensatory principle required, in Males LJ’s view, was between (1) the freights which Owners would have earned less the cost of earning them, and (2) the actual position in which Owners found themselves as a result of the breach.
Males LJ noted that the comparison which the judge had carried out was different. It was between Owners’ position if Charterers had been ready and willing to perform and Owners’ actual position. The judge said at  that undertaking this comparison did not involve “an impermissible sleight of hand”. However, Males LJ disagreed. Charterers’ obligation was not to be ready and willing to supply a cargo in each case, but actually to supply one. Charterers were not in breach because they were unwilling to perform, but because they failed to do so, even if the reason why they failed to do so was because they were unwilling.
In the case of an anticipatory breach (i.e. a renunciation in advance of the time for performance), 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. If so, that would affect the value of the rights which the innocent party had lost. But that was not so, in Males LJ’s view, in the case of an actual breach, such as the present one, where there was an absolute obligation to supply cargo (whether or not Charterers were ready and willing to do so). Nor was it relevant, in his view, whether performance was impossible because (in the absence of a defence such as frustration or illegality) impossibility is not a defence (fn.5). The simple fact was that Charterers failed to do what they had promised to do and were thereby in breach.
The nominal damages which the judge awarded did not result, in Males LJ’s view, from applying the long established and fundamental compensatory principle, but instead resulted in a distortion of that principle. It led to the paradoxical result that, even though clause 32 did not provide Charterers with a defence to liability, the effect of the clause was that they were not obliged to pay damages for failing to perform their contract.
Yet Charterers submitted that because the contract could never have been performed as a result of the dam burst, and Owners could never have earned freight in respect of the five shipments affected, the relevant factual position for the purpose of assessing damages was that Charterers were ready and willing to perform (or were seeking to perform) but were prevented from doing so by the dam burst. Charterers submitted that “the necessary assumption” was that Charterers were able and willing to perform and would have done so in the absence of any supervening external matter preventing them from doing so.
This in Males LJ’s view, however, assumed that the breach was Charterers’ unwillingness to supply cargo and not (as was correct) the fact that they did not supply cargo. That was, noted Males LJ, the “sleight of hand” of which Owners complained. The fact that Charterers were unable to perform even if they had wished to do so was irrelevant to the assessment of damages in circumstances where they undertook an absolute obligation to supply cargo and clause 32 provided them with no defence. In those circumstances Charterers were unable to perform their primary obligation to supply cargo and, accordingly, were obliged to perform instead their secondary obligation to pay damages.
Accordingly, having allowed the appeal, Males LJ determined that Owners were entitled to substantial damages.
There can be little doubt that the Court of Appeal’s decision on the cross-appeal is sound. The wording of clause 32 as a whole clearly indicates that one of the listed events must be an effective or dominant cause of the failure to perform the obligation if the party otherwise in breach is to be able to rely on that clause by way of defence.
However, there is much room to doubt the decision on the appeal itself. The prime driver for that decision appears to have been a desire to avoid what was perceived to be the paradoxical result otherwise achieved if the compensatory principle let Charterers off the hook of having to pay substantial damages to Owners despite their inability to rely on clause 32 as a defence.
The strong line of House of Lords and Supreme Court authorities on the application of the compensatory principle does, by and large, suggest that what is to be achieved is the awarding of compensation that realistically reflects the facts, including the impact of events later on. That necessarily includes avoiding over-compensating an innocent party by an award of substantial damages for performance that would not have been able to happen in any event.
While impossibility is said not to be a defence, Charterers would have been unable to perform the obligation to supply cargo in any event, irrespective of any unwillingness to do so due to other factors. This suggests that the ability of the parties to perform the COA for the five shipments in issue would, in effect, have been frustrated by events for which they were not responsible and were outside their effective control.
There is no doubt that the facts of this case are novel. Justice would equally have appeared to have been served by deciding that, despite clause 32 providing no defence, the bursting of the dam at the mine which supplied cargo to one of the agreed loading ports, and the unwillingness of the sole shipper of cargo at the other agreed loading port to supply cargo to Charterers, were an effective bar to substantial damages being awarded, to avoid over-compensating Owners artificially.
Perhaps tellingly, Teare J (the first instance judge in the High Court) had refused permission to appeal to the Court of Appeal on the basis that, in his view, there was no realistic prospect of success because the compensatory principle would not allow the recovery of substantial damages that represented the loss of freights which in fact could never have been earned.
Published comments since made by counsel representing Charterers indicates that, whilst the Court of Appeal itself has refused permission to appeal, an application for permission to appeal has been made to the UK Supreme Court. No doubt, a final appeal on the novel point raised would be beneficial both to the parties in this particular case and others in shipping and trading in general.
“EXCEPTIONS Neither the Vessel, her Master or Owners, nor 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: … earthquakes; Landslips; explosions; collisions; strandings, and accidents of navigation; accidents at the mine or Production facility or to machinery or to loading equipment; accidents at the Receivers' works, Port, wharf or facility; 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. If any time is lost due to such events or causes such time shall not count as Laytime or demurrage (unless the Vessel is already on demurrage in which case only half time to count).”
Footnote 2:  UKHL 12,  2 AC 353
Footnote 3:  UKSC 43,  2 Lloyd’s Rep 469
Footnote 4: The “Nikmary”  EWCA Civ 1715,  1 Lloyd’s Rep 55
Footnote 5: Taylor v Caldwell (1863) 3 B&S 826, page 833