Force majeure clauses are often found in agreements for sale of commodities and in charterparties. Very often, it is a long paragraph containing a very long sentence that is laborious to read. A force majeure clause, if applicable, would allow one party to the contract to avoid liability for non-performance on the occurrence of a force majeure event. What happens if that party seeking to rely on the force majeure clause had no intention to perform at all in the first place?
In a recent English Court of Appeal decision in Classic Maritime Inc v. Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102 (the “Limbungan Case”), the Court considered whether a charterer was excused from liability upon the occurrence of a force majeure event, even though the evidence showed that the charterer had no intention to perform the charterparty in any event.
Facts of the case
The charterer entered into a contract of affreightment for the shipment of iron ore pallets from Brazil to Port Kelang or Labuan. The contract of affreightment was for a total of 7 shipments which should have taken place between July 2015 and June 2016. The charterer had no cargo for the first two shipments and accepted liability in respect of the first two shipments.
Before the third shipment was due, the dam in the area where the iron ore was mined burst which resulted in a serious flooding of the mines. It was not in dispute that the bursting of the dam resulted in the stopping of production at the mines. It was also not in dispute that it became impossible to ship iron ore pellets from the load port between November 2015 and June 2016.
At the same time, it transpired that there was a collapse in demand at the Malaysian steel mills at that time. The iron ore pallets were initially intended for sale to the Malaysian steel mills. The trial judge made a finding of fact that even if the dam did not burst, it was more likely than not that the charterer would not have been able and willing to supply the cargoes for the third to seventh shipments as there would have been no demand for the cargoes.
The charterer argued that because of the force majeure clause and the occurrence of the force majeure event, the charterer is discharged from liability for those five shipments.
The shipowner on the other hand argued that the clause in question was an exception clause. It was argued that the charterer had to prove, that but for the dam burst, the charterer would have performed the contract in accordance with its terms. And if the charterer would not have performed in any event, the exception clause should not apply as the non-performance did not in fact arise from the events stated in that clause.
The Court noted that the interpretations of both the shipowner and the charterer were equally commercially possible in the sense that neither construction were uncommercial or surprising. The Court therefore proceeded to construe the meaning of that clause based on the words used in the clause.
The clause in question
The basic principle, which is uncontroversial, is that the application of the force majeure clause depends on the words used. The wording of the clause in this case is as follows:
“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: Act of God, act of war, act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people; embargoes; seizure under legal process, provided bond is promptly Furnished to release the Vessel or cargo; floods; frosts; fogs; fires; epidemics; quarantine; Intervention of sanitary, customs or other constituted authorities; Blockades; Blockages; riots; insurrections; civil commotions; political disturbances; 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).”
One point which was noted by the Court was that the title of this clause was “Exceptions” and not “Force Majeure”. While not conclusive, the Court held that the title given to the clause was relevant in construing the clause as an exception clause rather than a force majeure clause.
And in construing the words used, the Court found that it provides for a causal connection between the event described and the exclusion of liability. Amongst some of the findings, the Court found that the use of the words “resulting from” together with the requirement that the events in question “directly affect the performance of either party” import a causation requirement.
Eventually, the Court held that on a construction of the clause, there must be a causal connection between the force majeure event and the non-performance. Therefore, in order for the charterer to rely on this clause to excuse liability, the charterer must show that it would have performed the charterparty but for the occurrence of the force majeure event.
“Contractual Frustration” clause v. “Exceptions” clause
In construing the clause, the Court concluded that there was a very important difference between a “contractual frustration” clause and an “exceptions” clause.
A “contractual frustration” clause is one where, on its proper construction, the effect of the occurrence of certain events would result in the automatic termination of the contract, such that no further rights and obligations will accrue after the occurrence of that event.
An “exceptions” clause on the other hand, is described as a clause that does not cancel the contract for the future, but provides a defence to a claim in damages for breach of contract.
In the words of the trial judge:
“81. I find myself unable to accept Mr Rainey’s argument. There appears to me to be an important difference between a contractual frustration clause and an exceptions clause. A contractual frustration clause, like the doctrine of frustration, is concerned with the effect of an event upon a contract for the future. It operates to bring the contract, or what remains of it, to an end so that thereafter the parties have no obligations to perform. An exceptions clause is concerned with whether or not a party is exempted from liability for a breach of contract at a time when the contract remained in existence and was the source of contractual obligations. It is understandable that a contractual frustration clause should be construed as not requiring satisfaction of the ‘but for’ test because that is not required in a case of frustration. …
82. The context of an exceptions clause is different. It is not concerned with writing into a contract what is to happen in the event of a frustrating event. It is concerned with excusing a party from liability for a breach which has occurred. 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. …”
The Court of Appeal agreed with the reasoning of the trial judge. The Court of Appeal goes on to say that it does not really matter whether one labels the clause as a force majeure clause, a contractual frustration clause or an exception clause. What matters are the words used and the effect of those words used.
Our comments
This case is a timely reminder that when negotiating a contract, be it a contract for sale of commodities or charterparty, it would be necessary to give some thought as to the risk of events occurring that prevents performance, and how does one deal with such an event.
For example, in a sale and purchase agreement, the buyer is usually obliged to issue the letter of credit before the vessel’s arrival at the load port. Assuming an accident at the mines occurred before the buyer issues the letter of credit, the buyer would have to decide does he still proceed with the issuance of the letter of credit.
If the force majeure clause in the contract is a “contractual frustration” clause in the sense that the contract automatically terminates upon the occurrence of the force majeure event, then the answer would be the buyer would be contractually entitled to refuse to issue the letter of credit. No further rights or obligations arise once the contract is terminated.
However, if the force majeure clause is construed as an “exception” clause, then there will be some degree of uncertainty for the buyer. The seller can rely on the accident at the mines to excuse liability for his breach in failing to deliver the cargo. For the buyer however, the accident at the mines strictly speaking does not prevent the performance of the buyer’s obligation to issue the letter of credit. And if the buyer chooses not to issue the letter of credit, he is at risk of the seller making allegations that the buyer was in breach of contract by failing to issue the letter of credit within the time stipulated in the contract.
It is therefore good practice to think through the various force majeure events, and consider whether it is advantageous to draft a force majeure clause that operates like a “contractual frustration” clause, or one that operates like an “exemption” clause.
If you have any queries on the above, please feel free to contact us.
Disclaimer : This article is for general information only and not intended to constitute legal advice. We shall not be liable for any errors or omissions, nor shall we be liable for reliance on the contents of this article.
