A Commercial Court decision earlier this month has considered the extent to which a force majeure clause requires a party to prove that it would otherwise have performed its obligations in the absence of any force majeure event. In upholding such a requirement, the court emphasised the nature of the clause before it as an exceptions clause and distinguished previous case law dealing with force majeure clauses which lead to the termination of a contract. The case leaves a question as to how force majeure clauses which fulfil both purposes, such as that contained in the widely used FIDIC or LOGIC forms, are to be interpreted under English law.

Introduction

Force majeure clauses are commonly found in international construction, oil and gas and energy contracts. They typically excuse a party from performance and/or allow a right of termination upon the happening of events which render performance of the contract impossible, whether temporarily or permanently. A force majeure clause may apply only to certain events or generally to matters beyond the control of the parties.

Such clauses typically require a force majeure event to have “prevented" performance of the contract or that impossibility of performance has arisen "as a result of" the force majeure event. This causative language poses an issue as to whether the clause applies only if a party can show that it would have performed the contract but for the force majeure event, not merely that the event made performance impossible regardless of whether performance would otherwise have been achieved. In short, whether the “but for” test applies.

Previous English cases (including a decision of the House of Lords) have held that force majeure clauses which reflect the common law doctrine of frustration and provide for the termination of a contract do not require a “but for" test for causation to be satisfied (despite the use of causative language such as the word “prevented”). This mirrors how the doctrine of frustration operates at common law. A second line of English cases distinguishes between clauses which suspend performance so that the party concerned is not in breach of contract and other clauses which merely exempt a party from liability for breaches caused by a force majeure event. The question before the court in the present case was whether a force majeure clause which merely exempted a party from liability should be interpreted as not requiring the “but for” test to be satisfied.

Classic Maritime Inc v Limbungan Makmur SDN BHD

Classic, a ship owner, entered into a long term contract of affreightment with Limbungan for the carriage of iron ore pellets from Brazil to Malaysia. Limbungan intended make shipments under the contract using iron ore pellets obtained from the Germano iron ore mine in Brazil, owned by Samarco. On 5 November 2015 a tailings dam forming part of the mine burst, leading to loss of life and the biggest environmental disaster in Brazil’s history. Production was halted and Limbungan was unable to fulfil its obligation to make shipments under the contract.

Classic sued Limbungan for damages. As the freight rates in the contract were agreed prior to the collapse in demand for steel in 2009, they were more than seven times the market rate at the time the dam burst, giving a sizeable claim for damages.

Limbungan defended the claim on the basis of a force majeure clause in the contract providing that: “… the Charterers … shall [not] be Responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: … accidents at the mine or Production facility… always provided that such events directly affect the performance of either party under this Charter Party…"

There was no argument about whether events constituted an “accident at the mine”, as referred to in the clause. However, Classic argued that due to the collapse in demand for steel, Limbungan would not have been in a position to meet the required shipments under the contract even if the dam hadn’t burst. On the facts, the court agreed with Classic and found that Limbungan would not have made the shipments regardless of the production stoppage. This raised an issue as to whether the force majeure clause applied in such circumstances.

The “but for” test upheld

Limbungan relied on the cases noted above dealing with force majeure clauses which result in the discharge of a contract akin to the common law doctrine of frustration. The court accepted the strength of this line of authority and acknowledged that the wording of the clause before it was in essence the same as considered in those cases. Nevertheless, the court considered that a different approach was warranted for clauses which merely exempted a party from liability for non-performance:

“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.”

But to no avail

The application of the “but for" test meant that the force majeure clause did not apply and Classic had made out its claim for breach of contract. Somewhat paradoxically, however, the force majeure clause was found to defeat the quantum of Classic’s claim.

Classic’s damages claim was calculated by reference to the position it would have been in had Limbungan made the required shipments under the contract (i.e. absent the breach of contract). Although that is an entirely conventional approach to damages, the court found it to be “unrealistic” because it ignored why Lumbungan was in breach of contract. Lumbungan was in breach not simply because it didn't make the shipments, but because the force majeure clause did not excuse non-performance due to Lumbungan not being ready and willing to make the shipments even in the absence of the production stoppage. The correct comparison, according to the court, was with the position that would have occurred had Lumbungan been ready and willing to make the shipments. In that case, the shipments would have been prevented by the production stoppage and the force majeure clause would have applied. Classic had not therefore suffered any loss as a result of Lumbungan’s breach and was not entitled to substantial damages.

Conclusion and implications

This is an important decision which has a number of implications for the drafting and interpretation of force majeure clauses.

As noted above, the English courts presently draw a distinction between force majeure clauses where: (i) the obligation to perform is suspended or discharged upon the happening of specified events; and (ii) liability for failure to perform upon the happening of specified events is excluded. The latter being treated as exemption clauses. A further distinction also arises as to clauses which operate to discharge the contract entirely and those which do not.

The court’s reasoning as to why the “but for” test applied to the clause in the present case is likely to be of general application to other force majeure clauses which merely exempt parties from liability for non-performance. In essence, the court decided that the authorities suggesting that the “but for” test concerning causation did not apply to force majeure clauses were relevant to clauses which operate to bring the contract to an end; not those merely excluding liability and leaving the contract subsisting.

The genesis of this differing approach seems to be that force majeure clauses discharging the contract are treated as if they are an extension of common law frustration, where the “but for test” does not apply, but force majeure clauses excluding liability for non-performance are treated as exception clauses where the “but for test” does apply. The correct approach to clauses which suspend performance temporarily, and which neither discharge the contract nor exclude liability for non-performance, is unclear.

It is also not entirely apparent how contracts, read as a whole, with hybrid rights of exception, suspension and/or termination for force majeure will be treated. Many force majeure clauses will fulfil both purposes of exempting or suspending performance and providing for the termination of the contract (typically if the force majeure event persists for a certain period of time). The FIDIC form of contract is one such example and is widely used on international construction projects. The LOGIC form is another and is widely used in the international oil and gas market. As a single interpretation is needed for such clauses regardless of whether the exemption/suspension or termination provisions are relied on, a conflict arises as to which of the competing approaches discussed above ought to apply.

The distinctions relied upon by the court as to the characterisation of force majeure clauses pre-date recent developments as to the interpretation of limitation and exemption provisions at common law. The modern approach is to interpret such clauses according to their natural meaning rather than by reference to any preliminary categorisation. It remains to be seen whether the distinctions previously made as to force majeure clauses will survive these recent developments. In the meantime, parties would be well advised to pay close attention to the drafting of force majeure clauses as small changes in the language used can, on the present state of the law, have significant implications for the interpretation of the clause.

The court’s findings as to the assessment of damages are also significant. They would appear to make the conclusion reached as to the “but for” test largely theoretical. The court’s findings mean that, for practical purposes, the defence of a claim on force majeure grounds would not need to surmount the “but for" test (save perhaps where the claim is one for a remedy other than damages).

The court’s reasoning in this regard may well require clarification and development in future cases. The suggestion that damages should be assessed by reference to the reasons why a party is in breach, rather than solely by reference to the breach itself and its consequences, appears to be novel. A similar logic could well be said to apply to a variety of other scenarios, such as termination, where the hypothetical application of the force majeure clause (i.e. had a party otherwise been ready and willing to perform) might be said to negate a claim for damages.

References:

Classic Maritime Inc. v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm).