The Court of Appeal in Classic Maritime Inc. v Limbungan Makmur SDN BHD and Another [2019] EWCA Civ 1102 contrasted the circumstances in which an exceptions clause and a contract frustration clause would operate.

The appeal concerned the charterer’s failure to ship five cargos of iron ore from Brazil to Malaysia in the period following the Fundao dam disaster, which had the effect of preventing iron ore cargos from being shipped from Ponta Ubu but not from Tubarao. The court of first instance had found that the charterer did not intend to ship cargo due to a collapse of demand in Malaysia but, had it wanted to, it would have been unable to source alternative cargo from Tubarao.

Distinction between exceptions clauses and Gafta clause 21 (“the Prohibition Clause”)

The Court of Appeal compared and contrasted the charterparty exceptions clause with a contract frustration clause, such as the Prohibition Clause. The wording of each clause is set out below:

Exceptions clause

“32. Exceptions

Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party…”

The Prohibition Clause

“Prohibition

In case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the Government of the country of origin or of the territory where the port or ports of shipment named herein is/are situate, preventing fulfilment, this contract or any unfulfilled portion thereof so affected shall be cancelled. In the event of shipment proving impossible during the contract period by reason of any of the causes enumerated herein, sellers shall advise buyers of the reasons therefor. If required, sellers must produce proof to justify their claim for cancellation.”

Both clauses share characteristics in that they list a number of events beyond the parties’ control (FM events) and define the effect on the contract. The distinction between the two clauses lies in the consequences of the parties’ failure to perform their contractual responsibilities. The Prohibition Clause discharges both parties from any obligation to perform in the future (i.e., brings the contract to an end). Clause 32 does not bring the contract to an end but rather absolves the non-performing party from liability.

The party seeking to rely on the Prohibition Clause does not need to demonstrate that it would otherwise have been in a position to perform its contractual duties. The justification for this is that both parties need to know, then and there, and without investigation of matters known only to one party, whether they are under any continuing contract obligation.

The position is different with an exceptions clause which applies after the event and the time for performance has expired, and is solely concerned with whether a party is liable to pay damages. Here, the wording of clause 32 explicitly required a causal link between the event in question and the failure to perform. Because the charterer did not intend to supply cargo due to a collapse in demand in Malaysia, clause 32 did not operate to relieve the charterer from liability for its failure to perform.

Damages

The Court of Appeal noted that the charterer’s obligation was not to be ready and willing to supply a cargo, but to actually supply one. Therefore, the charterer was not in breach because it was unwilling to perform, but because it failed to do so.

Accordingly, the Court of Appeal held that damages were to be assessed by comparing the position that the owner was in, with no cargo supplied and no freight earned, with the position that it would have been in had the charterer supplied cargo and paid freight. On this basis, it was held that the owner was entitled to damages in the amount of US$19,869,573.

Summary

The Court of Appeal has usefully clarified that exceptions clauses are to be construed on their own terms.

The clause in question required the FM event to directly affect the performance of the contract. Where the charterer never intended to supply a cargo, the FM event did not have this effect, even though the cargo would in any event not have been available. Accordingly the clause was not triggered to relieve the charterer of liability for failure to perform.

Accordingly, the charterer was liable to compensate the owner for its out of pocket loss, being the freight which would have been earned had the charterer supplied the agreed cargo.