On 5 November 2015, the Fundao dam in Brazil, where iron ore is mined, burst. The slurry went right down to the ocean, villages were swamped and people lost their lives. The bursting of the dam also stopped production of the iron ore and it was from this event that the matter, between a ship owner and a charterer, came before Mr Justice Teare on 13 September 2018 in the Commercial Court of the High Court of Justice.
The ship owner, Classic Maritime Inc, a Marshall Islands company working out of offices in Monaco (the ‘Claimant’) entered into a long term contract of affreightment (the “COA”) for the carriage of iron ore pellets from Brazil to Malaysia. A Malaysian company, Limbungan Makmur Sdn Bhd (the ‘Defendant’) was the charterer under the COA. The Defendant failed to provide cargoes for seven shipments of iron ore pellets to the Claimant. Five of these instances occurred after the dam burst. Prior to the dam burst, the Defendant had predominantly sourced iron ore pellets from two suppliers. One supplier was unable to provide iron ore pellets following the dam burst; the second supplier was not affected but was unable or unwilling to provide iron ore pellets to the Defendant.
The Defendant sought to rely upon the damn burst as a force majeure provision - excusing it from liability to provide cargoes of iron ore pellets from shipment from Brazil to Malaysia. The Claimant did not accept that the Defendant was entitled to rely upon the force majeure clause in the COA and claimed damages of about US$20m for the breach of the COA.
The Court considered whether the existing relationship between the Defendant and the two suppliers constituted “arrangements” that were affected by the force majeure event or whether it was possible for the Defendant to fulfil its obligations through alternative methods of performance. The Court also looked at whether the second supplier’s inability, and unwillingness to provide the Defendant with the iron ore, affected the Defendant’s overall ability to perform their obligations under the COA. The defining factor was whether the dam bursting could be said to be the causation of the Defendant’s non-performance. In Mr Justice Teare’s view this was tied to the question of whether, but for the dam bursting, the Defendant was ready or willing to perform the contract.
Based on the facts, Mr Justice Teare found that the Defendant was not ready or willing to perform the COA, irrespective of the dam bursting. It was clear that some contractual arrangements had been made with the second supplier but it was also clear that for commercial reasons, the Defendant would not be able to source iron pellets from them. Thus, the dam burst was not the cause of the Defendant’s failure to perform the COA and therefore the Defendant was in breach of contract.
Turning to the compensation owed to the Claimant for failure to provide the cargoes, Mr Justice Teare held that the compensatory principle of damages meant that the Claimant should be put in the position it would have been but for the breach.
The Compensatory principle
The fundamental ‘compensatory principle’ underpins the assessment of damages in contract and tort law in England and Wales. The principle provides that the purpose of the award of damages is to compensate the injured party for loss, rather than to punish the wrongdoer; ergo the general rule is that damages should (so far as a monetary award can) place the Claimant in the same position as if the contract had been performed or the tort had not been committed.
In this particular matter, but for the breach, the Defendant would not have been able to provide cargoes due to the dam bursting. Had the Defendant been ready and willing to provide cargoes, it would have been able to rely on the force majeure provision in the contract. On this basis, The Claimant was not entitled to substantial damages in respect of the five cargoes that the Defendant failed to provide after the dam burst.
Things to take from the Judgment
Fundamentally, this matter serves as a timely reminder that both, questions of causation and damages, are fact sensitive and independent of each other. Ultimately, despite not being excused from performing the COA, the force majeure event had the practical effect of excusing the Defendant from compensating the Claimant for the breach of the COA.
It is clear from this Judgement that where a party seeks to rely on a force majeure event, it must show causation and establish that it would have performed the contract but for the majeure event; otherwise liability will be instilled on the party in breach of the contract / agreement.
Written by Sean Dowling, Solicitor, Judge & Priestley LLP
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