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Force majeure clauses and the “but for” test

15 August 2019 #Construction #Commercial


A recent Court of Appeal decision in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102 has considered whether a party could rely on an exceptions clause (similar to a force majeure provision) to excuse non-performance in circumstances where it was not able and willing to provide cargoes for shipping even if the force majeure event had not occurred.  The Court placed emphasis on the specific wording of the clause which it said required the “but for” test of causation to be satisfied. This decision is likely to impact on the drafting and application of force majeure clauses. Our commercial team wrote about the first instance decision here.

What is force majeure in construction contracts?

A force majeure clause in a contract will seek to excuse one or more parties from performing the contract where certain events occur that are outside of the parties’ control. Typical examples include a natural disaster, terrorist attack or industrial action.  It should be noted that Brexit (and its consequences) and a downturn in economic conditions more generally is unlikely to be considered as a basis for force majeure. 

The term force majeure has no recognised meaning in English law and some standard form construction contracts (including JCT) do not define force majeure events. However, in a JCT contract a force majeure event is a relevant event which may entitle the contractor to an extension of time and a ground for termination. By contrast, NEC does not refer to force majeure but in the compensation event and termination provisions refers to an event which stops or prevents the contractor from completing the work.   

The precise scope of the force majeure provision will depend on the context in which it is used: ‘A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The eect of the clause may vary with each instrument.’ (Lebeaupin v Crispin [1920] 2 KB 714)

The burden of proof is on the party seeking to rely upon the force majeure clause. He must prove the occurrence of the event he is relying on and that he has been prevented, hindered or delayed (as the case may be) from performing the contract by reason of the event. Subject to the terms of the contract, he must also prove that the event in question was beyond his control and that there were no further steps he could have taken to avoid or mitigate the consequences. 

A new requirement – the “but for” test

In Classic Maritime Inc v Limbungan Makmur SDN BHD, Limbungan could not rely on the force majeure clause in the contract as it would not have been ready and willing to provide cargoes for shipment even if the force majeure event had not occurred.

Classic Maritime, a ship owner, entered into a long-term contract with Limbungan for numerous shipments of iron ore from Brazil to Malaysia. In November 2015, a dam burst, stopping production at the mine that supplied the iron ore to Limbungan. Classic Maritime sued Limbungan for failing to make shipments under the contract.

Limbungan defended the claim relying on a clause in the contract providing that “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… accidents at the mine or Production 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." (emphasis added)

Both parties accepted that an accident at the mine had occurred. However, Classic Maritime argued that due to a collapse in demand for steel, Limbungan would not have performed its obligations even if the dam had not burst. 

Limbungan contended that a party seeking to rely on a force majeure event is not required to prove that, but for the force majeure event, it would have fulfilled its contractual obligations.

The High Court found that, since Limbungan would not have shipped the cargo even if the dam had not burst, the causation requirement of the force majeure clause was not met and Limbungan could not rely on the force majeure clause. As Classic Maritime was only awarded nominal damages (i.e. USD$1 dollar for each shipment in issue), Classic Maritime appealed on the issue of damages and Limbungan cross-appealed on liability.

The Court of Appeal agreed with the High Court and emphasised that “what matters is not the label but the content of the tin” and stressed that wording in the clause including “resulting from” and “directly affect the performance of either party” meant that the party relying on the clause needed to prove that the failure to perform resulted from the dam burst and directly affected the performance of its obligations.

The Court of Appeal disagreed with the first instance judge’s ruling on damages and application of the compensation principle i.e. that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.  As the clause did not provide Limbungan with a defence it had to pay damages to Classic Maritime totalling USD$19.8million.

Summary

It is likely that this case will impact the drafting of force majeure provisions. Contract drafters should note that the inclusion of words and phrases such as ‘results from’ and ‘causes’ in force majeure provisions are likely to require the application of the “but for” test.

In addition, parties may pay closer scrutiny to the wording of the clause itself and require parties relying on force majeure provisions to prove that ‘but for’ the force majeure event it would have been able to perform its obligations.

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Victoria  Kempthorne

Victoria Kempthorne
Senior Solicitor

E: vkempthorne@clarkslegal.com
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