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The Unforeseeable Consequence of Force Majeure

04 October 2018 #Commercial #Corporate


The doctrine of frustration in English Law provides very limited remedy and therefore, it is well established that parties should include a provision in a commercial agreement which governs issues of liability where a contract cannot be performed by virtue of unforeseen circumstances.

There is no legal definition of “force majeure” in English Law and as with any contractual provision, not only is it necessary to ensure any clause is validly incorporated in the contract and the drafting is clear, it is important to define what would give rise to or constitute an event of force majeure.

Common definitions include War, Acts of God, Terrorism, Earthquakes, Industrial Action and Changes in legislation.

It is common for parties when drafting force majeure clauses to specify how loss will be dealt with and whether the contract is to be suspended, or terminated or a combination of both.  It is also a requirement at law for any party seeking to invoke the clause to show that but for the force majeure event occurring that contract would have been fulfilled.

A recent decision of the High Court examined the operation of force majeure in the context of an exemption clause and the impact that one could have on a party’s ability to recover damages even where, on the question of liability the defence and reliance on a force majeure clause had failed. (Classic Maritime Inc v Limbungan Makmur SDN BHD (and others) [2018] EWHC 2389 Comm.  This case highlights the need to think beyond the drafting of an all encompassing clause, but have regard to the compensatory principle of damages in English Law and therefore ensure the contract deals with the issue of damages whether or not force majeure defences in respect of ascertaining liability fail.

Classic Martime entered into a contract to ship iron ore pellets from Brazil to Malaysia.  During the term of the contract, the Fundao Dam in Brazil burst, causing great devastation to the area and halting the production of iron ore pellets from the iron ore mine situated in the area.

Classic brought an action for breach of its shipping contract to ship iron ore pellets because the charterer was unable to supply cargo for shipment.  The defendant argued that the contract provided:

 “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….accidents at the 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…”

Consequently, the defendant should not be liable for substantial damages.

On the facts it was held that the defendant could not rely on the clause in question because it could not show that but for the dam burst, it would have supplied iron ore pellets for shipment.  It was held on the facts that there was no appetite to ship iron ore pellets irrespective of the dam bursting because of the economic environment regulating the price for the pellets at the time.

On the face of it therefore, the contract had been breached and the claimant would have been entitled to substantial damages as a consequence of the breach… or so it was argued.

The Court disagreed; The Court accepted an argument that substantial damages were not recoverable because, even if the defendant had been willing and able to ship the cargo, by virtue of the dam burst the defendant would in fact have in fact been prevented from shipping any iron ore pellets.

It did not follow therefore that because force majeure failed in respect of the test of liability, it would necessarily fail in preventing a party’s entitlement to substantial damages.

Force majeure does not often come before the Courts; however as the future of the UK’s relationship with the EU remains to be decided and March 2019 approaches we are likely to see more cases where contractual rights are suspended or terminated by virtue of such clauses being relied upon.

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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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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Stuart Mullins

Stuart Mullins
Partner

E: SMullins@clarkslegal.com
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