28 September 2018 - Post by:Laurence Ridgway
In Classic Maritime v Limbungan, the High Court held that a contractual force majeure clause incorporated a “but for” test of causation.
Limbungan, a charterer, contracted to provide iron ore for shipment by Classic Maritime, a ship owner. Limbungan failed to do so after a burst dam forced the mine that supplied the iron ore to close production. When Classic Maritime sought damages, Limbungan tried to rely on a force majeure clause in the contract, which carved out liability for losses caused by accidents such as flooding.
Limbungan argued that the principles of contractual frustration should be applied, so its contractual liability was automatically excused when the dam burst. However, the court held that the words “result from” and “directly affect” in the force majeure clause meant that Limbungan would only be excused from liability if it could establish that “but for” the dam bursting it would have provided iron ore for shipment. The court concluded that Limbungan would not have provided iron ore even if the dam had not burst.
Nevertheless, the court went on to determine that because there was a shortage of iron ore following the dam burst, Limbungan could not have obtained an alternative source of iron ore even if it had been willing and able to do so.
Therefore, Limbungan did not have to pay substantial damages because Classic Maritime would have suffered the same loss in any event irrespective of Limbungan’s performance under the contract.
Although this case turned on the wording of the force majeure clause, the judge made clear the distinction between frustration – concerned with cancelling future contractual obligations, and force majeure – concerned with excusing liability arising when the contract was still in place. Contracting parties should carefully bear in mind the effects of this distinction when drafting force majeure clauses.