Force Majeure – The ‘But For’ Event

In Classic Maritime –v- Limbungan Makmur, Limbungan had a contractual obligation to ship certain quantities of iron ore from Brazil to Malaysia on a ship chartered from Classic Maritime. In November 2015 the Samarco dam burst and flooded the iron ore mine, so Limbungan claimed force majeure under the contract. Classic Maritime said that this was a bit rich as Limbungan had not shipped any iron ore for months anyway because of a collapse in demand in Malaysia.

Did this matter? To express it in more legal terms, was it sufficient for Limbungan to show that an event defined as a ‘force majeure’ event under the contract had occurred (the flooding of the mine undoubtedly fell within the contract definition) or did Limbungan have to go further in order to be excused from its contractual liability and show that its failure to perform resulted from that event: in other words, that “but for” that event it would have performed its contractual obligations?

The relevant clause in the contract stated that Limbungan would not be responsible for any failure to ship the iron ore “resulting from” [a list including “floods” and “accidents at mine”] “or any other causes beyond [the party’s] control; always provided that such events directly affect the performance of either party”.

Limbungan argued that this clause was a relatively standard force majeure clause. It required causation (the “resulting from” wording) in the sense that it had to be shown that the event which occurred made it impossible for it to perform the contract, but it did not also require it to show that “but for” that event, it would have performed the contract. Classic Maritime, of course, argued the contrary position: “resulting from” should be interpreted to mean that the event was the actual cause of the failure, and therefore that there was no other cause of the failure, and therefore that Limbungan must prove that “but for” the dam burst it would have performed the contract.

The Court of Appeal agreed with Classic Maritime, based on the following interpretation of the contract:

1. The contract refers to a failure “resulting from” the event, “provided that [the event] directly affects performance” of the contract. As a matter of contract interpretation in this case, that means that the affected party must show not only that the event which has occurred is on the list of force majeure events or otherwise beyond its control, but also that its failure resulted from this event and that the event directly affected its performance.
2. The contract refers to “causes” beyond a party’s control, which means that a party is only to be excused where a “cause” directly affects its performance as against an event which “happens to have occurred”.

The court also interpreted the contract in the slightly wider context that the clause was intended to set out particular circumstances, agreed between the parties, in which either party would be excused from performance, and it was open to the parties to decide what tests would need to be met under that clause; it was not, and should be distinguished from, a ‘contractual frustration’ clause i.e. a clause which automatically discharges both parties from future performance.

The decision seems like a dose of justice for the backsliding Limbungan, but it may also create a deceptively difficult factual analysis for future cases which are based on similarly worded force majeure clauses – which seems likely given that “causes beyond a party’s control” is a commonly used form of wording, and the distinction between that wording and, say, the commonly used wider form of “events, circumstances or causes beyond its [reasonable] control” seems a difficult one to sustain notwithstanding the court’s view (noting that even in this case the clause seems to use “cause” and “event” interchangeably).

In this case the collapse in demand for iron ore seems to have coincided with Limbungan pausing its shipments for a number of months prior to the dam burst and that fall in demand then continued for a sustained period; but what if demand had collapsed only a week or two before the mine flooded, and/or had recovered a week or two after it flooded – leaving aside the impact on the level of damages, would Limbungan still have lost the case on the basis that the mine flooded during the short period of that collapse in demand, because objectively no one would have wanted to ship iron ore during that period?

The court’s decision also seems to emphasise what Limbungan “would have” done rather than what it “could have” done, despite neither “would” or “could” appearing in the clause – whilst it was certainly arguable as to what Limbungan “would have” done if the mine had not flooded (although Classic Maritime successfully argued that it would not have shipped the iron ore anyway), it was not arguable as to what Limbungan “could have” done if the mine had not flooded because it could not have shipped the iron ore.

Certainly this case points towards a number of future actions for parties to a contract:

1. Redrafting of force majeure clauses by contractors, service providers, and similar parties with the principal performance obligations under the contract, from the narrower “causes” to the wider “events, circumstances or causes” wording, and introducing wording to seek to avoid the “but for” causation hurdle.
2. If one party to a contract claims that their performance has been affected by a force majeure event, the other party should swiftly require the affected party to evidence that, but for that event, it would have performed all of its contractual obligations in accordance with their terms, and to raise any initial doubts that it may have in that respect.

Case: Classic Maritime Inc. –v- Limbungan Makmur SDN BHD (2019) EWCA Civ 1102.