FIDIC, force majeure, exceptional events and the “but for” test
By Jeremy Glover, Partner, Fenwick Elliott
Under the 2017 edition of the FIDIC Rainbow Suite, clause 19 which was headed “force majeure” has been replaced by clause 18, “exceptional events”. This is an interesting change; the term “force majeure” is typically provided for within most civil codes, whereas it is not a term of art under the common law.
The essential scheme of the FIDIC Form has remained unchanged, namely for something to amount to an exceptional event, there must be an event which is beyond the control of the party affected and which the party affected could neither have foreseen or provided against before entering into the contract nor avoided once it had arisen. The event must also not be the fault of the other party. Under sub-clause 18.2 of the new second edition, the Contractor must give a Notice, in the proper form, within 14 days of becoming aware, or of the date when it should have become aware, of the exceptional event. Subject to this, under sub-cause 18.3, the Contractor may be entitled to an extension of time and/or recovery of costs incurred as a result. If the exceptional event is prolonged, the option of termination may arise.
A question that might arise is whether a Contractor can only rely on this type of clause in circumstances where it can show that it would have been able to perform the contract “but for” the exceptional event, or whether it is enough to show that the event in question prevented the Contractor from performing its obligations under the Contract.. This question was considered by Mr Justice Teare in the case of Classic Maritime Inc. v Limbungan Makmur SDN BHD & Anr.
On 5 November 2015, the Fundao dam, in the industrial complex of Germano in Brazil where iron ore is mined, burst. Iron ore production immediately stopped and shipments were suspended. Classic had entered into a long-term contract of affreightment (the “COA”) for the carriage of iron ore pellets from Brazil to Malaysia. Limbungan was the charterer under the COA. Limbungan relied upon the dam burst as a force majeure event excusing it from liability for failing to provide cargoes of iron ore pellets for shipment from Brazil to Malaysia. Classic disagreed and claimed damages for breach of contract.
Clause 32 of the COA provided as follows:
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 . . .”
Mr Justice Teare noted that the clause was described as “a force majeure clause” though as with the new FIDIC Contract, that phrase is not used in it. The Judge thought it was better described as an “exceptions clause”. There was no dispute that the dam burst was an “accident at the mine”. Limbungan said that as a result of the dam burst, it found itself unable to supply cargoes for shipment under the COA. Classic said that the collapse of the dam had no causative effect on the charterer because the shipments would not have been performed even if there had not been a dam burst.
Classic submitted that the effect of clause 32 was to impose a “but for” test of causation. Since the clause required Limbungan’s failure to supply a cargo to “result from” the force majeure event (in this case the dam burst), and also for that event to “directly affect” the performance of Limbungan’s obligation, Limbungan was required to prove that, but for the dam burst, it could and would have performed the COA in accordance with its terms.
Limbungan disagreed, saying that whilst clause 32 imposed a causation requirement in the sense that it had to be shown that the dam burst rendered performance of Limbungan’s obligations impossible, it was not necessary for Limbungan to show that but for the dam burst it would have performed its obligations.
The Judge summarised the position in this way. Does the “but for” test have to be satisfied in a force majeure or exceptions clause which does not cancel the contract for the future, like a frustration clause, but provides a defence to a claim in damages for breach of the contract? The Judge felt that there was “an important difference” between a contractual frustration clause and what he had termed an exceptions clause. There was a difference between clauses which result in the discharge of a contract and the COA here:
“A contractual frustration clause, like the doctrine of frustration, is concerned with the effect of an event upon a contract for the future. It operates to bring the contract, or what remains of it, to an end so that thereafter the parties have no obligations to perform. An exceptions clause is concerned with whether or not a party is exempted from liability for a breach of contract at a time when the contract remained in existence and was the source of contractual obligations. It is understandable that a contractual frustration clause should be construed as not requiring satisfaction of the ‘but for’ test because that is not required in a case of frustration.”
However, the “exceptions” in the contract here were different. It is not concerned with writing into a contract what is to happen in the event of a frustrating event. It is concerned with excusing a party from liability for a breach that has occurred. As the Judge said, in these circumstances, it would be a “surprise” that a party could be excused from liability where, although an event within the clause had occurred which made performance impossible, the party would not have performed in any event for different reasons. Therefore clause 32 required Limbungan to show that but for the dam burst the cargo would have been supplied.
Therefore the court went on to consider whether, but for the dam burst, Limbungan would have supplied cargo for the voyages which were the subject of the present claim. This was a factual issue. On the facts, the Judge doubted whether, but for the dam burst, Limbungan would have been able and willing to supply cargoes for shipment pursuant to the COA with Classic. Limbungan were unable to demonstrate that their inability to fulfil the COA was “resulting from” or “directly affected by” the dam burst. This was because Limbungan had not fulfilled the two shipments prior to the dam burst, and at the time of the dam burst it appeared unable and/or unwilling to supply cargoes for shipment pursuant to the COA.
When it came to assessing quantum, Limbungan said substantial damages were not recoverable because, even if Limbungan had been able and willing to ship the cargoes but for the dam burst, Classic would not have been entitled to substantial damages because the dam burst would in fact have prevented Limbungan from shipping any iron ore pellets. Classic described this as “an impermissible sleight of hand”, from not being ready to perform the COA when liability was being assessed to being ready to perform when damages were being assessed. The Judge disagreed with Classic’s approach noting that the recoverability of substantial damages depended upon the compensatory principle and therefore upon a comparison between the position of Classic as a result of the breach and the position it would have been in had Limbungan performed its obligations. Here, if, but for the dam burst, Limbungan had been able and willing to ship the five cargoes, no cargoes would in fact have been shipped because of the dam burst and the dam burst would, in that event, have excused Limbungan from its failure to make the required shipments.
So, contrary to the approach on liability, clause 32 of the COA worked in Limbungan’s favour as far as quantum was concerned.
The dispute between Classic and Limbungan related to the performance of the COA. Did clause 32 set out circumstances which might excuse Limbungan from their breach of contract? In coming to the decision he did, Mr Justice Teare seemed to accept that there was a difference between clauses which result in the discharge of a contract (which did not apply the “but for” test) and the COA here, which exempted a party from liability for non-performance. Therefore it is likely that the “but for” test will apply, under English Law, to other similar “force majeure-type” clauses which merely exempt parties from liability for non-performance.
However, as noted above, whilst clause 18 of the FIDIC Form primarily deals with the effect on performance of an exceptional event, it does also potentially provide for termination. Mr Justice Teare’s approach did not deal with this type of contract, so under common law there still may be a conflict about whether or not the “but for” approach to liability adopted in the Classic case would apply. However, parties alleging force majeure will no doubt be called upon to show that they would have been able to perform had the force majeure event not occurred.