A distortion of the compensatory principle? - Quick reads - Gateley
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A distortion of the compensatory principle?

Gateley Legal

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We previously reported on the decision of the Commercial Court in the case of Classic Maritime Inc. v Limbungan Makmur Sdn Bhd  which concerned claims for non-performance of a long-term contract of affreightment after a dam burst at an iron ore mine in Brazil.

The judge held that the charterers, Limbungan Makmur, couldn’t rely on an exceptions clause referring to “accidents at the mine” because they wouldn’t have been ready and willing to provide cargoes for shipment even if the accident had not occurred. However, he went on to find that the owners, Classic Maritime, weren’t entitled to recover their losses of around US$19 million.

Both parties appealed to the Court of Appeal, which upheld the judge's ruling on the liability issue, but reversed his decision on the damages issue. The court agreed with the first instance judge that the relevant clause should be interpreted as an exceptions clause, not a force majeure or ‘contractual frustration’ clause like those in Gafta sale contract forms.

The case differed from previous decisions which have found that the party relying on a force majeure clause didn’t have to prove that they would have performed their obligations but for the force majeure event. Unlike the Gafta clauses, the clause in this case didn’t discharge the parties from future obligations and didn’t give Limbungan Makmur an automatic defence, regardless of whether they would otherwise have been able to perform. Since the evidence showed that they couldn’t have performed their obligations in any event, the clause didn’t protect them.

The wrong comparison

The appeal in relation to damages focused on the compensatory principle, whereby damages are awarded to put the innocent party in the same financial position as if the contract had been performed. The first instance judge compared Classic Maritime's actual position (being deprived of US$19 million in freight) with the hypothetical position if Limbungan Makmur had been ready and willing to perform, and concluded that, due to the dam bursting, Classic Maritime's financial position would have been no different. 

The Court of Appeal found that this was the wrong comparison. Limbungan Makmur’s obligation was not to be ready and willing to supply cargoes, but actually to supply them. Limbungan Makmur was not in breach because it was unwilling to perform, but because it failed to do so. The judge based his decision on previous cases (the “Golden Victory” and Bunge v Nidera) which concerned anticipatory breaches of contract, but this case concerned an actual breach. This made a difference because if a party repudiates a contract in advance then the value of the rights the other party has lost should be assessed. For this purpose it is relevant to consider whether the party which breached the contract would have been excused from performing it by later events. Those considerations don’t apply where there is an actual breach, particularly a breach of an absolute obligation (such as a charterer’s absolute obligation to supply a cargo).

An unexpected result

The appeal court described the judge's decision as a distortion of the compensatory principle, which would lead to the surprising result that although the exceptions clause did not protect Limbungan Makmur against liability it still protected them from paying damages for their breach. If the compensatory principle was applied correctly then Classic Maritime was entitled to be put in the same position as if Limbungan Makmur had supplied the cargoes as agreed and was entitled to the damages claimed.

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