Frustration and force majeure: a dam about to burst?

Issues of frustration and force majeure are likely to come to the fore in the light of the problems caused by coronavirus.  Dr Nathan Smith looks at a recent case and the factors

Dr Nathan Smith

Given the disruptive effect that the coronavirus has had on economies around the world, it is inevitable that it will have a significant impact on contractual relations.

Many contractors will be unable to perform their obligations as a result of the pandemic, but others may have been unable to perform anyway. Can they also rely upon a “force majeure” clause?

This was the question that the Courts considered in Classic Maritime Inc v Limbungan Makmur Sdn Bhd (1) Lion Diversified Holdings Bhd (2) [2019] EWCA Civ 1102.

What happened in Classic Maritime?

On 5th November 2015, the Fundao dam in the industrial complex of Germano in Brazil burst. The slurry went right down to the ocean, villages were swamped and people lost their lives.

Less importantly, the bursting of the dam also stopped production at an iron ore mine.

S (a shipowner) was contracted by C (a charterer) to deliver iron ore pellets from the mine to Malaysia. The catastrophe meant that iron ore pellets could no longer be shipped from the mine for several months.

C claimed that it was not liable to pay for the charter by reason of a “force majeure” or “exceptions” clause.

Did the supervening act fall within the clause?

This is one of the first questions to ask if faced with this type of issue.

Clause 32 of the contract was lengthy and provided that C would not be liable for loss or damage, or a failure to deliver cargo for shipping:

“… resulting from … Act of God, act of war … pirates or assailing thieves … floods, frosts, fires, fogs, epidemics, quarantine … riots, insurrections … landslips … accidents at the mine … or any other causes beyond … [C’s or S’s] … control; always provided that any such events directly affect the performance of either party … “

It was common ground that the dam burst was an “accident at the mine” and the Court found that it was beyond S’s control.

But what was the effect of the words “resulting from” and “always provided that any such events directly affect the performance of either party”? This was particularly relevant because C had made no arrangements to provide the cargo for shipping, regardless of the dam burst.

Did the clause have a causation requirement?

Applying the usual approach to construction, set out in cases such as Wood v Capita Insurance Services Ltd [2017] UKSC 24, the Court of Appeal and the Judge at first instance agreed that there was a causation requirement and held (at [48]):

“a reasonable and realistic businessman … would see see the broad common sense of saying that if, but for the dam burst, [the charterer] would not have performed its obligations, its failure to perform cannot fairly be said to have ‘resulted from’ the dam burst and the dam burst cannot fairly be said to have ‘directly affected’ the performance of [the charterer’s] obligations”.

The relevance of a supervening event

So just because a supervening event has occurred, it does not necessarily follow that there is no liability for failing to perform a contract.

It all depends on the wording of the clause when construed against the relevant background.

Does it matter that C could not have in fact performed the contract because of the dam burst? Did that reduce the claim for damages?

In short, no. C failed to do what it should have done under the contract and was in breach.

The fundamental principal of common law of damages is to put the injured party in the same position as it if the contract had been performed.

In the absence of a defence such as frustration or illegality, impossibility is not a defence: see Taylor v Caldwell (1863) 3 B&S 826 at 833.

Was frustration available as a defence?

The issue did not arise in Classic Maritime Inc, presumably because the supervening event fell within the situations that the parties had already considered as part of the contract.

In Davis Contractors Ltd v Fareham UDC [1956] 1 AC 696 at 729, Lord Radcliffe framed the following test for frustration:

“… frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances … would render [performance] … radically different …”

For a recent statement of “multi-factorial” test that is applied to determine whether or not a frustrating event has occurred, see the judgment of Marcus Smith J in Canary Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch) at [39].

The factors that will be relevant include:

– The terms of the contract and its factual matrix;

– The parties’ objective knowledge, expectations and assumptions, in particular as to risk, at the time of the contract;

– The nature of the supervening event; and

– The demands of justice.

Is the dam about to burst?

There are bound to be more cases where companies and individuals find themselves unable to perform their contractual obligations as a result of the ongoing pandemic. Most may have been able to perform their obligations if it had not occurred, but others would have defaulted in any event.

Matters to be considered

In a case where a party is or claims to be unable to perform a contract because of the pandemic, consider the following:

1. Does the contract contain an “exemption” or “force majeure” clause?

2. Does the coronavirus pandemic fall within the clause?

3. If so, is there a requirement for the defaulting party to be a position to perform anyway, before it can rely on the clause? Was the defaulting party in a position to perform?

4. If the contract makes no provision for the pandemic, has the contract been frustrated?

Covid-19 and frustration

There is no general answer to these questions. Whether or not Covid-19 amounts to a frustrating event can only be determined by reference to the “multi-factorial” approach when applied to the terms of a particular contract.

If the mine in Classic Maritime Inc had been forced to close because of coronavirus instead of a flood, would the contract have been frustrated? Probably not, because clause 32 also made provision for “epidemics” – but whether there are many contracts that have made clear provision for a pandemic remains to be seen.

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