Impossible to perform a contract – are you still liable?

Jul 11, 2019

What happens when it has become impossible for a business to perform its contractual obligations and there is a force majeure or exemption clause in the contract? Unfortunately, the non-performing party could face having to pay out a significant amount of damages to the innocent party, even if was not possible to perform its obligations.

In a recent case1, there were two key issues for the court:

  1. Must a non-performing party show that its contractual obligations would have been performed ‘but for’ the force majeure or excepted event under an exceptions clause?
  2. If that party was liable for non-performance, but performance was impossible anyway, -can the other party claim damages?

What’s the background?
The Samarco dam collapse in Brazil in 2016 caused 19 deaths. It also had serious commercial implications for various businesses impacted by it.  In this case, a ship owner claimed damages for breach of contract when the charterer engaged in a long contract of affreightment could no longer fulfil its obligations.

The charterer claimed that as a result of the disaster, it could not supply cargoes for shipment and, therefore, was covered by a ‘force majeure’ clause. It did not have to perform its obligations, so it was not liable to the shipowner for not providing cargo for shipment.

The relevant clause said:

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…

The appeal court, unsurprisingly, said it was a matter of construction of the clause and differentiated the circumstances of this case from ‘contractual frustration’ (also saying this was not a force majeure clause but an exemption clause).

It agreed with the High Court’s decision that although the charterer’s performance was made impossible, it could not rely on this clause because the clause required it to prove that it would have carried out the contract but for the collapse of the dam. It was determined here that (for various reasons) Limbungan would not have performed its obligations even if the dam had not burst. The court said there is no general rule saying it is not necessary to show ‘but for’ causation to invoke a force majeure or exceptions clause.

The Court of Appeal took the view that it is for the parties to agree a clause which only excused non-performance if the ‘but for’ test was met – and that is what they did here.

Damages
What about the issue of damages? Given that this case related to damages for an actual breach, the court found that the charterer could not escape liability and was liable for damages for its failure to fulfil its shipments obligations.  As the court said: “Impossibility is not a defence.” The fact that the contract could not be performed, and that it was impossible to do so, was not relevant to the assessment of damages. The simple fact is the charterer failed to do what it had promised to do and was therefore in breach.

The result was that the shipping company was entitled to substantial damages even in circumstances where performance was not possible because the court had found that they would not have performed in circumstances where the dam had not burst.

What does this mean?
The ruling shows how carefully the negotiation and drafting of force majeure and exemption clauses need to be to ensure your interests are properly protected. Such clauses must clearly reflect your intentions otherwise you risk being left open to substantial damages claim for non-performance, even if performance is not possible.

Clauses must also be clear. In this case, counsel for both shipowner and the charterer described the clause as “lacking intellectual coherence” and “a ragbag”.

How can we help?
We advise businesses on their contractual arrangements and terms, and their rights and responsibilities to the other contractual parties. If you have questions relating to a force majeure clause within one of your commercial contracts, or need representation on your commercial arrangements more generally, contact the expert commercial solicitors at Herrington Carmichael LLP as early as possible.

Please contact Mark Chapman on 01276 686222 and Cesare McArdle on 0118 977 4045.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

 

 

 

 

 

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