Disputes are a part of life. The business world is no exception. ADR (Alternative Dispute Resolution) offers practical and cost-effective approaches to conflict resolution such as mediation and arbitration. It obviates the need for costly and time-consuming litigation through the Courts.

ADR is a voluntary process, requiring the agreement of all involved to submit themselves to the process.

In addition, several of its forms are non-binding, so if participants do not reach an agreement, they can walk away without any commitment made. The main exceptions are arbitration and adjudication.

The process maintains confidentiality and participants cannot use what they say in subsequent processes, including litigation. It has broad applicability and professionals involved in maritime, commercial, and business law contexts often use it.

Comparison of ADR and Litigation as Dispute Resolution Methods

Of the various forms of alternative dispute resolution discussed here, mediation is usually the most cost-effective and quick. It offers a relatively economical way of assisting parties to reach an agreement. The process is non-binding until converted to a legally binding contract. It involves some minimal formality by way of a structure. Several mediation organisations exist with panels of mediators, sets of rules and sometimes facilities to accommodate hearings.

Although litigation through the English courts is an excellent method of mainstream dispute resolution, it can suffer from disadvantages, including delays through overcrowding of some courts, formality and high costs. Moreover, its process and decisions are public and can result in the end of business relationships. On the other hand, the Commercial Division of the High Court of Justice, London is internationally recognised for the expertise of its judges and the quality of its advocates in resolving complex, high-value commercial disputes. Also, the court system and judges, are free of cost to the parties, except for court filing fees.

Types of ADR in Maritime, Commercial, and Business Law

The term alternative dispute resolution embraces a range of techniques for resolving disputes:

• discussion and negotiation
• conciliation
• mediation
• arbitration
• adjudication
• early neutral evaluation

These methods can assist in resolving conflicts arising from complex legal agreements, misunderstandings between parties and other issues in business.

Discussion and Negotiation

Day to day, parties in dispute begin with informal discussions which may lead to the negotiation of a settlement. This can be the most cost-effective method of moving on to the next piece of business. But if not properly tied up, it can lead to the same or a similar dispute resurfacing in due course.

Such is the desirability of resolution by negotiation to avoid litigation or arbitration that a recent decision of the English High Court has given guidance on the enforceability of clauses requiring parties to negotiate.

Conciliation: Guided Negotiation for Dispute Resolution

Conciliation is an ADR method employing the services of a neutral third party, the Conciliator. The Conciliator may suggest possible solutions and so assist the parties to reach a settlement. But the parties have the final say. Conciliation is similar to mediation.

Mediation

Mediation is a widely used ADR technique. The mediator facilitates communication between the disputing parties, taking the heat out of unrestricted face-to-face contact and helping them reach a mutually acceptable resolution.

Mediation Format

The parties agree on a mediator. After an initial presentation at which the mediator sets out the ground rules, the parties each make opening statements of their positions. They then adjourn to separate rooms and the mediator visits each in turn to see where there is common ground. He may not repeat to the other party what one party says, without that party’s express permission. If things are going well, the mediator may invite the parties to meet and express their updated positions. In other cases, the parties stay separate and the mediator shuffles between them until they reach a consensus or it becomes apparent no agreement will be possible.

This method is highly flexible and moreover is non-binding and confidential. It is an excellent way to resolve a dispute while at the same time allowing the parties to preserve their relationship, from which future business may flourish. Sometimes Mediation may be multi-party and involve more than one mediator. But in the vast majority of cases, participants jointly appoint one mediator only.

Alternative Dispute Resolution: Other Examples

Adjudication and Early Neutral Evaluation in ADR

Adjudication is a swift dispute resolution process in which an independent third party, the adjudicator, makes a binding decision. While it is binding, participants can challenge it in court or through arbitration since it is usually interim.

Early neutral evaluation is a non-binding opinion offered by a neutral third party on the merits of the disputing parties’ cases. It can help them decide how to proceed with their dispute, whether through settlement, further ADR, or litigation. Overall, it provides them with guidance on the strength of their cases before committing to a particular resolution method.

Arbitration: A Private and Binding Alternative to Court Proceedings

Arbitration is a contract-based form of dispute resolution. A party’s right to refer a dispute to arbitration depends on the existence of an agreement (the “arbitration agreement”) between the disputing parties. Commercial contracts often include arbitration clauses. Alternatively, once a dispute has arisen, in the absence of an agreement to arbitrate, the parties may make a separate agreement to refer it to arbitration.

In entering into an arbitration agreement, the parties agree to refer their dispute to a neutral tribunal to decide their rights and obligations. Unlike mediation or conciliation, an arbitration tribunal makes a decision, called the Award. The Award is binding on the parties. The process and award are confidential to them.

The Arbitration Act 1996

Arbitrations held in England are subject to the Arbitration Act 1996 (the “Act”). The Act may apply to arbitrations held outside England. The Act contains mandatory and non-mandatory provisions. Non-mandatory provisions include permitting the parties to choose which of the many rules of procedure shall apply to the arbitration, such as the rules of the London Maritime Arbitration Association, the London Court of International Arbitration or the International Court of Arbitration.

If the arbitration clause does not specify procedure or the parties fail to agree on it, the Act provides rules that apply in the absence of such agreement. Other non-mandatory rules allow the parties to choose the applicable law, which does not have to be the law of England. The mandatory provisions apply notwithstanding any agreements to the contrary and include stay of legal proceedings, power to extend agreed time limits, power to remove an arbitrator, general duty of the tribunal, general duty of the parties, securing the attendance of witnesses, enforcement, and challenging the Award.

Note in particular (1) that the power of the courts to stay legal proceedings (section 9 of the Act) has given rise to a considerable number of applications to the courts for a stay.
Section 9(4): on an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.
And (2) that impartiality is of the greatest importance, so much so that Section 24(1) of the Act provides:

“A party to arbitral proceedings may (upon notice to the other parties, to the arbitrator concerned and to any other arbitrator) apply to the court to remove an arbitrator on any of the following grounds:
(a) that circumstances exist that give rise to justifiable doubts as to his impartiality;”

The Arbitration Process

This process generally consists of the following steps:

1. The arbitration agreement: This determines key elements of the process. It includes the number of arbitrators, their selection, the location and the legal seat of the arbitration. It also specifies whether it will follow the rules of a particular arbitration institution or is ad hoc. The governing law in a contract may be expressly stated, failing which it has to be determined.
   • See the example of the UK Supreme Court decision on determining the Proper Law of an arbitration agreement.
2. Starting an arbitration: Typically, a claimant sends a document called a “request for arbitration” or a “notice to arbitrate” to its opponent. The other party will have the opportunity to respond briefly within a set period of time and selects an arbitrator where appropriate.
3. Constitution of the tribunal: It must be formally constituted. Commonly, each party selects one arbitrator, and the two so selected choose a  third who has equal status but acts as chair. Or the third arbitrator may be specified in the arbitration agreement to be umpire, the difference being that he takes no active part in the arbitration unless and until the other two disagree. Sometimes the arbitration agreement provides that there shall be a single arbitrator.
4. Identification of issues: The issues for determination must be identified, which can include issues of fact, law, and quantum.
5. Determination of process and timetable: The parties and the tribunal will decide the process and timetable, designing them to fit the requirements of the particular dispute.
6. Conduct of the arbitration: The arbitration will proceed according to the adopted procedure, which usually involves written submissions, witness statements, expert reports, and document production.
7. The arbitration hearing: Arbitrations often involve one or more hearings before the tribunal, where the parties’ lawyers present arguments and question witnesses and experts. More straightforward disputes and those not requiring witness evidence may be decided on documents alone.
8. The Award: The tribunal will produce its Award, or decision, which may be with reasons or without reasons.
9. Challenging/appealing the award: A tribunal’s findings of fact can rarely be challenged. The grounds of appeal are stated in the Act, namely, the tribunal lacked substantive jurisdiction (section 67) or there was a serious irregularity affecting the tribunal, the proceedings or the award (section 68). Or that the Award was in breach of natural justice, or in conflict with public policy. In such cases, a party ask for the award to be set aside or sent back to the tribunal for reconsideration.
10. Enforcement: Is dealt with in the following section.

Enforcing Arbitration Awards Across Borders

One of the attractions of arbitration is that it is often easier to enforce an award in another country than it is to enforce a court judgment without a rehearing. Enforcement regimes vary, and it is crucial to consider the prospects of enforcement when deciding whether and how to arbitrate a dispute. See New York Convention¹ below.

The realities of enforcement vary depending on factors such as the jurisdiction in which enforcement is likely to be sought, the status of the party against whom enforcement is sought, and whether it is possible to take steps to ensure the other side does not get rid of its assets to frustrate enforcement. It is crucial to consider the prospects of enforcement at the outset of any dispute, especially if cash in the bank is vital.

Conclusion

ADR methods offer several benefits including:

• reduced costs
• sometimes faster resolution times
• confidentiality
• its non-binding nature unless an agreement is reached (and a binding settlement agreement is entered into)
• preservation of business relationships

By understanding the various ADR techniques and their applications, participants can choose the best method to resolve their disputes effectively and efficiently. Alternative dispute resolution is a popular choice for parties seeking an accessible and amicable resolution to their conflicts.

¹ The New York Convention 10 June 1958, covers the recognition and enforcement of foreign arbitral awards. Almost 90% of the cases grant enforcement of an arbitral award, as shown by commercial arbitration data. The two basic actions contemplated by the New York Convention are the recognition and enforcement of foreign judgments and the referral by a court to arbitration.

The first action is the recognition and enforcement of foreign arbitral awards, i.e., arbitral awards made in the territory of another (Contracting) State. The second action contemplated by the New York Convention is the referral by a court to arbitration. Article II(3) provides that a court of a Contracting State, when seized of a matter in respect of which the parties have made an arbitration agreement, must, at the request of one of them, refer them to arbitration (unless the arbitration agreement is invalid).

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Limitation under the Hague-Visby Rules

Article IV r.5(a) of the Hague-Visby Rules provides as follows:

“Unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the goods in an amount exceeding the equivalent of 667.67 units of account per package or 2 units of account per kilogram of gross weight of the goods lost or damaged, whichever is the higher.”

The issue

The issue was whether the words “goods lost or damaged” refer only to physically lost or damaged goods or whether this also could refer to cargo subject to economic damage.

Previous judgment on the issue

In a previous case – The LIMNOS² – not more than 250 MT of cargo was physically damaged but the entire cargo was distressed. It was held that the words “goods lost or damaged” refers to two categories of goods, namely: (1) goods that are lost in the sense of being missing or destroyed and (2) goods that are damaged in the sense of not being lost, but surviving in damaged form. This did not refer to economic damage. Limitation under Article IV r.5(a) of the Hague-Visby Rules was thus calculated only by reference to the small quantity of damaged cargo despite the fact that the value of the entire cargo was affected.
In the course of that case reference was made to the anomaly that if there was no cargo at all that was physically lost or damaged then the limitation provisions did not apply and the carrier’s exposure was in those circumstances unlimited.

Facts in the THORCO LINEAGE

The claimant was at all material times the owner of a bulk cargo of zinc calcine with a gross weight of 10,287.07 WMT which was loaded on board the vessel THORCO LINEAGE for carriage from Baltimore, USA to Hobart, Australia. On 21 June 2018, whilst on passage across the Pacific Ocean, the vessel lost power as a result of an engine failure. On 23 June 2018 she grounded on Raroia Atoll in French Polynesia. As a result of the grounding she suffered extensive damage with ballast tanks being punctured, the rudder lost and the propeller damaged beyond repair.

The vessel was the subject of salvage operations and eventually towed to South Korea for repairs. The cargo was discharged and some forwarded to destination.

It was understood that of the total cargo only 764.07 WMT were lost or physically damaged with the remaining 9,523 WMT undamaged.

The costs arising out of the grounding included (a) salvage and (b) cost of onward shipment of sound cargo. Such cost did not relate merely to the cargo that was lost or damaged.

Was limitation to be calculated only by reference to the 764 WMT physically lost or damage or the entire cargo?

Held

The THORCO LINEAGE did not follow the earlier decision in the Limnos. It was held that the meaning of “lost or damaged goods” in Article IV r.5(a) of the Hague Visby Rules could include goods which have been economically damaged.

In the judgment it was stated:

“The merchant will expect to have his goods delivered to him at the discharge port pursuant to the contract of carriage contained in or evidenced by the bill of lading in the same good order and condition as they were in when shipped on board. If they are not so delivered they will be regarded as damaged. There is, I think, no dispute as to that. But… casualties can occur at sea which imperil both ship and cargo as a result of which the goods can only be delivered at the discharge port in sound condition as a result of additional and unexpected expense being incurred by the merchant. This case is an example of two … expenses, salvage payable pursuant to LOF and the cost of on-shipping goods from a place of safety to the port of discharge. In such cases the goods, though in sound condition, will have for the merchant a diminished value at the port of discharge to the extent of the additional expense which he has incurred. In such cases it can fairly be said, and I have no doubt would be said by the merchant, that the goods have suffered economic damage as a result of the casualty at sea. The cargo is as much the victim of the casualty as it is where physical damage is caused.… I therefore think that when one has regard to the context of the carriage of goods by sea there is a cogent argument that the ordinary meaning of “lost or damaged goods” in Article IV r.5(a) of the Hague Visby Rules can include goods which have been economically damaged.”

It was observed in passing that Article IV r.5(a) could not have been intended to prevent there being a limitation by requiring the presence of physical damage to the goods.

The court also upheld an alternative argument that the cargo in this case was physically damaged in that it was subject to the salvor’s maritime lien and so the claimant’s proprietary or possessory title to the cargo was damaged.

In conclusion it was held the limit of the defendant’s liability in respect of the claimant’s liability to pay salvage and the on-shipment costs was based upon 2 SDRs per kilogramme of the entire cargo.

¹ Trafigura PTE Ltd v TKK Shipping Ltd (“The Thorco Lineage”) [2023] EWHC 26 (Comm)

² Serena Navigation v Dera Commercial Establishment (“The Limnos”)[2008] 2 Lloyd’s Reports 166

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So what is the back story?

Good faith – no general principle applicable to contracts

Firstly it is, and continues to be, well understood that in contrast to some other legal systems there is no general obligation of good faith under the English law of contract. In the words of a recent judgment of the UK Supreme Court

But, in contrast to many civil law jurisdictions and some common law jurisdictions, English law has never recognised a general principle of good faith in contracting. Instead, English law has relied on piecemeal solutions in response to demonstrated problems of unfairness²:

Good faith as an implied contract term

When will good faith obligations arise in connection with a contract? Aside from cases where good faith is an express term of a contract the question is whether such an obligation is to be implied as a term of a contract. 

There are two types of contractual implied term. The first is a term to be implied into a particular contract in the light of the express terms, commercial common sense, and the factual circumstances known or reasonably available to the parties at the time the contract was made. The second type arises where the law, sometimes by statute sometimes through common law, effectively imposes terms into certain types of relationships unless such a term is expressly excluded³. 

In the latter case a duty of good faith is implied by law in certain categories of contract such as contracts of employment, contracts of insurance or partnership agreements. However as a consequence of the decision in Yam Seng Pte v International Trade Corp [2013] EWHC 111(QB) it s now possible to claim that a good faith obligation may be implied in so called “relational” contracts. Such relational contracts:

“…may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.”⁴

This has led to the avalanche of cases referred to earlier where claimants have attempted to show their contract was “relational” in order to establish an implied good faith obligation.

What are the characteristic of a “relational contract”?

The following, non exhaustive, characteristics of a relational contract⁵ were approved in the Court of Appeal judgment in Candey “merely as a sense check rather than a series of statutory requirements“:

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
4. The parties will be committed to collaborating with one another in the performance of the contract.
5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.

The Court of Appeal judgment in Candey v Bosheh

Candey were a firm of solicitors. They agreed to act for Bosheh in litigation on the basis of a conditional fee agreement (“CFA”). Under the terms of that agreement Bosheh would pay Candey a fee if there was a recovery but nothing if they lost the case. In the event Bosheh settled their dispute on a “drop hands” basis and there was thus no recovery and no fees payable to Candey.

Candey brought proceedings against their now former client Bosheh on the basis that the CFA was a relational contract and that client was in breach of a duty of good faith, by settling the underlying litigation on terms which meant that Candey had no express entitlement to their fees.

The judge at first instance rejected the argument that the client Bosheh owed their lawyers a duty of good faith observing that there was no authority to support the argument that a client owes his solicitor a duty of good faith and the solicitor’s fiduciary duty to the client would displace such a finding.

The Court of Appeal considered the matter first by reference to the usual test for implied terms, and then by asking whether this was a relational contract.

They did not accept that the normal rules for implication of terms into contract would here imply a good faith obligation into the CFA. Such an obligation was not so obvious that it went with saying and it was not necessary to make the CFA contract work.

Separately the court did not accept that the CFA was a “relational” contract having regard to the characteristics listed above and rejected the argument that a good faith obligation would thereby be implied by law. They concluded:

In short, this was an ordinary solicitors’ retainer which happened to be on a CFA basis. There are thousands of those in operation at any one time in the UK. Nobody has ever suggested before that they are relational contracts, or that in every CFA, the client owed the solicitor a duty of good faith.

Conclusions

The Court of Appeal finding on this case is not in itself surprising. That a client might owe a duty of good faith to his lawyer was described as a startling concept. However some of the comments are of interest because they seem to suggest that we have reached a high water mark where good faith allegations are concerned. Whilst the concept of good faith being implied into relational contracts remains intact it looks as if it may in the future be more difficult to successfully argue for its application. In referring to the prior avalanche of claims based to alleged relational contracts the court added cryptically, “Only a relatively few have succeeded“, which may be an indication as to how they viewed the situation.

The pointers suggest that the future trend may be away from allegations that a contract is “relational “ and back towards consideration of whether under the normal rules a good faith term is to be implied in any given contract. In the words of the court:

“Putting (it) another way, it might be said that the elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law.”

Note the reference to “the elusive concept of good faith” which appears to accept that it may arise but leaves open just what this might amount to in any give context.

A further point – Fiduciary relationships distinguished from good faith obligations

The court confirmed that the CFA was a fiduciary relationship, with Candey owing a fiduciary duty, or an obligation of “loyal subordination” of its own interests to those of the Boshehs and that such a duty was different to the trust and confidence of a good faith obligation in a relational contract. There is nothing new here as this merely reaffirms the existing law. However it is worth drawing attention to this fundamental difference.

[1] Candey ltd v Bosheh [2022] EWCA civ 1103

[2] Affirming the earlier decision in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 at 439 

[3] Europa Plus SCA SIF & Ors v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (Comm) at paragraph 33

[4] Yam Seng Pte v International Trade Corp [2013] EWHC 111(QB)

[5] Bates v Post Office [2019] EWHC 606

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” Owing to the outbreak of hostilities it is now quite evident that the delivery of the machines on order … cannot take place. Under the circumstances we shall be obliged if you will kindly arrange to return our initial payment … at your early convenience.”

So wrote the agents of the Eastern European buyers of machinery to the UK based sellers some seven days after the buyers’ country had been invaded.

The sellers refused. This was not the invasion of Ukraine in 2022 but the German invasion of Poland in 1939. Nothing changes. In that event further performance of the contract was impossible due to the war and question was whether the Polish buyers could recover the earlier payment (eventually held that they could)[1].

The invasion of Ukraine is likely to directly or indirectly impact on the performance of many contracts. War, whether declared or not, may directly or indirectly prevent contractual performance. There may also be a ripple effect with sanctions, legal obstacles, cyber attacks and market issues that flow out from hostilities that may impact on contract performance.

What is the legal situation in such circumstances, where does risk lie and what remedies might be available? In this article we look briefly at the legal landscape and legal routes that might apply where the performance of contracts subject to English law is prevented by circumstances flowing out of hostilities.

Two routes – operation of law or application of contract terms

Where issues arise that affect performance of a contract the parties’ obligations may be governed either by operation of law or under the terms of the applicable contract. We consider each of these below.

Operation of law – Frustration of contract

Does the law operate to relieve or suspend contractual obligations if circumstances make performance impossible or economically unviable? English law has historically required parties to perform their contractual obligations but where unforeseen circumstances arise to render performance of impossible it may be considered “frustrated”.

The result is that the contract is considered as being at an end and the parties discharged from any further performance obligations. In the words of one judge[2]:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.“

This doctrine has its origin in the case of Taylor v Caldwell[3]. The parties contracted for the use of a music hall but the hall burnt down before it could be used thus rendering the contemplated performance of the contract impossible. The contract was held to be frustrated and the parties discharged from further obligations.

Examples of circumstances giving rise to frustration in the past include destruction of the subject matter and supervening illegality[4]. The case of the Polish buyers[5] referred to at the beginning of this article was another example of frustration.

Frustration is limited in its application. Thus:

1. Frustration does not arise merely if changed circumstances make a contract more onerous to perform[6].
   In the words of one judge[7]: “The appellants were undoubtedly put to considerable expense and inconvenience. But that is not enough”.

2. Frustration does not apply on a temporary basis to merely suspend a contract. If frustration applies then it ends the contract permanently. This may be contrasted with the effect of Force Majeure clauses considered below where a contract may continue whilst the obligation to perform is suspended or qualified.

Frustration thus may not be applicable in many cases where the impact of hostilities on contractual performance falls short of rendering it impossible.

Where a contract is frustrated the rather prosaically named Law Reform (Frustrated Contracts) Act 1943 establishes a statutory framework to deal with payments made and work done prior to frustration. Charter parties and contracts of insurance are excluded from this Act.

Other than in the limited cases when a contract is frustrated English law is not generous in providing legal solutions to events impacting on contract performance. English law (unlike some other legal systems) does not recognise Force Majeure as a legal concept and this term has no technical legal meaning. It is relevant only in the context of contractual provisions referred to later.

Likewise English law does not assist where there is a material change of circumstances that adversely affect the parties if the contract is still possible to perform and not considered frustrated.

Contract clauses where performance is affected by hostilities

The occasions when a contract is considered frustrated may be limited. Outside frustration what of the contract terms? Contract terms will, of course, vary considerably and reference to the name used for any particular type of clause may not be helpful. Much will depend on the wording and its construction. However some broad areas of coverage may be identified:

1. clauses suspending or qualifying present obligations going forward.
2. clauses excluding liabilities arising out of past performance.
3. clauses concerned with the effect of an event upon a contract for the future.
4. clauses giving a right of termination.

Clauses suspending or qualifying obligations – Force Majeure

It is common for commercial contracts to include a clause suspending or qualifying the parties’ present obligations if certain “Force Majeure” events arise. As mentioned previously force majeure as such is not a legal concept recognised under English law but the name if commonly used for such contract terms.

This type of clause intended to address the parties’ further obligations on the arising of certain events. The contract is thus usually considered as (at least initially) continuing with the clause merely modifying or suspending obligations.

A typical force majeure clause (a) lists a number of event or causes beyond the control of the parties (“Force Majeure” events), (b) defines the effect such events much at have to apply and (c) the consequences on the parties obligation if that occurs.

“Force Majeure” events listed tend to divide into (a) natural disasters and (b) man made events that include war and “restraint of princes” or act of government. Hitherto cyber attacks do not seem to feature as express events listed in typical wording.

One important point is that unless otherwise stated in the wording a change in economic circumstances will not alone be considered as a Force Majeure event. As stated in one case[8] it is:

“well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed is not regarded as being a force majeure event“

And again[9]

” … It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance. ……… This conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, ….., to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure or frustration.“

Force Majeure clauses typically require an affected party to give notice to the other contract party for the clause to be activated.

Clauses excluding liabilities arising out of past performance – Exceptions clauses

Exceptions clauses exclude or limit liability for specified past breaches of contract at a time when the contract remained in existence and was the source of contractual obligations. As such they are different from Force Majeure clauses that cover present performance.

Clauses concerned with the effect of an event upon the future of the contract

Another type of clause is one that expressly addresses the effect of frustrating events on future performance and operates to end the contract and the obligations of the parties.

Termination clauses

Most commercial agreements include a clause giving a right to terminate triggered by certain named events. Such termination clauses may include a right to terminate in the event of war or other hostilities as defined. Such provisions may merely trigger a right that has to be exercised rather than a termination that arises automatically if an event occurs. Such events may include the continuation of a force majeure event for more than a stated period thus linking this to any force majeure provisions as referred to above.

Ready willing and able to perform – a precondition?

One further question for consideration is whether any contractual  provisions that excuse a party from performance are subject to a precondition that the party concerned was otherwise ready willing and able to perform its obligations. This has been called the “but for” test i.e. whether it was necessary for a party to prove that, but for the force majeure or frustrating event, it could and would have performed the contract in accordance with its terms. Whether this applies in any given case will depend on the wording of the clause concerned. It is, however, a point that may invite consideration.

Where contract terms are concerned there is no one answer. These comments are merely indicative of the ground that may be covered by any contract terms. As mentioned previously much depends on the precise contract wording.

Sources

[1] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4

[2] Lord Simon  in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

[3] [1863] EWHC QB

[4] Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 where regulations passed in connection with the war made performance illegal.

[5] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4

[6] Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3

[7] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

[8] Tandrin Aviation Holdings Ltd v Aero Toy Store [2010] 

[9] Thames Valley Power Ltd. v. Total Gas & Power Ltd. [2006] 1 Lloyd’s Rep. 441

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This case concerned loss resulting from a grounding caused by a defective passage plan. The issues before the court were

(i) Seaworthiness. Did a defective passage plan render the vessel unseaworthy for the purposes of Article III Rule 1 of the Hague Rules?

(ii) Carrier’s due diligence. Did the failure of the master and his officers to exercise appropriate skill in preparing the passage plan constitute a want of due diligence on the part of the carrier to make the vessel seaworthy?

Passage planning obligation

In 1999 the International Maritime Organisation (“IMO”) adopted  Guidelines for Voyage Planning. The guidelines identify four components of passage planning: appraisal, planning, execution and monitoring. The appraisal stage requires consideration of all available information including up to date charts and the ascertaining of all areas of danger and of those areas where it will be possible to navigate safely. The planning stage requires the making of a berth to berth passage plan on the basis of the appraisal and the marking of the intended route or track and identification of any areas of danger on the chart.

The court recognised that prudent passage planning would require due regard to these guidelines.

The factual background

On 18 May 2011 the vessel CGM LIBRA ran aground on a shoal whilst leaving the port of Xiamen, China. According to the passage plan the vessel was to have proceeded along the buoyed fairway. However the master took the decision to pass outside buoy 14.1 and leave the fairway resulting in the grounding.

The vessel had on board the latest chart and notices to mariners. However the latest applicable notice to mariners included the following warning:

“Numerous depths less than the charted exist within, and in the approaches to Xiamen Gang.”

This warning was not noted on the chart or included in the written passage plan. It was later found that had this warning been on the chart the master would have been unlikely to have navigated outside the fairway. The passage plan was thus defective and causative of the grounding.

The claim

The grounding led to the vessel being the subject of salvage. This in turn led to General Average being declared with the vessel owners seeking a contribution from cargo interests amounting to some US$13 million. Certain cargo interests resisted on the grounds that a ship owner is not entitled to recover general average contributions from the owners of the cargo where the loss or expenditure was caused by its “actionable fault” which includes any causative breach of the terms of the relevant contract of carriage. In the present case it was argued that the vessel owners were in breach by failing to exercise due diligence to make the vessel seaworthy by virtue of the defective passage plan.

Hague Rules

The contract of carriage was subject to the Hague Rules. Article III sets out the responsibilities and liabilities of the carrier:

“1. The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to:
(a) Make the ship seaworthy.
(b) Properly man, equip and supply the ship…

Subject to the provisions of article 4, the carrier shall properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.”

Article IV sets out the rights and immunities of the carrier. In relation to the obligation of seaworthiness under article III rule 1, the relevant provision is article IV rule 1 which provides as follows:

“1. Neither the carrier nor the ship shall be liable for loss or damage arising or resulting from unseaworthiness unless caused by want of due diligence on the part of the carrier to make the ship seaworthy, and to secure that the ship is properly manned, equipped and supplied,  … in accordance with the provisions of paragraph 1 of article III. Whenever loss or damage has resulted from unseaworthiness the burden of proving the exercise of due diligence shall be on the carrier or other person claiming exemption under this article.”

In relation to the obligation properly and carefully to care for the goods under article III rule 2, the relevant provision is article IV rule 2 which provides as follows:

“2. Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from:

(a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship.”

Held

The court held as follows:

ISSUE 1 – DID THE DEFECTIVE PASSAGE PLAN RENDER THE VESSEL UNSEAWORTHY FOR THE PURPOSES OF ARTICLE III RULE 1 OF THE HAGUE RULES?

The court held that the defective passage plan did render the vessel unseaworthy for the purposes of Hague Rules Article III Rule 1.

Negligent navigation. The court accepted that the preparation of a passage plan was a matter of navigation and also accepted that the failure to note or mark the uncharted depths warning in the passage plan and on the working chart could be regarded as an “act, neglect, or default” in “the navigation … of the ship” within the article IV rule 2(a) exception.

Seaworthiness an overriding obligation. However it held that Article III, rule 1, is an overriding obligation[2] and thus rejected owner’s attempt to rely on the negligent navigation exception. Where loss or damage was caused by a breach of the carrier’s obligation to exercise due diligence to make the vessel seaworthy under article III rule 1, the article IV rule 2 exceptions could not be relied upon, including where the excepted matter was the cause of the unseaworthiness.

Attribute of the vessel. The concept of unseaworthiness is not subject to an attribute threshold requiring there to be an attribute of the vessel which threatens the safety of the vessel or her cargo. In the course of the judgment the court referred to earlier authorities confirming that seaworthiness is not limited to physical defects in the vessel and her equipment. Seaworthiness extends, for example,  to documentary matters such as having on board adequate and up-to-date charts[3] and  the mental abilities of the crew and whether they have a “disabling want of skill” or a “disabling want of knowledge”[4].

The prudent owner test. In  considering whether a defect rendered a vessel unseaworthy the court also referred with approval to the long established “prudent owner” test stating:

“Save for exceptional cases at the boundaries of seaworthiness, the well-established prudent owner test, namely whether a prudent owner would have required the relevant defect to be made good before sending the vessel to sea had he known of it, is an appropriate test of seaworthiness, well suited to adapt to differing and changing standards”.

Remediable defects. The fact that a defect is remediable may mean that a vessel is not unseaworthy. This is likely to depend on whether it would reasonably be expected to be put right any defect before any danger to vessel or cargo arose. The court rejected any distinction between providing the vessel with the materials and equipment required to make a vessel seaworthy and the use made of those materials by the crew. It stated that if it is necessary to make use of those materials in order to render the vessel seaworthy for the voyage then the carrier will be responsible for any negligent failure so to do.

Passage plan. The carrier’s obligation requires the carrier to ensure that a proper passage plan is prepared; not merely to provide a proper system to enable the crew to carry out the required planning exercise. The court stated:

“Given the “essential importance” of passage planning for the “safety … of navigation”, applying the prudent owner test, a vessel is likely to be unseaworthy if she begins her voyage without a passage plan or if she does so with a defective passage plan which endangers the safety of the vessel”.

ISSUE 2 – DID THE FAILURE OF THE MASTER AND SECOND OFFICER TO EXERCISE REASONABLE SKILL AND CARE WHEN PREPARING THE PASSAGE PLAN CONSITUTE WANT OF DUE DILIGENCE ON THE PART OF THE CARRIER FOR THE PURPOSES OF ARTICLE III RULE 2 OF THE HAGUE RULES?

The court  confirmed that the carrier has a non delegable obligation to exercise due diligence to make the vessel seaworthy.

The court rejected the argument that the crew failure to exercise due skill in navigation matters (here to prepare the passage plan) was not a breach of the carrier’s due diligence obligations on the basis that it was outside the orbit of the carrier.

It was confirmed that the carrier is responsible for any failure to exercise due diligence by those to whom he has entrusted the task of making the vessel seaworthy. It is the carrier’s contractual responsibility to ensure that due diligence is exercised in making the vessel seaworthy and he cannot contract out of that responsibility by delegation[5]. The court stated:

“The obligation on the carrier to exercise due diligence to make the vessel seaworthy requires that due diligence be exercised in the work of making the vessel seaworthy, regardless of who is engaged to carry out that task”

and

“The carrier is liable for a failure to exercise due diligence by the master and deck officers of his vessel in the preparation of a passage plan for the vessel’s voyage. The fact that navigation is the responsibility of the master and involves the exercise by the master and deck officers of their specialist skill and judgment makes no difference”.

“The carrier’s seaworthiness obligation in relation to passage planning is not limited to providing a proper system for such planning”.

On the subject of passage planning the court suggested that errors made by the master or officers in the later execution or monitoring stages of passage planning (i.e. navigation during the voyage) might fall within the nautical fault exception under Article IV whereas if such errors were attributable to the carrier’s failure to have proper systems in place that might be considered a failure on the part of the carrier to exercise due diligence to make the vessel seaworthy and thus not within the Article IV exclusion.

Conclusion

This is an important decision with comment that may be relevant for future cases involving consideration of the Hague Rules .

[1] [2021] UKSC 51

[2] Following Maxine Footwear Co Ltd v Canadian Government Merchant Marine Ltd [1959] AC 589

[3] Grand Champion Tankers Ltd v Norpipe A/S (The Marion) [1984] AC 563

[4] Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) [2002] 1 Lloyd’s Rep 719

[5] Following the House of Lords decision in Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd (The Muncaster Castle) [1961] AC 807

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