In a further twist of the MUR Shipping BV v RTI Ltd proceedings, the Supreme Court has overturned the Court of Appeal's decision and ruled that a "reasonable endeavours" proviso in a force majeure clause does not require a party to accept non-contractual performance. The judgment has important implications for the drafting and interpretation of force majeure clauses generally – and the impact of sanctions in particular.
Executive Summary
Force majeure clauses commonly provide, expressly or impliedly, that the clause cannot be relied on if the particular effects of the event cannot be overcome by reasonable endeavours from the Party affected. The central question for the Supreme Court in MUR Shipping BV v RTI Ltd was whether the exercise of "reasonable endeavours" may require the party affected to accept an offer of non-contractual performance from the other contracting party in order to "overcome" the effects of the event. In October 2022, the Court of Appeal held it may do in certain circumstances, including on the facts of this case.
The Supreme Court have handed down their judgment, reversing the Court of Appeal decision and upholding the earlier High Court decision. They have accepted MUR's argument that "reasonable endeavours" does not require a party to accept an offer of non-contractual performance.
This decision emphasises the importance that the courts place on contractual rights, and on predictability and certainty in English commercial law.
1 Background
The dispute in this case concerned the shipment of minerals from Guinea to Ukraine between July 2016 and June 2018 pursuant to a Contract of Affreightment (the "Contract") between MUR and RTI, where the amount of freight due was defined by reference to a price per metric tonne in USD. In April 2018, the US Treasury's Office of Foreign Assets Control applied sanctions to RTI's associated company, leading to difficulties for RTI in paying the freight in USD. As an alternative, RTI proposed that it make payment in euros which could be converted into USD as soon as it was received by MUR's bank. It also agreed to bear any additional costs or exchange rate losses in converting the euros into US dollars. MUR rejected the proposal and sought to invoke the force majeure clause in the Contract to relieve it from the obligation to load the vessel.
The definition of a "Force Majeure Event" in the Contract
"A Force Majeure Event is an event or state of affairs which meets all of the following criteria:
a) It is outside the immediate control of the Party giving the Force Majeure Notice;
b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
c) It is caused by one or more of... any rules or regulations of governments or any interference or acts or directions of governments... restrictions on monetary transfers and exchanges;
d) It cannot be overcome by reasonable endeavours from the Party affected."
An arbitral Tribunal in December 2020 found that the requirement under the Contract that the Force Majeure Event "cannot be overcome by reasonable endeavours" effectively required MUR to accept RTI's Proposal. MUR appealed on the grounds that the Tribunal had erred in law by concluding that the "reasonable endeavours" sub-clause required MUR to accept a form of non-contractual performance. At first instance, the High Court held that the Tribunal's award had been vitiated by an error of law as MUR was not, in the exercise of reasonable endeavours, required to accept payment in euros and that the imposition of sanctions had therefore constituted a Force Majeure Event. In October 2022, the Court of Appeal overturned the High Court's decision and restored the Award on a majority decision.
More information on the High Court and Court of Appeal decisions
For further detail about the background to the proceedings, please see our contemporaneous briefings on the High Court decision and Court of Appeal decision:
2 Supreme Court decision
On 15 May 2024, the Supreme Court unanimously overturned the Court of Appeal's decision, finding that a reasonable endeavours proviso does not require a party to accept a non-contractual solution. MUR were therefore entitled to rely on the force majeure clause as its rejection of RTI's alternative offer did not constitute a failure to exercise reasonable endeavours.
A narrow issue of interpretation?
The Court of Appeal considered that the central issue was on the interpretation of "overcome" to establish whether acceptance of RTI's proposal to pay freight in euros and to bear the cost of converting those euros into dollars would "overcome" the relevant state of affairs. The Court held that the force majeure clause in the Contract should be applied in a common-sense way which would achieve the purpose underlying the parties' obligations (i.e. to provide MUR with the right quantity of USD in its account at the right time). As RTI's proposed solution would have ensured this, the Court found that it should be regarded as overcoming the state of affairs resulting from the imposition of sanctions.
The Supreme Court found that the majority of the Court of Appeal were wrong to approach the case as an interpretation of the specific reasonable endeavours proviso in this particular Contract. It held that this was not a matter of interpretation of the specific clause as force majeure clauses will generally be interpreted as applicable only if the relevant party can show that the event was beyond its reasonable control – and therefore, if the Court of Appeal's decision were correct, would be applicable to force majeure provisions generally.
Relevant principles
MUR's case was that, absent express wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. RTI's case was that it will do so in certain circumstances: (i) where accepting the offer of non-contractual performance would cause no detriment or other prejudice to the party seeking to invoke force majeure; and (ii) accepting the offer of non-contractual performance achieves the same result as performance of the contractual obligation in question.
The Supreme Court had regard to the following principles when reaching its decision that reasonable endeavours provisos do not require acceptance of non-contractual performance:
Principle 1: The object of reasonable endeavours provisos
In the absence of clear wording, the Supreme Court concluded that a "reasonable endeavours" condition in a force majeure clause does not require the impacted party to accept non-contractual performance. The purpose of a such a condition is not to require a party to take reasonable steps to secure non-contractual performance, but to enable a contract to be performed.
Principle 2: Freedom of contract
The Court of Appeal decision undermined the value of contractual rights, which extends to the freedom to not accept an offer of non-contractual performance: "the principle of freedom of contract includes the freedom not to contract."
Principle 3: Clear words needed to forego valuable contractual rights
There was a clear and undoubted contractual right for MUR to require payment in USD. Clear words are required for a party to forego valuable contractual rights.
Principle 4: The importance of certainty in commercial contracts
Certainty and predictability are of particular importance in English commercial law (particularly given the frequent choice of English law as the governing law in international commercial transactions). The Court viewed MUR's case as straightforward: absent clear wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. This contrasted with RTI's case, which it viewed as giving rise to considerable legal and factual uncertainty: a requirement to accept non-contractual performance would require the parties to assess whether such a change is detrimental, or whether it will achieve the same result as performance of the contractual obligation in question.
The Supreme Court acknowledged that the very concept of a "reasonable endeavours" proviso imported some element of uncertainty, and that some may favour reasonableness over certainty. It took the view, however, that the concept of reasonable efforts should not be "allowed to ride rough-shod over the required contractual performance" and "undermine the expectations of reasonable business people". It was not disputed that parties can, by clear wording, themselves provide for reasonable endeavours to include accepting an offer of non-contractual performance from the other party.
In light of the above, the Supreme Court accepted MUR's case that a requirement to use "reasonable endeavours" to overcome a force majeure event does not include accepting an offer of non-contractual performance absent clear wording to that effect.
3 Key lessons
Interpreting and drafting force majeure clauses
As described above, the Supreme Court judgment makes clear that its findings here are applicable to force majeure clauses generally, and that this was not a narrow issue of interpretation. In particular, unless there is clear wording to the contrary, most force majeure provisions will be interpreted in the following way:
- The importance of reasonable steps: The clause will only apply if the event or state of affairs that has caused the problem with performance cannot be avoided by taking reasonable steps. The Supreme Court said that this would normally be the case even if there is no express reference to reasonable endeavours.
- The importance of the original bargain: The clause is not intended to allow the party who is unable to perform to effectively change the terms of the original bargain by requiring the other party to accept non-contractual performance. If the other party chooses to accept such performance, it can opt to do so – but it is not under any obligation to accept it.
However, although the above comments reflect the way that most force majeure clauses are drafted, you shouldn't assume that all such provisions will automatically be interpreted in this manner. It is essential to consider the precise wording of the clause – and we have previously highlighted a case where the drafting led the Privy Council to treat the issue of non-contractual performance somewhat differently.
Sanctions and force majeure
This decision will be of particular interest to parties facing difficulties in rendering or receiving payment in contractually specified currencies as a result of sanctions, including those associated with the conflict in Ukraine. Whilst the Supreme Court did not comment on that aspect, it's worth noting that simply changing the currency may not be a fool-proof way to avoid sanctions risk. Nor would this always be desirable: a last-minute currency change could potentially be a circumvention offence in some jurisdictions. What may be somewhat comforting is that the imposition of sanctions on a counterparty was accepted as an "event" capable of triggering a force majeure clause; this question however was accepted by the court and was not the subject of the appeal, so comments in the judgment could well be tested again in the future.
Read the full judgment here: https://www.supremecourt.uk/cases/docs/uksc-2022-0172-judgment.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.