The Supreme Court has given judgment in RTI Ltd v MUR Shipping BV [2024] UKSC 18 on the interpretation of a force majeure clause in a shipping contract containing a proviso that parties are to make reasonable endeavours to overcome the force majeure event. In unanimously allowing the appeal, it concluded that such proviso does not oblige parties to accept an offer of non-contractual performance – even where this would achieve the same result as contractual performance and cause no detriment. The decision has general application to force majeure clauses in all commercial contracts.
Background
The appellant shipowner MUR Shipping BV (“MUR”) entered into a contract of affreightment with the respondent charterer RTI Ltd (“RTI”) on an amended Gencon form voyage charterparty for a monthly shipment of bauxite from Guinea to Ukraine. It was agreed that RTI would make monthly payments to MUR in USD.
Clause 36 of the contract contained a force majeure clause with a reasonable endeavours proviso (“the proviso”) included at Clause 36.3(d), stipulating that the force majeure event would only be designated as such if “it cannot be overcome by reasonable endeavors [sic] from the Party affected.”
Following the imposition of US sanctions on RTI's parent company, RTI faced difficulty in making timely payments in USD under the contract due to banking delay. MUR subsequently invoked the force majeure clause by serving a force majeure notice. This was rejected by RTI, instead offering to pay MUR in euros and to cover any loss associated with the currency transfer. MUR declined, suspending operations under the contract.
RTI commenced arbitration seeking damages for the cost of chartering seven replacement vessels during the period that contractual operations were suspended. The arbitral tribunal found that accepting payments in euros as proposed by RTI was a realistic alternative which MUR could have accepted without detriment. It concluded that MUR's force majeure case failed on the basis that the event could have been overcome by reasonable endeavours and ordered MUR to pay damages.
The decisions below
MUR appealed to the High Court. Jacobs J allowed the appeal on the basis that the reasonable endeavours proviso did not require MUR to accept an offer of non- contractual performance before it could rely on the force majeure clause.
This decision was reversed by a majority of the Court of Appeal (Arnold LJ dissenting), which held that the force majeure event could have been overcome by accepting RTI's offer as this would have achieved the same result and would have involved no detriment to MUR. It therefore would have constituted reasonable endeavours in this case [13 – 16].
The Court of Appeal viewed the case as turning on the specific wording of the force majeure provision, in particular the word “overcome”. Males LJ, with whom Newey LJ agreed, considered that the word “overcome” did not necessarily mean that the contract had to be performed in strict performance with its terms if the offer of non-performance causes no detriment (at [25 – 30]).
The Supreme Court
The central issue on appeal was whether the exercise of reasonable endeavours require the party affected, if able to rely on a force majeure clause, to accept non-contractual performance.
In allowing the appeal, the Supreme Court agreed with MUR's that the proviso was a common feature of force majeure clauses. Even if clause 36 had not contained the reasonable endeavours proviso at 36.3(d), it would nevertheless have been interpreted as containing a proviso to like effect (at [29]).
It followed that the issue was one of general application to be addressed as a matter of principle. It was not, as the Court of Appeal had found, a narrow issue of interpretation of the specific wording of the force majeure clause (at [25 – 26]).
The Supreme Court viewed the authorities relied upon by MUR (Bulman & Dickson v Fenwick & Co [1894] 1 Q.B. 179 and (Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691 (‘the Vancouver Strikes case')) as providing “strong implicit support for MUR's case”. In addition, there were “good reasons of principle” supporting MUR's case that “reasonable endeavours” do not include accepting an offer of non-contractual performance absent clear wording to that effect (at [102]). Four principles in particular were relied upon as “good reasons”, these were as follows.
(1) The object of the reasonable endeavours proviso
Force majeure provisions are to be interpreted by reference to reasonable endeavours to overcome it, due to the doctrine of causation. A party is excused from contractual performance by a force majeure event if the failure to perform is caused by the force majeure event. If the failure to perform could have been prevented by reasonable endeavours, it will not be so excused (at [36]).
Reasonable endeavours, therefore, concern measures the affected party should have reasonably taken to enable such performance, not substitution of a different performance (at [37] – [38]).
The impediment to performance was the inability to pay in USD due to banking delay. The object of the reasonable endeavours proviso was to require the party affected to take reasonable steps to overcome the impediment to be able to pay in USD.
The offer by RTI to pay in euros was an offer to substitute a different performance. It did not overcome the impediment to performance as it did not have the relevant causal impact. It did not enable the contract to be performed according to its terms (at [39] – [40])
(2) Freedom of contract
As regards this second principle, the Supreme Court noted that the principle of freedom of contract includes freedom not to contract. Freedom not to contract, it held, includes freedom not to accept an offer of a non-contractual performance of the contract. On this basis, MUR was free to reject RTI's offer of non-performance (at [41] – [42]).
(3) Clear words needed to forego valuable contractual rights
Payment of the freight under the contract was to be in USD. In the view of the Supreme Court, MUR had an undoubted right to insist on payment in USD and to refuse any other currency. RTI's argument was essentially that the proviso required MUR to forgo this valuable contractual right by accepting payment in euros.
Drawing on an analogous principle of statutory and common law interpretation in a public law context, the Supreme Court held it to be a general principle of contractual interpretation that parties do not forego valuable rights absent clear words to that effect. Absent clear wording, therefore, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. No such words were contained in Clause 36.3(d) (at [43] – [46]).
Moreover, it was not in dispute that by clear wording, the parties could themselves provide for reasonable endeavours to include the acceptance of non-contractual performance. If RTI could have performed the contract by payment in either euros or dollars, the position on the facts would have been very different (at [58]).
(4) The importance of certainty in commercial contracts
The Supreme Court was of the opinion that RTI's case was “not anchored to the contract” and gave rise to considerable legal and factual uncertainty.
RTI's position that reasonable endeavours required the acceptance of non-contractual performance required inquiries into whether: (i) no detriment or prejudice was caused to the affected party; and (ii) the same result as contractual performance could be achieved (at [49 – 50]).
The Supreme Court considered that not only was it unclear exactly what amounted to a “detriment” in the circumstances, but also that (ii) required, as Males LJ had put, an inquiry into “the purpose underlying” the relevant obligation and whether that purpose could be achieved by the offer of alternative performance. This was held to be problematic in the view of the Supreme Court as “there may be no clear purpose” (at [53]).
“All of these questions arise in the context of a clause which requires immediate judgments to be made. Parties need to know with reasonable confidence whether or not a force majeure clause can be relied upon at the relevant time, not after some retrospective inquiry” (at [55]).
It was accepted that concept of “reasonable endeavours” imported some element of uncertainty, but that did not justify departure from contractual performance which would introduce “unwarranted uncertainty” in which the expectations of reasonable business people would be undermined (at [58]).
Discussion
Although the case concerned the interpretation of the specific force majeure clause in the affreightment contract, in the Court's own words, the case has significant implications for the interpretation of reasonable endeavours provisos and force majeure clauses generally.
Although parties can contract to provide that reasonable endeavours to overcome the force majeure event include acceptance of an offer of non-contractual performance, clear wording to that effect is needed. Conversely, there will be no diminution of valuable contractual rights absent clear wording of the same. Without such wording, a reasonable endeavours proviso cannot force (majeure) an affected party to accept an offer of non-contractual performance.
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.