Force Majeure, Exceptions Clauses And Reasonable Endeavours Obligations

RTI Ltd -v- MUR Shipping BV [2024] UKSC 18

The Supreme Court has unanimously ruled that a party can rely on a force majeure (FM) clause only if it shows that reasonable steps have been taken to avoid the effect of the "force majeure event" (FME) as defined in the clause. 

However, those reasonable steps do not go as far as obliging a party to accept a form of performance that is different to what the parties have agreed in their contract. 

The judgment is important in highlighting the English courts' emphasis on the need for certainty in commercial contracts, particularly in the context of sanctions. 

The background facts

RTI and MUR entered into a contract of affreightment on amended Gencon terms (the COA), which provided for payment of freight to MUR in US dollars. Clause 36 of the COA allowed a party to suspend performance of its contractual obligations on the occurrence of a FME. Pursuant to clause 36.3, an event or state of affairs could be classified as a FME only if it could not "be overcome by reasonable endeavours from the Party affected". 

In April 2018, RTI's parent entity was sanctioned by US Office of Foreign Assets Control (OFAC) and those sanctions also affected RTI. As a result of the sanctions, payment of freight to MUR would be delayed: payments in USD would have to pass through an intermediary bank and would have been stopped there pending further investigation. MUR (as the party entitled to receive payment in USD) gave notice to RTI of a FME under the COA and claimed that it was entitled to suspend performance of its obligation to nominate carrying vessels under the COA. RTI offered to pay freight in Euros instead, and to cover any currency conversion costs, but MUR insisted that it had a right to receive payments in the agreed currency. 

The earlier decisions

This is a case where no court agreed with the decision of the lower court or tribunal. 

The matter went first to arbitration, where RTI claimed the costs of having to charter in alternative tonnage to replace the vessels that MUR had refused to nominate. The Tribunal sided with RTI and found that MUR had failed to exercise reasonable endeavours to overcome the FME, as required under clause 36.3. According to the Tribunal, RTI's offer caused no detriment to MUR and MUR was wrong to turn it down: RTI's offer meant that MUR would receive payment of the same value plus any costs consequent on the currency conversion. 

MUR successfully appealed the arbitration award before the Commercial Court. The Court held that the obligation to exercise reasonable endeavours to overcome the effects of a FME does not mean that a party has to accept a method of performance which does not form part of the parties' bargain i.e. non-contractual performance. In this case, the parties had agreed that freight would be paid in USD and MUR could not be compelled to accept payment in any other currency.

The matter went to the Court of Appeal, which held (by a 2:1 majority) that the focus should not be on the "reasonable endeavours" but on the fact that the payment RTI was offering would "overcome" the effects of the FME. 

The Supreme Court decision

The Supreme Court unanimously agreed with MUR and the Commercial Court. It found as follows: 

1. Whenever there is a FM clause (a term which is not defined under English law and should probably be understood as covering perils-based exceptions clauses generally), this will generally require the party seeking to rely on it to show that: (a) the triggering event/state of affairs was beyond its reasonable control; and (b) the affected party could not avoid the triggering event/state of affairs by taking reasonable steps. If those requirements are not expressly agreed, they will be implied.   
2. If the parties have contractually agreed how an obligation will be performed, the obligation to take reasonable steps in the context of a FM clause does not mean that the parties are obliged to perform or accept performance in a non-contractual way. 

Comment

Both the Commercial Court and Supreme Court judgments provide important guidance to commercial parties on how English courts will approach issues regarding contractual performance – especially in the context of sanctions clauses, which fall to be interpreted and applied against the backdrop of an extremely volatile regulatory framework.

Specifically:

1. Certainty: The Supreme Court has reconfirmed that English law considers certainty and predictability to be of paramount importance. Parties need to know where they stand, especially when they must decide (often under extreme pressure) whether to perform the contract. Such clauses should be read in a way that allows for snap decisions on whether they apply or not.   
2. Grammatical nuances are unlikely to impress: The Supreme Court decision confirms the practical way in which English courts will read commercial contracts. Attempts to draw fine distinctions between synonyms are unlikely to be convincing unless underpinned by a conceptually solid and commercial reasoning.   
3. The 'hard core' of the bargain: At the heart of each contract lie the fundamental obligations each party has agreed to perform. Each side is entitled to rely on strict performance of those obligations and it cannot be obliged to perform or accept performance of those obligations in a way different to what has been agreed, even if this alternative performance method is commercially equivalent.   
4. Clear words required to forego valuable rights: The Supreme Court has confirmed that clear and express wording will be required in a contract if it is to conclude that a party intended to sacrifice valuable rights arising under or in connection with the contract. A debate can be had about what is 'valuable' for these purposes and this will depend on the circumstances of each case, but the right to performance of the bargain and remedies for failure to perform will probably qualify as 'valuable'.

Parties should also remember that the courts will be inclined to apply a high threshold of causation before allowing a party to rely on an exceptions/force majeure clause, as reflected in the Court of Appeal decision in Classic Maritime Inc -v- Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102. 

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.