UK Supreme Court Guides On Contractual Terms And The Use Of Force Majeure

Once a rarely considered boilerplate clause, force majeure provisions have come to the fore in recent years with both the pandemic and sanctions resulting from the war in Ukraine having a drastic impact on many commercial transactions. A recent Supreme Court decision has therefore provided some welcome guidance on how the English courts will consider the operation of this provision.

In RTI Ltd v MUR Shipping BV, the claimant entered into a contract with the defendant containing a force majeure (FM) clause. The FM clause suspended contractual performance if that performance was prevented or delayed by (among other things) "any rules or regulations of governments...restrictions on monetary transfers". The definition of a FM event included that "it cannot be overcome by reasonable endeavours from the Party affected".

The defendant became a sanctioned entity under US sanctions in 2018. Although the claimant was a Dutch entity, it argued that as the contract specified that payment to it was to be made in US dollars (the only connection with the US under the contract), the sanctions would prevent it being paid.

The defendant countered that, although the contract provided for payment in dollars, the "reasonable endeavours" requirement obliged the claimant to accept a non-contractual payment (for example, payment in euros instead).

That argument was accepted by an arbitral tribunal but held to be wrong by Mr Justice Jacobs. His decision was overturned by the Court of Appeal, adopting what it described as a "common sense approach". The Supreme Court has now unanimously sided with Mr Justice Jacobs.

Here, reasonable endeavours required the claimant to take steps to allow payment in US dollars to be made (for example, by applying for a specific licence, if available). But it did not require accepting non-contractual payments in a different currency: "Making arrangements for non-contractual payment does not, however, enable the contract to be performed."

The Supreme Court stressed that its views were not restricted to the particular wording of the FM clause in question: this conclusion was of general application, given that it is a common feature of FM clauses that the event or state of affairs cannot be avoided by taking reasonable steps (so the need to make reasonable endeavours would have been implied even in the absence of express wording).

It is noteworthy that, in reaching this conclusion, the Supreme Court emphasised the fundamental principles of freedom of contract (which includes the freedom to not accept non-contractual performance) and that clear words are needed to give up a contractual right. As a result, in practice, little will be required now under the "reasonable endeavours" part of a FM clause. That is because, if it were possible to overcome the FM event, it probably wasn't really a FM event in the first place.