Contract Is (Still) King—Update On The UK Supreme Court's Decision In RTI Ltd v MUR Shipping BV

Key Takeaways

In the words of the UK Supreme Court, the decision in RTI v MUR raised "fundamental points of principle" that could, in theory, apply to all force majeure clauses.

Our top three takeaways are:

1. Unlike the common law doctrine of frustration (where a contract may be automatically discharged when performance becomes impossible), force majeure clauses are an opportunity for parties specifically to agree how to respond to certain future events beyond their control. However, in order to ensure the clause operates in accordance with the parties' expectations, it is necessary to spell out with as much specificity as possible what steps should be taken.
2. While it may seem that the shipowner in this case was acting opportunistically in suspending nomination of the vessels even though they would be no worse off in commercial terms by accepting payment in Euros, the court did not substitute its own judgment in this respect. This reflects past authorities (see, e.g. the judgment in the 19th century case of Bulman & Dickson v Fenwick & Co, referred to in the Supreme Court judgment: "It is not a question between the plaintiffs and defendants as to what is reasonable or unreasonable, it is a question of contract between the parties").¹
3. In the ongoing process of striking a judicial balance between contractual certainty on the one hand, and avoiding uncommercial outcomes on the other, this is a judgment which comes down clearly on the side of the former. Those who are concerned by the "uncommercial" outcome in this case have the ability to legislate for their preferred outcome when negotiating the terms of the agreement.

Introduction

The Supreme Court's decision in RTI v MUR² demonstrates that, when it comes to force majeure clauses, the English court will not step in to impose a solution that has not expressly been provided for in the contract, even if, with the benefit of hindsight, it may make commercial sense to do so. The message from the Court is clear: if you want to be certain about how far a party needs to go to overcome the effect of a force majeure event, draft accordingly.

In RTI v MUR, the key issue before the Supreme Court was whether a shipowner was required to accept payment in a currency other than US dollars when it became practically impossible for the charterer to pay in dollars (because of sanctions). The Supreme Court reversed the Court of Appeal's decision and held that, as a matter of general principle, a party invoking a force majeure clause does not have to accept noncontractual performance unless the contract explicitly requires it.

Both the impact of sanctions on contractual arrangements (in particular, since Russia's invasion of Ukraine), and the meaning and effect of force majeure clauses (including in light of the impact of COVID-19) have been hot topics in English contract law in recent years. This judgment therefore provides welcome guidance on one aspect of general importance in considering such clauses.

Case Summary

Facts

MUR Shipping BV ("MUR") as shipowner entered into a contract of affreightment with RTI Ltd ("RTI"), pursuant to which MUR agreed to make monthly shipments of bauxite, in exchange for monthly payments made in US Dollars from RTI.

The contract contained a force majeure clause. The clause read:

"36.1. Subject to the terms of this Clause 36, neither Owners nor Charterers shall be liable to the other for loss, damage, delay or failure in performance caused by a Force Majeure Event as hereinafter defined. While such Force Majeure Event is in operation the obligation of each Party to perform this Charter Party (other than an accrued obligation to pay monies in respect of a previous voyage) shall be suspended. ...

36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

On 6 April 2018, the United States (US) imposed sanctions on RTI's parent company, which seriously impaired RTI from making payments in US Dollars. Four days later, MUR sent a force majeure notice stating that RTI's inability to make timely payment in US Dollars to MUR amounted to a force majeure event. RTI did not accept the notice and offered to make payment in Euros instead and to compensate MUR for all additional costs it may incur by receiving payment in Euro (EUR). MUR did not accept this offer and suspended its performance under the charterparty, thus requiring RTI to incur the additional costs of chartering substitute vessels to ship the bauxite.

Previous Decisions

• Decision in arbitration: RTI commenced an arbitration seeking damages for the additional charter costs on the basis that MUR's suspension of performance amounted to a breach of contract. In its defence, MUR relied on the force majeure However, the Tribunal held that it was not permitted to do so as, by rejecting the offer of payment in EUR, MUR had failed to make "reasonable endeavours" to overcome the issue as required under clause 36.3(d).
• High Court: MUR appealed the decision under section 69 of the Arbitration Act, claiming that the Tribunal erred on a point of law. On appeal, the High Court found in favour of MUR and held that payment in US Dollars was a part of the parties' bargain. The exercise of reasonable endeavours had to be directed to achieving performance of the contract and could not require a party to work towards a different result which was not part of the agreement.
• Court of Appeal: The Court of Appeal (with Arnold LJ dissenting) overturned the High Court's decision and held that in certain circumstances a reasonable endeavours proviso could require acceptance of noncontractual performance. The majority of the Court of Appeal shifted focus from what constituted "reasonable endeavours" to what the word "overcome" meant. Using a common-sense approach, the Court of Appeal held that a problem would be "overcome" if its adverse consequences could be completely avoided. Applying this logic, in the current case, RTI's offer to pay in Euros and indemnify MUR for any incidental losses, would have "overcome" the sanctions issue.

Supreme Court Decision

The Supreme Court unanimously allowed MUR's appeal.

The Supreme Court found that the question as to whether a reasonable endeavours proviso requires the party invoking the force majeure clause to accept noncontractual performance was one of general application, given the widespread nature of that type of proviso.

The Supreme Court held that a force majeure clause in the usual form does not have that effect. It gave four main reasons for its conclusion:

The reasonable steps which a party must take to avoid a force majeure event must be aimed at the continuation of contractual performance. A reasonable endeavours proviso does not extend to require that party to accept noncontractual performance. The Supreme Court called it "absurd" to suggest that MUR caused the breakdown of the contract by failing to accept noncontractual performance.

Freedom of contract, a fundamental principle of English law, also encompasses freedom not to contract. This freedom not to contract would extend to refusing to accept performance that is not provided for on the terms of the agreement.

MUR had a contractual right to be paid for freight in US Dollars and correspondingly MUR was entitled to refuse payment in any other currency. As a general principle of contractual interpretation, a party should not be required to forego a contractual right unless this is made clear by the contract.

Certainty is foundational to commercial law. The Supreme Court found that RTI's description of the circumstances where noncontractual performance would have to be accepted was surrounded by uncertainty, e.g. as to where the line is to be drawn in terms of too much detriment to be suffered by the party seeking to rely on the clause.

Footnotes

1. [1894] 1 QB 179, 183

2. RTI Ltd v MUR Shipping BV [2024] UKSC 18

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