Force majeure not overcome by non-contractual performance
23 May 2024
There have been various global crises in recent times, including the COVID-19 pandemic, Russia's invasion of Ukraine, and the attacks on international shipping in the Red Sea. In such circumstances, contract parties might look to force majeure clauses as one way to manage adverse impacts on contractual performance. Failure properly to apply a force majeure clause can result in lengthy legal proceedings and, potentially, the contract being brought to an early end. This can come as a huge surprise (and cost) to the party who does not fully understand how their force majeure clause operates. It is thus essential that parties understand the scope of force majeure clauses included in their contracts and the way in which they might be interpreted.
The UK Supreme Court (the Supreme Court) recently handed down its unanimous decision allowing an appeal against a judgment of the Court of Appeal in RTI Limited v MUR Shipping BV [2024] UKSC 18. The Supreme Court held that a party's obligation to use "reasonable endeavours" to overcome a force majeure event does not oblige it to accept an offer of non-contractual performance in the absence of clear wording to that effect in the contract.
Factual background
The parties to this matter (MUR Shipping BV (MUR), a Dutch company, and RTI Limited (RTI), a Jersey company) had entered into a contract on 9 June 2016 with MUR as shipowner and RTI as charterer. The contract provided for a continuous carriage of bauxite from Guinea to Ukraine between 1 July 2016 and 30 June 2018 and a corresponding flow of payments from RTI to MUR, which payments were expressly required to be made in US dollars.
The contract contained a force majeure clause which defined a "Force Majeure Event" as an event which, amongst other things, could not be overcome by the reasonable endeavours of the affected party.
On 6 April 2018, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) listed RTI's parent company, United Company Rusal plc (Rusal), on the Specially Designated Nationals list, subjecting both Rusal and its subsidiaries (including RTI) to primary US sanctions.
On 10 April 2018, MUR notified RTI of a force majeure event under the contract, claiming that the payment of US dollars was prevented by the application of US sanctions against RTI. RTI rejected MUR's notification of force majeure and offered to make payments in euros, as well as to bear any losses that MUR would suffer upon RTI paying in euros. MUR rejected RTI's offer of payment in euros and refused to nominate vessels, insisting that it was entitled to suspend performance in reliance on the force majeure clause in the contract.
On 23 April 2018, OFAC extended permission for parties to carry out activities incidental and necessary to the maintenance or wind down of operations or contracts that had become subject to sanctions until 23 October 2018. MUR resumed nominations of vessels on 25 April 2018, and thereafter accepted payments from RTI in euros (converted into US dollars by MUR's bank on receipt).
Arbitration
RTI subsequently commenced arbitration proceedings against MUR (the contract providing for disputes to be resolved by way of arbitration), seeking to recover the costs it had incurred chartering seven replacement vessels in the period during which MUR had claimed force majeure, suspended its performance and stopped nominating vessels.
Whilst agreeing that OFAC's imposition of sanctions had given rise to a force majeure event, the tribunal held that MUR had an obligation to use "reasonable endeavours" to overcome that force majeure event in accordance with the express wording of the contract. The tribunal held that the obligation to use "reasonable endeavours" to overcome the force majeure event could have been discharged by MUR accepting RTI's offer of payment in euros.
Proceedings in the High Court and Court of Appeal
MUR appealed to the High Court pursuant to section 69 of the Arbitration Act 1996, which permits appeals to the court on questions of law.
At first instance, Jacobs J found that the terms of the contract included an express obligation on RTI to make payment in US dollars (and a corresponding entitlement on the part of MUR). Jacobs J held that any obligation to use "reasonable endeavours" could only refer to endeavours which aimed at achieving the parties' contractual bargain.1 He noted that the loss of a contractual right consequent upon a party exercising reasonable endeavours would render the contractual terms uncertain. Jacobs J therefore allowed MUR's appeal.
RTI successfully appealed Jacobs J's decision.2 The majority of the Court of Appeal held that the key question was the interpretation of the contractual force majeure clause, and in particular the meaning of the word "overcome" in the reasonable endeavours obligation. The majority held that the term "overcome" included contracts being performed outwith their express terms, the relevant question being whether the adverse consequences of a force majeure event could be avoided.
Arnold LJ issued a dissenting judgment, finding that the party invoking a force majeure clause was entitled to insist on contractual performance, and that clear words would have been necessary if a party was required to accept non-contractual performance as a means of overcoming force majeure.
The Supreme Court's decision
MUR appealed to the Supreme Court, which issued a unanimous decision allowing the appeal.
The Supreme Court concluded that "'reasonable endeavours' to overcome a force majeure event do not include accepting an offer of non-contractual performance absent clear wording to that effect".3
The Supreme Court held that there were four principles that supported MUR's case and the Supreme Court's decision:
- The object of reasonable endeavours provisos: a party affected by a force majeure event must be able to show that the force majeure event caused the failure to perform the contract according to its terms.4
Here, the relevant contractual performance was RTI's payment to MUR, which was expressly required to be in US dollars. MUR was obliged to exercise reasonable endeavours to enable the payment of US dollars without delay, but not any other currency, as this was "the only way in which the impediment to contractual performance could have been 'overcome'".5 - Freedom of contract: the principle of freedom of contract, a fundamental aspect of English law, "includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract".6
- Clear words needed to forego valuable contractual rights: Under English law, a party is not required to give up contractual or common law rights in the absence of a clear term, expressly included in the contract or necessarily implied.
MUR had a clear contractual right to be paid in US dollars. The corollary of that is that it had a contractual right to refuse payment in any other currency, and clear words would be necessary for MUR to be required to give up that right. - The importance of certainty in commercial contracts: It was key that the parties knew "whether or not a force majeure clause can be relied on at the relevant time, not after some retrospective inquiry".7 An interpretation of the reasonable endeavours obligation that required detailed investigations of issues of detriment and prejudice was not in keeping with this principle.
While the result would have been different had the contract provided alternative methods of payment, it was common ground that RTI was obliged to pay in US dollars, and "certainty is maintained so long as the reasonable endeavours proviso is interpreted as focusing on that as the relevant contractual performance".8
Notably, the Supreme Court found that a force majeure clause would be applicable "only if the party invoking it can show that the event or state of affairs was beyond its reasonable control and could not be avoided by the taking of reasonable steps".9 The question of whether a force majeure event could be overcome was held to constitute a principle of general application, rather than a requirement which applies only where an explicit reasonable endeavours (or similar) proviso has been written into a contract.10 Accordingly, the force majeure clause in question would have been interpreted as containing a reasonable endeavours proviso had such an express clause not been included.11
Accordingly, the Supreme Court's decision is of relevance to any party considering invoking force majeure, irrespective of whether the clause relied upon contains an obligation to exercise reasonable endeavours to overcome force majeure.
What you need to know
The following are our key takeaways from the Supreme Court's decision:
- Force majeure under English law is a much wider concept than the doctrine of frustration and, as a creature of contract, is entirely dependent on the words used (or indeed omitted) by the parties in their force majeure clause.12
- Even where there is no express term which requires a party to use reasonable endeavours to overcome a force majeure event, English law will likely imply such an obligation. If contract parties do not want their ability to claim force majeure to be restricted in such manner, clear words to that effect should be used in the force majeure clause.
- An offer of non-contractual performance will generally not suffice to discharge an obligation to use reasonable endeavours to overcome a force majeure event: a party is not required to forego or vary its express contractual rights in order to rely on a force majeure clause. If contract parties are prepared to accept non-contractual performance in the event of force majeure, they should expressly spell this out in their contract. Clauses which provide alternative methods of performance might also provide room for manoeuvre. However, careful thought should be given to how such caveats would apply in practice, including which obligations fall within or outwith the scope of such offer.
- This case is a stark reminder of the perils of getting the interpretation and application of force majeure clauses wrong. Here, the force majeure notice was given in 2018, some six years prior to the Supreme Court's decision. An arbitration and three appeals through the English courts ensued. Careful thought and informed legal advice, both when contracting and when considering invoking a force majeure clause, will help to reduce disputes risk and potentially lengthy delays to legal and commercial certainty. See our previous article for a summary of the key considerations for parties seeking to advance or respond to a claim of force majeure.
