June, 2024 - May the force majeure be with you? Supreme Court decides extent of ‘reasonable endeavours’ required to overcome force majeure
In RTI Ltd v MUR Shipping BV [2024] EWCA Civ 1406, the Supreme Court unanimously allowed the owner’s appeal (reversing the Court of Appeal’s majority decision), by concluding that “reasonable endeavours” to overcome force majeure events do not include having to accept an offer of non-contractual performance.
Facts
The owner, MUR Shipping BV, entered into a contract of affreightment (the “COA”) with the charterer, RTI Ltd, on an amended Gencon voyage charter. The freight payments from the charterer to the owner were to be made in US dollars.
The COA contained a force majeure clause which included the following provisions:
"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:
a) It is outside the immediate control of the Party giving the Force Majeure Notice;
b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
c) It is caused by one or more of acts of God, extreme weather conditions, war, lockout, strikes or other labour disturbances, explosions, fire, invasion, insurrection, blockade, embargo, riot, flood, earthquake, including all accidents to piers, shiploaders, and/or mills, factories, barges, or machinery, railway and canal stoppage by ice or frost, any rules or regulations of governments or any interference or acts or directions of governments, the restraint of princes, restrictions on monetary transfers and exchanges;
d) It cannot be overcome by reasonable endeavors from the Party affected.
36.4. A Party wishing to claim force majeure in respect of a Force Majeure Event must give the other Party a Force Majeure Notice within 48 hours (Saturdays, Sundays and holidays excepted) of becoming aware of the Force Majeure Event […]."
In April, 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed sanctions on Mr Oleg Deripaska and various companies which he controlled, either directly or indirectly, including United Company Rusal Plc, which was the majority owner of the charterer.
The owner therefore sent a force majeure notice to the charterer, broadly stating that because of the OFAC sanctions, it would be in breach of sanctions to continue to transport the charterer’s cargoes or receive the US dollar freight payments.
The charterer rejected the force majeure notice on the basis that sanctions would not interfere with cargo operations and that payment could be made in euros – i.e. the alleged force majeure event could be overcome by ‘reasonable endeavours’ (as provided for in the COA’s force majeure clause). The charterer also made clear that it would bear any additional costs or exchange rate losses in converting euros to US dollars. The owner was not prepared to accept payment in euros and maintained its refusal to nominate vessels.
The arbitration
The dispute proceeded to arbitration, where the arbitrators found that the owner was not entitled to rely on the force majeure clause suspending its obligation to load, because the force majeure event could have been overcome by the exercise of reasonable endeavours, i.e. accepting payments in euros.
The arbitrators found that this would have presented no disadvantage to the owner. Accordingly the charterer was entitled to damages for the owner’s refusal to nominate vessels to load the relevant cargoes.
Appeal to the Commercial Court
The owner obtained permission to appeal to the Commercial Court under section 69 of the Arbitration Act 1996, the specified question of law for decision being whether ‘reasonable endeavours’ can include accepting payment in euros instead of US dollars as provided for in the COA.
Jacobs J found in favour of the owner and allowed the appeal, concluding that the contractual right to payment in US dollars formed part of the parties’ bargain. The exercise of reasonable endeavours required payment towards the performance of that bargain, not towards a performance directed to achieving a different result which formed no part of the parties’ agreement.
Appeal to the Court of Appeal
The Court of Appeal (by majority decision, Arnold LJ dissenting) overturned the Commercial Court’s decision and restored the award of the arbitrators, finding that the proposal of payment in euros achieved the objective of the COA, with no detriment to the owner, and therefore overcame the state of affairs caused by the imposition of sanctions.
Appeal to the Supreme Court
The Supreme Court found that there were “several principles” (as strongly supported by authority) which provide good reasons for the owner’s case, namely:
- The object of reasonable endeavours provisos
The Supreme Court explained that force majeure clauses and reasonable endeavours provisos concern the causal effect of impediments to contractual performance. Contractual performance means performance of the contract according to its terms and failure to perform means failing to perform in accordance with those terms. As such, the object of the reasonable endeavours proviso is to maintain contractual performance rather than substitute it with a different performance.
- Freedom of contract
The fundamental principle of freedom of contract in English law – i.e. that parties are generally free to contract on whatever terms they choose – also includes the freedom not to contract, such that a party is not obliged to accept the offer of a non-contractual performance of the contract.
- Clear words needed to forego valuable contractual rights
The owner was clearly entitled under the COA to receive payment in US dollars. A party should not be required to accept non-contractual payments unless the contract makes that clear (either expressly or by necessary implication) that the party has given up that right. As a general principle of contractual interpretation, parties do not forego valuable rights without it being made clear that that was their intention.
- The importance of certainty in commercial contracts
The importance of certainty and predictability in commercial contracts is a well-established principle of English commercial law. The owner’s case was found to be in keeping with this principle: i.e. what steps can reasonably be taken to ensure contractual performance. On the other hand, the charterer’s case was found to raise a number of questions and create considerable legal and factual uncertainty, including inquiries into whether the acceptance of non-contractual performance would involve no detriment to the party seeking to invoke force majeure; and achieve the same result as performance of the contractual obligation in question.
Commentary and conclusion
Given the frequency of ‘reasonable endeavours’ provisos in force majeure clauses, expressly or impliedly, and the prevalence of sanctions issues which often raise the question of whether a force majeure clause applies (as occurred in this case), this decision is of particular importance for parties considering the exercise of a force majeure clause.
After a controversial and widely debated journey from arbitration through the appeal court system, the Supreme Court has provided the final say: in the absence of clear wording requiring a party to accept non-contractual performance, a party cannot be compelled to accept non-contractual performance to overcome the purported force majeure event, even if that non-contractual performance would be of no detriment to the party seeking to rely on it.
As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.