The English Court of Appeal finds that accepting non-contractual performance would have overcome a force majeure event

In this update we discuss the English Court of Appeal's judgment in MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm), which was handed down on 27 October 2022. The judgment addresses the issue of what a party is required to do in the context of a force majeure clause which stipulates that the affected party must use its “reasonable endeavours” to overcome the relevant force majeure event.  In particular, the Court was asked to determine whether the requirement to use "reasonable endeavours" (to overcome the force majeure event) included the affected party having to accept performance of a contractual obligation in a manner which differed from that contemplated by the contact.

The judgment is a useful illustration of how the words used in a force majeure clause can significantly broaden or narrow the effect of the clause, and is particularly relevant in the context of current geopolitical events and evolving sanctions regimes which have led to parties increasingly seeking to rely on force majeure clauses to excuse non-performance.

Background

In 2016, MUR Shipping BV ("MUR") and RTI Ltd ("RTI") entered into a contract of affreightment, pursuant to which MUR agreed to ship bauxite between Guinea and Ukraine between 2016 and 2018 (the "COA"). The quantities of bauxite involved meant that in practice, there would be a continuous flow of shipping activity. 95% of the payments on each cargo became payable in US dollars within five banking days after signing or releasing bills of lading.

The COA contained a force majeure clause, which included in its definition of "Force Majeure Event" a requirement that the relevant event "…cannot be overcome by reasonable endeavours from the Party affected". This wording was central to the present dispute.

On 6 April 2018, the US government imposed sanctions on United Stock Company Rusal Plc ("Rusal"), which was RTI's majority shareholder. RTI itself was not, however, added to the US sanctions list. On 10 April 2018, MUR issued a force majeure notice to RTI suspending its obligation to load seven cargoes. The notice explained that, as a subsidiary of Rusal, RTI was to be treated as if it were named on the US sanctions list. Therefore, there was a risk that further performance of the COA would constitute a breach of US sanctions.

RTI rejected the force majeure notice, contending that the sanctions would not interfere with cargo operations, that payment could be made in Euros, and that MUR (as a Dutch company) was not a "US person" and was therefore not subject to US sanctions. However, MUR refused to accept this position and maintained its refusal to load cargoes.

The US government issued a general licence on 23 April 2018 which allowed MUR to resume performing the COA, which it did on 25 April 2018. However, in the intervening period RTI had to obtain alternative shipping at additional cost. RTI brought arbitral proceedings against RTI to recover those costs.

Arbitration and Commercial Court

The arbitral tribunal found that MUR's case on force majeure would have been successful, but for the fact that the force majeure event could have been "overcome by reasonable endeavours" on MUR's part, per the terms of the COA. RTI's proposal to pay in Euros and bear any cost of conversion to US dollars was, the tribunal said, a "completely realistic alternative".

MUR appealed this decision to the Commercial Court under s69 of the Arbitration Act 1996 on a point of law: whether the reasonable endeavours provision obliged MUR to accept RTI's non-contractual performance.

In the Commercial Court, Jacobs J overturned the tribunal's award. He found that the scope of reasonable endeavours provisions was limited to the performance of the contract entered into by the parties. This provision did not oblige MUR to accept RTI's proposed non-contractual performance to overcome the force majeure event.

RTI appealed this judgment to the Court of Appeal, asking the court to determine the same point of law.

Court of Appeal

The parties' arguments

RTI reiterated an argument that had previously been rejected by Jacobs J in the Commercial Court. RTI contended that there were two possible interpretations of the "reasonable endeavours" provision:

1. A broader interpretation, that in considering whether MUR as "the Party affected" had exercised reasonable endeavours, the only question was whether MUR had acted reasonably, the arbitrators having found as a fact that it had not. The parties' contractual obligations were one factor in determining the answer to that question, but were no more than that. There was no rule that a party could never be required to accept non-contractual performance by its counterparty.
2. A narrower interpretation, that even if reasonable endeavours did not require MUR to accept non-contractual performance of obligations relating directly to loading or discharge, which were mentioned in the force majeure clause, different considerations applied to RTI's obligation to make payment in US dollars, which was not explicitly mentioned in that clause. Therefore, MUR could be required in the exercise of reasonable endeavours to accept payment in another currency.

MUR argued that existing case law¹ established a principle that absent some contrary indication in the clause, reasonable endeavours did not require a party to accept anything less than contractual performance. That principle accorded with the purpose of such clauses and promoted certainty, and was consistent with the principle that a party is not to be taken to be giving up its legal rights in the absence of clear express words to that effect.

The judgment

The Court of Appeal (split 2:1) allowed RTI's appeal and restored the arbitral award. The leading judgment was delivered by Males LJ, who explained the court's reasoning:

• The question was not about whether MUR had acted reasonably, as RTI had suggested in its "broad interpretation" argument.
• Rather, it was whether in order to overcome the state of affairs caused by the US sanctions, it was essential for the COA to be performed in strict accordance with its terms. In other words, whether it could only be overcome if RTI found a way to make timely payments in US dollars.
• The word "overcome" did not necessarily mean that the COA must be performed in strict accordance with its terms. This would be "too narrow an approach to the construction of the clause". Such clauses "should be applied in a common sense way which achieves the purpose underlying the parties' obligations".
• In this case, MUR's acceptance of RTI's proposal would have achieved precisely the same result as performance of the contractual obligation to pay in US dollars, RTI's proposed solution would have resulted in MUR receiving the right quantity of US dollars in its bank account at the right time, with RTI bearing any additional cost.
• However, the force majeure event would not have been overcome if RTI's proposal would have resulted in any detriment to MUR, or in something different from what was required by the contract.
• There was nothing in the authorities cited by MUR to cast doubt on this analysis. Neither Bulman v Fenwick or Vancouver Strikes involved a similar "reasonable endeavours" provision, nor an non-contractual proposal to overcome a force majeure event.

Comment

COVID, the war in Ukraine and the ongoing global supply chain shortages have, understandably, resulted in there being an increased focus on force majeure clauses, and how they operate in practice – and this decision is a helpful reminder that in the context of force majeure clauses, the wording used in the clause is paramount.  This is in contrast to other jurisdictions where the concept of force majeure is implied more broadly into commercial relationships, irrespective of whether or not there is a specific force majeure clause in the contract. 

Although force majeure clauses may have historically been thought of as being "boilerplate", they can confer very valuable rights to a party that is placed in a position where it is unable to perform its obligations on time or at all, due to events beyond its control.  Consequently, when negotiating contracts, parties should carefully review what the effect of the force majeure clause is in the event it is invoked, and should scrutinise these clauses in the same way they would scrutinise termination provisions, or other clauses which confer valuable rights to one or more parties.