Legal briefing | 05 Dec 2022 |

Force majeure, reasonable endeavours and sanctions: Court of Appeal takes a different view

In MUR Shipping BV v RTI Ltd, the Court of Appeal ruled that a force majeure clause did not apply because the party unable to comply with its obligations had offered suitable alternative performance (as envisaged by the clause, which included a reasonable endeavours obligation). In doing so, it reversed the decision at first instance, where the court ruled that the shipowners were entitled to insist on being paid in US dollars, not euros, as required by the contract. The case highlights the difficulties in relying on force majeure clauses, even where (as here) the contract is affected by US sanctions.

Executive summary

On 27 October 2022, the Court of Appeal handed down its judgment in MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406, allowing the appeal and restoring the award of the arbitrators who found that the shipowners ("MUR") could not invoke the force majeure clause in the contract (which contained a reasonable endeavours obligation).

The Court of Appeal overturned the High Court's decision (which found that the force majeure clause applied, even though the affected party, MUR, had been offered alternative performance). The Court of Appeal concluded that MUR could have overcome the state of affairs caused by the imposition of sanctions on the charterers' ("RTI") associated company by accepting RTI's proposal of alternative non-contractual performance. RTI proposed making payment for freight in EUR (rather than USD as stipulated under the contract), which could be converted into USD as soon as it was received by MUR's bank ("RTI's Proposal"). The Court of Appeal found that RTI's Proposal would not have resulted in any detriment to MUR and would have achieved precisely the same result as performance of the contractual obligation to pay in USD. MUR could not, therefore, rely on the force majeure clause. It should be noted, however, that the Court of Appeal's decision was not unanimous.

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Background

The dispute in this case concerned the carriage of bauxite from Guinea to Ukraine pursuant to a Contract of Affreightment (the "Contract") between MUR and RTI. Under the terms of the Contract, the amount of freight due was defined by reference to a price per metric tonne in USD and payment was to be made to MUR in the Netherlands.

On 6 April 2018, the US Treasury's Office of Foreign Assets Control applied sanctions to RTI's associated company. That led to prospective delays and difficulties for RTI in paying the freight in USD, as it was required to do under the Contract. As an alternative, RTI proposed that it make payment in EUR which could be converted into USD as soon as it was received by MUR's bank. RTI also agreed to bear any additional costs or exchange rate losses in converting the EUR into USD. MUR rejected RTI's Proposal and sought to invoke the force majeure clause in the Contract.

The definition of a Force Majeure Event in the Contract

"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… any rules or regulations of governments or any interference or acts or directions of governments… restrictions on monetary transfers and exchanges;

d) It cannot be overcome by reasonable endeavors from the Party affected."

MUR suggested this relieved it from the obligation to load the vessel for two reasons. First, the sanctions exposed it to potential liability as a secondary party if it continued to deal with RTI. Second, the sanctions would prevent the payment of freight, since almost all such payments would have to pass through an intermediary bank in the US, and would therefore prevent or delay loading as MUR could not be expected to load cargo for which it would not receive payment. RTI denied there was any Force Majeure Event, suggesting there was no real risk that MUR would be exposed to liability under the sanctions, as it was a non-US entity and a transitional period had been provided to wind down relations which covered most of the term of the Contract. RTI had also offered to pay freight in EUR and to bear any costs of converting this to USD. Therefore, RTI submitted this could not be a Force Majeure Event, as MUR could have overcome the impact of sanctions by reasonable endeavours – i.e., accepting a different, but functionally equivalent, form of payment.

The arbitral award and the appeal

This dispute was submitted to an arbitral Tribunal who rendered their First Partial Award on this (and a number of associated disputes) on 23 December 2020 (the "Award"). In the Award, the Tribunal largely accepted MUR's case, finding that each of limbs (a) to (c) in the definition of Force Majeure Event had been satisfied. However, the Tribunal found that MUR could have accepted payment of freight in EUR without suffering any detriment and, therefore, found that the "reasonable endeavours" clause effectively required MUR to accept RTI's Proposal. Therefore, the Tribunal concluded that there was no Force Majeure Event.

MUR appealed the Award, under section 69 of the Arbitration Act 1996 and with leave from Calver J, on the grounds that the Tribunal had erred in law concluding that the "reasonable endeavours" sub-clause (clause 36.3(d)) required MUR to accept a form of non-contractual performance. RTI resisted this appeal and sought to uphold the Award both on the original grounds and on a number of alternative grounds.

High Court decision

At first instance, Jacobs J concluded, among other things, that on a true construction of the Contract, payment was to be made in USD. The mere fact that MUR's agents could convert the payment received to USD prior to remitting this would not render the payment in EUR contractually compliant. RTI's offer to make payment in EUR was an offer to render non-contractual performance. Bulman v Fenwick & Co[1] and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food[2] provided clear authority that "the nature of the contractual obligation determines the question of the nature of the steps which a party must take to avoid the impact of a force majeure event, and that a party does not have to perform the contract otherwise than in accordance with the contract in order to avoid a force majeure event"[3].

The High Court held that MUR was not, in the exercise of reasonable endeavours, required to accept payment in EUR and that the imposition of sanctions had properly constituted a Force Majeure Event. Therefore, the Award had been vitiated by an error of law.

Court of Appeal decision

The Court of Appeal (Males LJ gave the leading judgment) overturned the High Court's decision and restored the Award, concluding that MUR's acceptance of RTI's Proposal would have overcome the state of affairs caused by the difficulty of making timely payments of USD resulting from the sanctions imposed on RTI's associated company.

What was the correct approach to reasonable endeavours and alternative performance?

Males LJ made the following points, among others:

The appeal related to the specific terms of clause 36, particularly clause 36.3(d). The Court of Appeal was not concerned with reasonable endeavours or force majeure clauses in general. Rather, "[e]ach such clause must be considered on its own terms"[4].
Clause 36.3(d) was not concerned "with the exercise of reasonable endeavours in the abstract, let alone with whether the party affected has acted reasonably. The question is whether the relevant event or state of affairs can be overcome by reasonable endeavours from the party affected. However reasonable a party's endeavours may be, they are irrelevant if they do not result in the overcoming of the event or state of affairs in question"[5].
MUR had a contractual right to receive payment of freight in USD and there was no question of MUR being required to abandon or vary that right. Rather, the question was whether accepting payment in EUR would overcome the state of affairs resulting from the imposition of sanctions on RTI's associated company.

What did "overcome" mean?

The Court of Appeal noted that terms such as "overcome" and "state of affairs" are broad and non-technical terms. The force majeure clause should be applied in a common-sense way which would achieve the purpose underlying the parties' obligations i.e., that MUR should receive the right quantity of USD in its bank account at the right time. Males LJ could see no reason why a solution which ensured this should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. He did not interpret the word "overcome" to mean that the Contract had to be performed in strict accordance with its terms and found that the Tribunal's conclusion that the force majeure could have been overcome by reasonable endeavours from the party affected was a finding of fact (or at any rate of mixed fact and law), with which the Court of Appeal should not interfere. The position would be different if RTI's Proposal resulted in any detriment to MUR or in something different from what was required by the Contract.

Why was the High Court wrong?

The High Court's reason for concluding that the force majeure clause did in fact apply was that the Contract required payment in USD and a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure or similar clause. However, the Court of Appeal concluded that the purpose of the payment obligation was to provide MUR with the right quantity of USD in its account at the right time, which RTI's Proposal provided.

The Court of Appeal distinguished this case from the cases relied on at first instance, Bulman v Fenwick[6] and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food[7], noting that neither of those cases had an equivalent clause 36.3(d)(a reasonable endeavours obligation) and the proposed alternative performance would not have overcome the problem nor given the affected party the substance of what it was entitled to under the contract.

Dissenting Opinion

Arnold LJ dissented concluding an "event or state of affairs is not overcome within the meaning of clause 36.3(d) by an offer of non-contractual performance, and in particular an offer of non-contractual performance by the counterparty to the Party affected"[8]. Arnold LJ found that "the party invoking the clause is entitled to insist on contractual performance by the other party"[9] and "[i]f the parties to the contract of affreightment intended clause 36.3(d) to extend to a requirement to accept non-contractual performance, clear express words were required and there are none"[10].

What are the key lessons from this case?

This decision will be of particular interest to parties facing difficulties in rendering or receiving payment in contractually specified currencies as a result of sanctions, including those associated with the conflict in Ukraine. Although on this occasion the Court of Appeal found that the offer to pay in a different currency (which would then be converted into the currency stipulated under the Contract by the affected party's bank) could overcome the imposition of sanctions on RTI's associated company, this may not be a fool-proof way to avoid sanctions risk. Nor would this always be desirable: a last-minute currency change could potentially be a circumvention offence in some jurisdictions. What may be somewhat comforting is that the imposition of sanctions on a counterparty was accepted as an "event" capable of triggering a force majeure clause; this question however was accepted by the court and was not the subject of the appeal, so comments in the judgment could well be tested again in the future.

What does this ruling tell us about force majeure clauses?

Force majeure clauses also tend to be construed narrowly by the courts and, as evidenced by this decision, it can often be difficult to rely on such provisions. Indeed, the common outcome is that the force majeure clause does not apply (see for example, our briefings on force majeure in relation to the COVID-19 pandemic and Brexit). It is important, however, not to read too much into a single case. As Males LJ emphasised in this decision, each force majeure clause must be considered on its own terms.

In particular, offering alternative performance may have different consequences depending on the precise wording of the clause. In this case, the alternative performance meant that the force majeure clause did not apply. However, there have been instances where the opposite was the case i.e. the contract envisaged that if there was a force majeure event, then provided that alternative performance was offered, the clause would apply so as to relieve the party from liability to comply with its strict obligations under the contract.

A force majeure clause therefore requires careful and considered drafting and parties should ensure that any such provision accurately reflects their intentions.

The full judgment is available here: MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406 (27 October 2022) (bailii.org)