Introduction
The Court of Appeal has recently handed down its judgment in the case of MUR Shipping BV v RTI Ltd, which considers when a force majeure clause can relieve a party from performance of its contractual obligations in circumstances where that party has an obligation to use reasonable endeavours to overcome a potential force majeure event. The Court of Appeal (by way of majority) has overturned the decision of the High Court, which had held that, in exercising “reasonable endeavours” to overcome the impact of sanctions, a party is not required to accept anything other than what has been agreed in the contract.
Debevoise & Plimpton has previously considered the High Court’s decision in “Russia Related Sanctions—Helpful Guidance on the Proper Application of a Force Majeure Clause,” which provides an overview of the proper application of force majeure clauses in the context of Russia-related sanctions. The key takeaways considered in that article still apply, namely that the meaning and effect of a force majeure clause will depend entirely on the specific wording. However, the Court of Appeal has now confirmed that a party may have an obligation to accept payment in an alternative currency to the one specified in the contract to overcome the effect of a force majeure event. The Court of Appeal’s decision in MUR Shipping BV v RTI Ltd turned entirely on the specific wording of a force majeure clause and the requirement of a contracting party to exercise “reasonable endeavours.” The Court of Appeal’s decision and the wider implications for other contracting parties are analysed further below.
Summary of the Facts
In 2016, MUR Shipping (the “Owners”) entered into a freight contract with the RTI (the “Charterers”). Under the contract, the Owners would transfer goods to Ukraine, on behalf of the Charterers and the Charterers would pay for this service in U.S. dollars. The contract contained a force majeure clause that included four criteria, including that a force majeure event was an “[…event or state of affairs which] cannot be overcome by reasonable endeavours from the party affected.”
In 2018, the Charterers’ parent company was added to the U.S. sanctions list. The Owners subsequently notified the Charterers that this was a force majeure event. The Owners stated that the U.S. sanctions would (1) unacceptably delay its receipt of the Charterers’ U.S. dollar payment (delay would be caused by U.S. banks that would thoroughly scrutinise the transaction to confirm whether the transaction breached U.S. sanctions); and (2) prevent it from being able to load and discharge the Charterers’ goods onto the freight vehicle.
The Charterers did not accept that the U.S. sanctions constituted a force majeure event that allowed the Owners to refuse to perform the contract. The Charterers argued that there was no force majeure event because (1) the Owners were not impacted by the sanctions as they were not a “U.S. Person” for the purposes of the U.S. sanctions list, so their obligation to load and discharge the freight goods was not impacted; and (2) the Charterers offered to pay in the alternative currency of Euros and include an indemnity against any costs of conversion so that the Owners did not suffer any detriment. The Owners refused to load the freight goods. Accordingly, the Charterers brought a claim for the additional costs of finding another freight shipping company and the parties went to arbitration.
The Tribunal’s Decision
The arbitral tribunal was asked to determine a number of issues, including whether a “Force Majeure Event” had in fact occurred. The tribunal accepted that it was not a breach of sanctions for the Owners to load further cargoes under the contract. However, they considered that it had not been clear at the time, and it was reasonable for the Owners to take some time to review the position.
The tribunal then considered the effect of sanctions on making payments in U.S. dollars under the contract. They held that it was not unlawful for the Owners to load cargoes or for the Charterers to pay freight in U.S. dollars. However, it was “highly probable that the U.S. intermediary bank would have initially stopped the transfer on the basis of RTI’s status as a blocked party until the bank could investigate whether the transaction complied with U.S. sanctions requirements.”
The tribunal finally turned to the definition of a force majeure event that “[i]t cannot be overcome by reasonable endeavours from the Party affected.” The tribunal found that the Owners’ case on force majeure failed at the last hurdle because it could have been overcome by “reasonable endeavours.” Accepting payment in Euros would have presented no disadvantage to the Owners and was a completely realistic alternative they could have adopted with no detriment.
The High Court Decision
The High Court allowed the Owner’s appeal on the narrow question of whether a party is 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.”
The High Court rejected the Charterers’ argument and overturned the tribunal’s award in favour of the Owners. Citing Bulman v Fenwick & Co [1894] 1 QB 179, the High Court held that the affected party, in this case, the Owners, are not “required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure clause …” (emphasis added)—this was a firmly established general principle of law.
The Court of Appeal Decision
The Court of Appeal’s decision reinforces the importance of analysing a force majeure clause on the specific contractual wording. Males LJ emphasised that his judgment was not concerned with reasonable endeavours clauses or force majeure clauses in general, but each clause must be considered on its own terms.
Males LJ also sounded a warning for parties seeking to rely on the more flexible approach adopted by the tribunal, which had found that it can be reasonable for parties to take their time to consider the impact of sanctions and considered practical, as well as legal restrictions on contractual performance. Although this was not a matter for appeal, Males LJ expressed some doubt that there was an event or state of affairs that (a) prevented or delayed the loading of cargo at the load part; and (b) was caused by one of the matters specified in the contract. While Males LJ had no trouble accepting that the imposition of sanctions on the Charterers’ parent company was out of the Owners’ control, he described the tribunal’s reasoning in relation to (a) and (b) above as “problematic.”
The only question on appeal that the Court of Appeal was required to consider was—“whether the force majeure event or state of affairs could have been overcome by reasonable endeavours [i.e., acceptance of Euro payment] from MUR as the party affected.” (emphasis added). In other words, was “… acceptance of RTI’s proposal to pay freight in euros and to bear the cost of converting those euros into dollars [enough to] overcome the state of affairs caused by the imposition of sanctions on the Charterers’ parent company”?
Males LJ rejected the two arguments raised by the Charterers: the broad submission that all that matters is whether the party affected has acted reasonably; and the narrow submission that the payment proposal of Euros instead of U.S. dollars did not constitute non-contractual performance. He considered that the parties’ arguments and the decision of the High Court were focused on the question of reasonable endeavours in general terms. But, Males LJ considered, “the real question in this case is whether acceptance of RTI’s proposal to pay freight in euros and to bear the cost of converting those euros into dollars would overcome the state of affairs caused by the imposition of sanctions on Rusal. If it would, it would have been a very straightforward matter for MUR to accept that proposal, requiring no exertion on its part. If it would not, no amount of endeavours, reasonable or otherwise, would change that situation.”
Instead, he looked at the precise wording of the force majeure clause and considered whether, on the terms of the clause the “endeavours” (payment in Euros) would have been successful in overcoming the “event” or “state of affairs.” He concluded that “[t]erms such as ‘state of affairs’ and ‘overcome’ are broad and non-technical terms and clause 36 should be applied in a common sense way which achieves the purpose underlying the parties’ obligations—in this case, concerned with payment obligations, that MUR should receive the right quantity of US dollars in its bank account at the right time. I see no reason why a solution which ensured the achievement of this purpose should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided.”
Key Takeaways
This case makes clear that the interpretation of a force majeure clause will be determined by the specific wording of the clause. However, force majeure clauses do commonly contain “reasonable endeavours” provisions, and the decision is likely to have wider commercial significance for parties considering their contracts in light of new sanctions and currency restrictions.
The decision is significant in finding that, in some circumstances, a party may have to accept payment in a currency other than that specified in the contract, if to do so would overcome a force majeure event. The Court of Appeal distinguished the line of authorities relied on by the High Court that a party does not have to accept non-contractual performance, as shown by the decision in Bulman v Fenwick & Co [1894] 1 QB 179.
In this case, the payment in alternative currency would have entirely overcome the “state of affairs” in question with no detriment to the Owners. This may not always be the case, and the decision does not generally impose an obligation to accept payment in an alternative currency in all cases. Parties may still be able to rely on the objection that a proposal is for non-contractual performance depending on the facts of the case.