The UK’s Supreme Court has issued an important judgment clarifying the extent to which parties are required to use reasonable endeavours to avoid force majeure. Force majeure, or in layman’s terms ‘act of god’, is a specified, and generally unforeseen and disruptive, event which may mean that one or both parties to a contract are relieved from having to fulfil their obligations under it. In the present case, the underlying contract contained a force majeure clause, which included a provision requiring the party which was affected by the force majeure event to exercise reasonable endeavours to overcome it.
The relevant force majeure event took the form of US sanctions which effectively prevented payment by the charterer under an affreightment contract being made to a shipowner using US dollars. The charterer instead offered to make payments in euros and to cover any losses arising to the shipowner through the conversion of those payments into US dollars. However, in what seems a somewhat counterintuitive decision, the Supreme Court unanimously found against the charterer, on the basis that the requirement on the shipowner to exercise reasonable endeavours to overcome the force majeure event did not mean that it had to accept performance that was not in accordance with the terms of the contract.
Background
MUR Shipping BV (MUR) as shipowner and RTI Ltd (RTI) as charterer entered into a contract of affreightment which required MUR to make its vessels available to RTI in exchange for payment in US Dollars (the Contract). The Contract contained a force majeure clause which provided that neither party would be liable for loss, damage, delay or failure in performance caused by a “Force Majeure Event” which amongst other things, had to be an event which could not be “overcome by reasonable endeavors from the party affected”.
As a result of sanctions imposed on RTI’s parent company by the US Office of Foreign Assets Control (OFAC) (which affected RTI itself as it was a majority-owned subsidiary), MUR gave notice of a force majeure event on the basis that the sanctions prevented payment by RTI in US dollars under the Contract. RTI rejected the notice and offered to pay in euros instead of US dollars and to also absorb the costs of any exchange rate losses incurred by MUR in converting from euros to US dollars. MUR insisted that it was entitled to suspend performance. On 23 April 2018, OFAC effectively deferred the application of sanctions until 23 October 2018 and MUR resumed performance under the contract whilst accepting euros.
It was common ground between the parties that although the sanctions did not prohibit payment of US dollars under the contract, it was nevertheless highly probably that there would have been difficulties in making such payments: at the very least, payments from RTI would be delayed while any US intermediary bank investigated its status as a sanctioned party.
RTI commenced arbitration seeking damages in relation to the costs it incurred of chartering replacement vessels for the period in which MUR suspended performance under the Contract. The tribunal found in RTI’s favour, awarding $2million in damages for breach of contract, essentially on the basis that MUR had failed to exercise reasonable endeavours to overcome the force majeure event by accepting RTI’s offer to pay in euros and therefore could not rely on the force majeure clause. MUR appealed to the High Court of England and Wales on a point of law under section 69 of the Arbitration Act 1996.
At first instance, Jacobs J relied on authority to the effect that a reasonable endeavours provision could not oblige a party to accept non-contractual performance. Here, the Contract plainly required RTI to make payment in US dollars. Jacobs J ruled that the exercise of reasonable endeavours required endeavours “towards the performance of that bargain”, not endeavours to achieving a “different result which formed no part of the parties’ agreement”.
The Court of Appeal approached the issue as one of contractual interpretation of the “reasonable endeavours” clause. It looked to the underlying objective in the contract, which included that MUR should receive the right amount of US dollars as payment at the right time. Viewed in this way, the majority of the Court of Appeal found that payment in euros would have achieved precisely the same result and would have caused no detriment to MUR. Accordingly, it held that MUR’s failure to accept payment in euros meant that it did not exercise reasonable endeavours to “overcome” the force majeure event.
The Supreme Court unanimously allowed MUR’s appeal and held that the Court of Appeal was wrong to view the particular force majeure clause in the Contract as a bespoke form of clause. The Supreme Court referred to a number of textbooks and other authorities which established that a force majeure clause will generally be interpreted (or a term will be implied to the same effect) as 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. Accordingly, the Supreme Court found that the facts of the present case fell within the general paradigm (i.e. the “reasonable endeavours” clause was not unusual) and could not be easily distinguished from prior case law.
Therefore, the key question was whether, in the absence of express wording, an obligation to take reasonable endeavours to “avoid” or “overcome” a force majeure event means that the party seeking to invoke force majeure is required to accept non-contractual performance by the other party, or at least required to do in some circumstances as the Court of Appeal had held. The Supreme Court held that it did not, having regard to considerations of both principle and prior authority in reaching its decision. As to principle, amongst other things, the Supreme Court found that: (a) the principle of freedom of contract includes freedom not to contract and the freedom not to contract includes freedom not to accept an offer of a non-contractual performance of the contract; (b) clear words ought to have been required to displace MUR’s right (as expressed in the contract) to receive payment in US dollars; and (c) accepting non-contractual performance for the purposes of exercising reasonable endeavours would undermine certainty of contract as it would entail ex-post inquiry into whether the party entitled to receive performance was being subject to some form of detriment. As to prior authorities, it was common ground that there was no prior case law which directly disposed of the question of whether or not a “reasonable endeavours” proviso in a force majeure clause requires the affected party to accept an offer of non-contractual performance. However, the Supreme Court found that the prior authorities provided “strong”, albeit implicit, support for MUR’s position, whereas any support in the authorities for RTI’s position was weak.
Implications
The key takeaway from the Supreme Court’s decision is that parties to force majeure clauses should use clear and unambiguous language if they intend that reasonable endeavours to circumvent a force majeure event may include forms of performance which deviate from the express contractual terms. If they do not, they risk limiting “reasonable endeavours” to means which are not expressly or impliedly at odds with the contract.
The Supreme Court’s decision has particular implications for parties affected by sanctions, which have been placed upon an increasing number of entities in the wake of the Ukraine war and conflict in the Middle East. The number of disputes involving such clauses is rising against this geopolitical backdrop.
From a broader theoretical standpoint, the case reflects a tension between two considerations that underpin contract law, and indeed, this tension can be seen to be exemplified by the contrasting decisions at first instance, appeal to the Court of Appeal and then appeal to the Supreme Court. On the one hand, the Supreme Court’s decision clearly promotes certainty of contract and affirms the sanctity of the express language. On the other hand, one may question whether the decision truly reflects the intent of sophisticated commercial parties, to whom there might be little difference between a payment in US dollars and a payment in euros with insurance against losses.
