Force majeure and the bargain that’s been struck: The Supreme Court decision in MUR Shipping

The interpretation of force majeure clauses continues to be a live issue for many of our clients operating in international markets, affected by geopolitical turmoil and Russia’s invasion of Ukraine. A string of recent decisions has considered force majeure clauses in the context of the imposition of sanctions (see, for example, our article on the Litasco decision).

Most recently, on 15 May the Supreme Court handed down its judgment in RTI Ltd v MUR Shipping BV [2024] UKSC 18 (the Decision). Departing from the Court of Appeal’s position, the Supreme Court found that taking “reasonable endeavours” to overcome a force majeure event does not include a requirement for parties to accept offers of non-contractual performance, absent clear words in the agreement to that effect. In the context of this case, this meant that a party was not required to accept payment in Euros when the agreement expressly provided for payment in US Dollars.

Background

The dispute concerned a contract of affreightment between MUR Shipping BV (MUR) as shipowner and RTI Limited (RTI) as charterer (the Contract). The Contract provided for the carriage of bauxite in bulk from Guinea to Ukraine between 1 July 2016 and 30 June 2018. Due to the large quantities of bauxite being transported, there would be continuous shipment of vessels and regular payments from RTI to MUR. Under the contract, payments were to be made in USD.

The Contract contained a force majeure clause. For the purposes of the Decision, the important sub-clause was as follows:

“36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:… (d) It cannot be overcome by reasonable endeavors [sic] from the Party affected.”

On 6 April 2018, the US’s Office of Foreign Assets Control (OFAC) imposed sanctions and designated RTI’s parent – United Company Rusal (plc) as a Specially Designated National (SDN). Because RTI was majority-owned by Rusal, it became subject to the same restrictions.

On 10 April, Mur Shipping provided notice of force majeure on the basis that it could not lawfully make payment in USD in light of the new US sanctions. RTI rejected this notice, offering to pay in Euros instead and to bear any additional costs/exchange rate losses resulting from the change in currency. MUR refused this offer, maintaining its right to receive payment in USD and contending that it was entitled to suspend performance. On 23 April 2018, OFAC issued a General Licence which extended existing permissions for parties to carry out activities ordinarily incident and necessary to the maintenance or wind down of operations or contracts that were subject to sanctions until 23 October 2018. MUR resumed performance and – going forward – accepted payments from RTI in Euros (which were, upon receipt, converted into USD by MUR’s bank).

Great minds may differ

RTI commenced arbitration, seeking damages for the cost of chartering in replacement vessels during the period within which MUR suspended its performance. The arbitrators decided that MUR was not able to rely on the force majeure clause as it should have accepted RTI’s offer to pay in Euros given MUR would suffer no detriment in doing so in circumstances where RTI had offered to incur any associated costs.

This matter was appealed to the Courts, and Jacobs J found that the exercise of “reasonable endeavours” only required reasonable endeavours to effect performance of the bargain that the parties had contractually agreed: the parties had agreed for payments to be made in USD and deviation from that agreement to permit the receipt of payment in Euros did not form part of the bargain. A different decision, Jacobs J reasoned, would undermine the requirement for certainty in contracts.

The Court of Appeal took a different view.  Males LJ considered that the “real” question turned on whether the state of affairs would be “overcome” by the proposal to pay in Euros and by RTI incurring the associated costs. He found that the meaning of “overcome” does not require strict contractual performance, and the finding by the arbitrators that the state of affairs could be overcome by the payment in euros was a finding of fact, or “at any rate of mixed fact and law”, that should not be interfered with by the Courts. Males J considered that the position would have been different if the proposal caused detriment to MUR “or in something different from what was required by the contract” as in those circumstances, the force majeure event would only have been partially overcome. Newey J agreed with Males J as to the question to be decided and agreed that if the force majeure event could be overcome in a practical sense, this would be sufficient. Arnold LJ dissented, contending that a force majeure event cannot be overcome by an offer of non-contractual performance.

The Decision

The Court of Appeal had considered that it was dealing with a narrow issue of contractual interpretation, namely the meaning of “overcome” in this context. MUR disagreed with this proposition, submitting that provisions for “reasonable endeavours” in force majeure contracts are common-place and the findings on this issue would be of general application. The Supreme Court agreed, finding that a decision on this issue would be applicable to force majeure clauses generally.

The Supreme Court found that force majeure clauses (and the “reasonable endeavours” provisos within them) are concerned with the “causal effect of impediments to contractual performance” and that the question of causation must be asked having regard to the terms of the contract itself. On that basis, the Supreme Court found that the relevant question was:

“whether reasonable endeavours could have secured the continuation or resumption of contractual performance…..The object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance”

The Supreme Court emphasised the importance of the freedom to contract, the freedom not to contract, and the need for certainty in commercial contracts.  The Supreme Court acknowledged that there is an inherent uncertainty in what constitutes “reasonable endeavours” and provided the example of where “reasonable endeavours” might include a requirement to apply for a specific licence to authorise performance – in that situation, there is uncertainty as to the outcome. However, the Supreme Court considered that the evaluation of what constitutes “reasonable endeavours” is nonetheless “geared” toward achieving contractual performance and that it would not be desirable to impose additional uncertainty by departing from what is expressly provided from in the contract.

It further emphasised that, to forgo valuable contractual rights, clear words need to be contained in the agreement and observed that is open to parties to specifically provide that “reasonable endeavours” includes accepting an offer of non-contractual performance.

The Supreme Court ultimately agreed with MUR that it was not required to accept payment in Euros and was entitled to insist on payment in USD and allowed its appeal.

Key Takeaways

The Decision signifies a return to core contractual principles, namely the importance of the bargain that the parties have struck and the need for clear wording to deviate from that bargain. Negotiating force majeure clauses will generally require a consideration of the following:

• What does the force majeure clause require? The precise wording of the clause will be pivotal in determining whether certain conditions must be complied with in order to rely on the clause.
• How much uncertainty is acceptable? As acknowledged by the Supreme Court, there is some inherent uncertainty in the meaning of “reasonable endeavours”. If, for example, a business does not wish the content of that obligation to include (in the sanctions context) a licence application – it should consider including clear wording to that effect.
• To what extent is flexibility desirable? The Supreme Court emphasised in the Decision that there is nothing precluding parties from inserting wording in their force majeure clauses to allow for non-contractual performance - but that wording needs to be clear. If, for example, a business can see real benefits to having multiple currency payment options to account for fluctuating geopolitical dynamics, it may choose to draft a broader clause.