UK Supreme Court majors on force majeure in appeal to arbitral award
03 June 2024The UK Supreme Court has ruled that a requirement to use reasonable endeavours to overcome a force majeure event does not mean a party has to accept non-contractual performance. The decision accords with the paramount English principle of freedom of contract and will assist with ensuring contractual certainty in commercial contracts. It is also a reminder of the usefulness of the right to appeal an arbitral award to Court on a point of law.
The story to date
The contract
In RTI Ltd (Respondent) v MUR Shipping BV (Appellant) [2024] UKSC 18, the parties had entered into a contract of affreightment – MUR was the shipowner and RTI was the charterer. The contract included a force majeure clause. Importantly, clause 36.3(d) of the contract included the reasonable endeavours proviso that “A Force Majeure Event is an event or state of affairs which meets all of the following criteria: … It cannot be overcome by reasonable endeavours from the Party affected.”
What is a force majeure clause?
Force majeure is a contractual mechanism that excuses a party from liability for breach of contract if the breach is caused by an event outside the party’s control. It recognises that a party should not be penalised where it cannot fulfil the contract due to events it cannot influence.
A force majeure clause normally suspends a party’s obligations while it tries to rectify the issue. It will also normally allow a party – possibly only the “innocent” party or possibly either party – to end the contract if the force majeure is not resolved after a specified period of time.
The contract will usually set out what qualifies as a force majeure. This often includes a rather bleak panoply of events, including natural disasters, epidemics, civil unrest and war. If the contract relates to a specific project, parties might also include more specific events.
The contract stated that RTI would pay MUR in US dollars (USD).
In April 2018, just under two years into the contract’s term, the US Office of Foreign Assets Control (OFAC) imposed financial sanctions on the Russian individual and companies which ultimately owned RTI. However, OFAC did not impose sanctions specifically on RTI.
As a result, MUR notified RTI, claiming that a force majeure event had arisen.
RTI rejected MUR’s notice and offered to pay MUR in euros instead of USD and to bear any additional costs or exchange rate losses suffered by MUR in converting euros to USD. However, MUR maintained its right to payment in USD and insisted that it was entitled to suspend performance under the force majeure clause.
What did the arbitration award say?
Initially, the parties submitted their dispute to arbitration.
Dealing briefly with this issue in two paragraphs (in an award comprising 156 paragraphs) and without any reference to case law, the arbitrators concluded that the sanctions would not in fact have prevented RTI from paying MUR in USD. However, they also said it was reasonable to expect that payments in USD would have been delayed due to increased vigilance by US banks and that payment in euros was a much more realistic possibility.
As a result, they concluded, there had not been a force majeure as defined in the contract, because MUR could have “overcome” the alleged force majeure event by accepting payment in euros, which would have amounted to “reasonable endeavours”.
Appeal of the arbitral award
MUR appealed this point to the High Court, taking advantage of the right pursuant to section 69 of the Arbitration Act 1996 for parties to appeal to the English court an arbitral award on a point of law. Section 69 is a provision which parties are able to, and often do, contract out of. However, that had not happened here, so this route of appeal was open to MUR.
In upholding the appeal, the High Court found the following.
- The contractual right to payment in USD formed part of the parties’ bargain. The exercise of reasonable endeavours to overcome a force majeure event required endeavours towards the performance of the contractual bargain, not towards any other result for which the parties had not contracted.
- If the loss of a contractual right were to turn purely on what is reasonable in a case, the contractual right would be beset by uncertainty, which is generally to be avoided in commercial transactions.
RTI appealed to the Court of Appeal, which allowed the appeal overturning the High Court’s decision by a 2:1 majority decision. In summary, Males LJ (with whom Newey LJ agreed) said that the key question was whether accepting payment in euros would overcome the state of affairs that had resulted from sanctions being imposed on RTI’s holding company. If it would, then accepting payment in euros would have been “a very straightforward matter for MUR”.
In approaching this question, Males LJ considered that the court was dealing with an issue of interpretation that turned on the specific terms of the force majeure clause in the contract and, in particular, the use of the term “overcome” in clause 36.3(d) of the contract. The Court of Appeal considered that “overcome” in the reasonable endeavours proviso had to be given a broad and non-technical meaning. The majority rejected the argument that the state of affairs could be overcome only if the parties found some other way to pay in USD.
In Males LJ’s words, a solution that ensured MUR received the right amount of USD in its bank account at the right time would overcome the state of affairs resulting from the imposition of sanctions. This included a mechanism where MUR was paid in euros, then that sum was immediately converted into USD. This would have achieved “precisely the same result” as the contractual obligation to pay in USD.
In his dissenting judgment, Arnold LJ said that while it would have been reasonable for MUR to accept payment in euros to resolve the difficulty with USD payments, it was not obliged to do so. Arnold LJ held that there was a presumption that contracting parties do not give up their contractual rights unless they have agreed to do so in clear, express words. That had not happened here, and so MUR was entitled to insist on its strict contractual right, namely to be paid in USD, not euros.
We discussed the Court of Appeal judgment in further detail in our previous article.
The Supreme Court’s decision
In a unanimous decision, the Supreme Court rejected the Court of Appeal’s finding that it was dealing with a narrow issue about the use of the word “overcome” in this specific reasonable endeavours proviso. The Supreme Court held that “it is well 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.”
The reasonable endeavours proviso as drafted in the contract was therefore a “very common feature” of force majeure clauses. It followed that:
- even if clause 36 had not contained a reasonable endeavours proviso (clause 36.3(d)), “it would have been interpreted as containing a reasonable endeavours proviso to like effect …
- no particular significance can be attached to the use of the word “overcome”.”
The Supreme Court considered that this approach was supported by considerations of principle and relevant judicial authorities.
Considerations of principle
The Supreme Court referred to the following four considerations of principle in support of its decision.
1.
The object of reasonable endeavours provisos
The Supreme Court accepted MUR’s argument that force majeure clauses subject to a reasonable endeavours proviso (whether expressed or implied) raise an issue of causation. The party seeking to rely on the force majeure clause “must be able to show that the force majeure event caused the failure to perform. That means establishing that the failure to perform could not have been avoided by the exercise of reasonable endeavours.” Reasonable endeavours in this context means “whether reasonable endeavours could have secured the continuation or resumption of contractual performance.”
Here, any available reasonable endeavours would have involved RTI finding a way to pay MUR in USD (such as by securing a licence from OFAC, albeit that proved impractical in the circumstances), as per the terms of the contract. Steps to secure “some different, non-contractual performance”, such as payment in euros, would not meet the “object of the reasonable endeavours proviso which is to maintain contractual performance, not to substitute a different performance.” Payment in euros was not stipulated in the contract and so any such payment would not constitute a performance of the terms of the contract or “reasonable endeavours” to meet the expressed terms of the contract. It would be “absurd” for MUR to have to accept such an offer of non-contractual performance.
2.
Freedom of contract
As is well established in English contract law, “parties are generally free to contract on whatever terms they choose”. That principle “includes the freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract.” MUR and RTI had chosen to agree that payment under the contract would be made in USD only. Therefore, MUR was free not to accept the offer of payment in euros.
3.
Clear words needed to forego valuable contractual rights
A party is not be required to give up a valuable right unless the contract makes clear (whether expressly or by necessary implication) that the party has given up that right. “Indeed, one may regard it as a general principle of contractual interpretation that parties do not forego valuable rights without it being made clear that that was their intention.”
Here, MUR had a contractual right to be paid freight in USD. It therefore had a contractual right to refuse to accept payment in euros. The court found that “clear words would be necessary for MUR to be required to forego that valuable right, including making clear the circumstances which that would be so required. Neither of these matters are addressed by clause 36.3(d).”
4.
The importance of certainty in commercial contracts
The certainty and predictability of English commercial law is a key reason why parties to international commercial transactions frequently choose English law as the governing law of their contracts.
Absent clear wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. The purpose of the proviso is limited to an inquiry of what steps can reasonably be taken to ensure contractual (not non-contractual) performance. To introduce non-contractual performance into the proviso would only lead to time-consuming and costly retrospective inquiries with likely unpredictable results leading to disputes requiring adjudication.
Such a state of affairs would be unsatisfactory, not least because the very circumstances where force majeure clauses are considered are extreme and therefore parties need to know at that time whether they can be relied upon in short order, not after some retrospective inquiry. In that regard, the judgment acknowledged that the term “reasonable endeavours” involves an evaluative judgement and, therefore, a degree of uncertainty. However, to gear that evaluation towards non-contractual performance would only create “needless additional uncertainty by departing from the standard provided by the terms of the contract and hence what constitutes contractual performance.”
The relevant judicial authorities
It was common ground that there was no case which directly considers whether reasonable endeavours in a force majeure clause requires the affected party to accept an offer of non-contractual performance from the other party. That said, the court found that the authorities relied upon by MUR (Bulman & Dickson v Fenwick & Co [1894] 1 QB 179 and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691) provided implicit support for its position. RTI did not suggest that Bulman and Reardon Smith Line should be overruled. The court was less convinced by the authorities RTI put forwarded, giving detailed reasons for those conclusions in the judgment.
What does this mean for me?
Supreme Court authority on the interpretation of a common contractual requirement is always helpful. As the Supreme Court noted, force majeure clauses commonly either include a "reasonable endeavours" provision, or such a provision is implied into them. Commercial parties will therefore appreciate the restoration of certainty afforded by the Supreme Court’s decision that reasonable endeavours does not include a requirement to accept non-contractual performance, unless specific wording is included to this effect.
The similarities between many force majeure clauses should not, however, be overemphasised. Contractual interpretation will always be a question of understanding the specific words used. So while the decision provides helpful clarity, it remains important not to treat force majeure clauses as "boilerplate" without consideration as to how they may work in practice. Parties should give thought to the factors discussed in our previous article and ask themselves in advance if they wish to attribute any specific meaning as to what will constitute reasonable endeavours to work around a force majeure event.
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