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Charting the waters of sanctions, force majeure and reasonable endeavours

Posted on 5 May 2022

As sanctions continue to make headlines, the English Commercial Court's recent decision in MUR Shipping BV v RTI Ltd1 demonstrates the impact these wide-reaching prohibitions and restrictions can have on apparently unconnected transactions. The case, in which it was held that the exercise of reasonable endeavours under a force majeure provision did not require a party to sacrifice their rights to contractual performance in circumstances where sanctions would otherwise bite, should also be welcomed by commercial parties as a helpful confirmation of English law's respect for party autonomy.

Background

The claimant shippers entered into a contract of affreightment ("COA") with the defendant charterers in 2016 to carry consignments of bauxite from Guinea to Ukraine, with freight payable in US dollars. The COA provided that neither party would be liable to the other for loss in the event of a "force majeure event" which could not be "overcome by reasonable endeavours from the party affected". 

In April 2018, the US Government imposed sanctions on the charterers' parent company. The shippers invoked the COA's force majeure clause on the basis that it would be a breach of sanctions for them to continue performance of the COA, and that the sanctions prevented US dollar payments by the charterers. The charterers disagreed that sanctions would interfere with cargo operations and proposed that payment be made in euros. The shippers rejected that suggestion as payment in euros was not provided for under the contract and such an arrangement would therefore constitute non-contractual performance. The shippers declined to nominate ships under the COA until a licence was granted by the US authorities allowing normal trading activities to continue. The charterers obtained alternative tonnage for this period and brought a claim against the shippers for the additional costs incurred.

The dispute proceeded to arbitration. The tribunal ultimately concluded, on the basis of expert evidence, that the imposed sanctions would not have prevented payment under the COA.  However, it was highly probable that any US intermediary bank through which the dollar payments were routed would have exercised extreme caution in making payment.  Given the potentially serious consequences that can flow from a failure to comply with the relevant sanctions legislation, the shippers were entitled to take time to review the situation, subject to the "reasonable endeavours" qualification in the force majeure clause.  In this respect, the tribunal concluded that the charterers' proposal that payment be made in euros was a realistic alternative which, as a matter of reasonable endeavours, the shippers should have accepted. Accordingly, the shippers were unable to rely on the force majeure clause and were found liable for damages in excess of $2 million. The shippers appealed to the English Commercial Court under section 69 Arbitration Act 1996.

The issue before the Commercial Court

Amongst other matters, the shippers' appeal raised a key question of law: would reasonable endeavours in this context extend to accepting payment in (non-contractual) euros, in place of (contractual) US dollars?

The charterers submitted that, where a question arises as to the exercise of reasonable endeavours, the significance of any contractual obligation is simply one factor to be weighed in the balance in deciding the overall question of reasonableness, and the overall question was one for the tribunal to determine. However, Mr Justice Jacobs firmly rejected this proposition, which he noted was not supported by authority.  He concluded that 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. A relevant contractual obligation is not simply a factor to be weighed in the balance when coming to an overall assessment of reasonableness. 

The charterers also contended that, even if reasonable endeavours did not require a party to accept non-contractual performance in relation to the place of discharge or nature of cargo, the fact that euros could be readily converted to dollars meant that it should be accepted in this case. Again, Mr Justice Jacobs rejected the proposition, noting that it was both undesirable and difficult to weigh up the relative importance of different aspects of the contract, and was likely to lead to considerable uncertainty in the operation of force majeure clauses.

In this case, there was a contractual right to receive payment in US dollars, and a contractual obligation to make payment in US dollars. This right and obligation formed part of the parties' contractual agreement, and any requirement for reasonable endeavours could not require a party to take steps to achieve a result which formed no part of the parties' contractual agreement.

Concluding remarks

Now, more than ever, this case provides timely clarity on the steps parties are expected to take in addressing the contractual uncertainties that may arise with the imposition of international sanctions, as well as in other potential force majeure situations like the COVID-19 pandemic. It will no doubt come as a relief to many that the position is clear: where a force majeure provision requires it, then parties must undertake reasonable endeavours to fulfil their contractual rights and obligations – no less, but also no more.

In reaching his decision, Mr Justice Jacobs recognised the risk of contractual rights beginning to lose their meaning altogether if reasonable endeavours obligations in this context are extended too far. For, if the test turns on what is reasonable in a case, notwithstanding the contractual agreement between the parties, what is a contractual right at all? The decision in MUR Shipping BV v RTI Ltd affirms the foundational English contract law principle of the respect for party autonomy and its upcoming appeal will be followed with interest.

1 [2022] EWHC 467 (Comm)

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