Introduction
In MUR Shipping BV v RTI Ltd, the Court of Appeal has held that the exercise of reasonable endeavours under a force majeure provision required a non-defaulting party to accept non-contractual performance in circumstances where this would have no detrimental effect on the non-defaulting party. The Court of Appeal's reversal of Mr Justice Jacobs' first instance judgment (see our previous article here), raises interesting questions as to the lengths commercial parties may be expected to go to in force majeure circumstances. In an increasingly uncertain post-pandemic trading landscape, where sanctions continue to play a key role on the international political stage, the decision also demonstrates the impact these factors can have on apparently unconnected transactions.
Background
In 2016, the claimant shippers ("MUR") entered into a contract of affreightment ("COA") with the defendant charterers ("RTI") to carry consignments of bauxite from Guinea to Ukraine. Freight was 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" or "state of affairs" which could not be "overcome by reasonable endeavours from the party affected". While such an event or state of affairs was in operation, the obligation of each party to perform the contract was to be suspended.
In April 2018, US sanctions were imposed on RTI's parent company. MUR 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 RTI. RTI proposed that payment be made in euros and offered to cover the costs of the subsequent US dollar conversion, but MUR rejected the proposal as payment in euros was not provided for under the contract, and it would therefore constitute non-contractual performance. RTI was forced to obtain alternative tonnage and brought a claim against MUR for the additional costs of doing so.
The dispute proceeded to arbitration, where it was held that RTI's proposal that payment be made in euros was a realistic alternative to payment in dollars as a matter of precaution (which would not, in the tribunal's view, have been prevented under the imposed sanctions) which, as a matter of reasonable endeavours, MUR should have accepted. Accordingly, MUR were unable to rely on the force majeure clause and were found liable for damages in excess of $2 million.
MUR appealed to the English court under section 69 Arbitration Act 1996, which provides that a party is entitled to appeal to the Court on a question of law arising out of an award, and at first instance, the appeal was allowed. The Commercial Court concluded that an offer of non-contractual performance does not need to be accepted in the exercise of reasonable endeavours. RTI appealed to the Court of Appeal.
The issue before the Court of Appeal
Lord Justice Males rejected suggestions that the appeal was concerned with reasonable endeavours clauses in general, instead holding that each force majeure clause must be considered on its own terms.
In the context of this clause, the key question was whether acceptance of RTI's proposal to pay freight in euros would "overcome" the state of affairs caused by the imposition of sanctions. If so, MUR were obligated, under the force majeure clause, to accept the proposal; if not, any endeavours on the part of MUR, reasonable or otherwise, would be irrelevant.
In considering this question, Lord Justice Males found that "state of affairs" and "overcome" are broad and non-technical terms, such that the clause was to be interpreted in a common sense way so as to achieve the purpose underlying the parties' obligations. In this case, that purpose was that MUR should receive the correct quantity of US dollars in their bank account at the right time. RTI's offer to make payment in euros, as well as to cover any additional costs or exchange rate losses, achieved the original payment obligation with no detriment to MUR. The answer to the key question was, therefore, yes: the state of affairs caused by the imposition of sanctions could be overcome by MUR's agreement to accept payment in euros. The arbitrators' original conclusion that the force majeure event could have been "overcome by reasonable endeavours from the party affected" was thus a finding of fact, or at any rate of mixed fact and law, with which the court should not have interfered.
If RTI's proposal had resulted in any detriment to MUR, or in something different from what was required by the contract, the conclusion would have been different, but on the facts before the tribunal, there was no difference between what MUR would obtain from acceptance of RTI's proposal and what it was entitled to under the contract, and on this basis Lord Justice Males therefore found that RTI's appeal of the first instance decision should be allowed, with the award of the arbitrators restored.
Dissenting opinion
While Lord Justice Newey shared Lord Justice Males' conclusion, Lord Justice Arnold dissented, taking the view that a party is entitled to insist upon its strict contractual right and that clear, express words are required if a clause is to extend to accept non-contractual performance. Whilst RTI's offer to pay in euros would, in this case, have resolved the problem without detriment to MUR, Lord Justice Arnold found that as a matter of principle, an event or state of affairs cannot be "overcome" by an offer of non-contractual performance, particularly when the offer of non-contractual performance is made by the defaulting party.
Concluding remarks
A close reading of Lord Justice Males' judgment makes clear that, contrary to the parties' submissions, this case does not develop any new principles when it comes to the interpretation of reasonable endeavour obligations, but instead necessitates a simple exercise, applying familiar principles of contractual interpretation. The decision is therefore an important reminder to contracting parties to carefully examine the language of their force majeure clauses, and to exercise caution before refusing to accept non-contractual performance.
It is also important to bear in mind that Lord Justice Males made clear that his decision was based on the finding that MUR would have suffered no detriment in accepting payment in euros in this case. Had the non-contractual performance proposed resulted in any detriment, or something different to what was required by the contract, it could not have been said that the force majeure situation had been overcome.
Whilst critics may argue that this Court of Appeal ruling has the potential to heighten commercial uncertainty in an already turbulent global economy, others may welcome the common sense approach of this cautionary tale. With the Supreme Court having granted MUR permission to appeal, this case will continue to be followed with interest.