Introduction
In issue 35 of Resolution we reported on the MUR Shipping case in which the Court of Appeal controversially held that the reasonable endeavours proviso in a force majeure clause required a party to accept an offer of non-contractual performance.
The decision was criticised as rocking the boat of commercial certainty, but it has now been reversed by the Supreme Court, which unanimously held that reasonable endeavours to overcome force majeure do not include accepting non-contractual performance.
The contract, the force majeure clause and the reasonable endeavours proviso
What the contract required
MUR Shipping BV (MUR) was a ship owner. RTI Ltd (RTI) was a charterer. MUR and RTI entered into a charterparty (the contract) whereby RTI would regularly deliver cargoes of bauxite to MUR at a port in Guinea, to be unloaded onto MUR’s ships and transported to Ukraine.
The contract required RTI to deposit freight payments into MUR’s account in US dollars, at a specified time for each cargo.
The force majeure clause and reasonable endeavours proviso
The contract contained a force majeure clause with an express reasonable endeavours proviso. In short, the event in question only qualified as force majeure if it fell within one of the types of events specified and if its effects could not be overcome by the reasonable endeavours of the party affected.
The force majeure event and the offer of non-contractual performance
Following the outbreak of war in Ukraine, the US Government imposed sanctions on RTI’s Russian owner. This fell within the types of events in the force majeure clause because it would have the effect of restricting or at least delaying US dollar payments by RTI.
MUR sent a force majeure notice suspending its performance on the basis that the imposition of US sanctions preventing or delaying RTI’s contractual obligation to pay in US dollars, was a force majeure event.
But RTI objected to the suspension. It offered to make payment in euros instead, meet all costs of MUR’s bank converting the euros to US dollars, and cover any shortfall in exchange rates. This offer of non-contractual performance would ensure MUR received payment on time, at no detriment to it and thereby ‘overcome’ the event causing the issue.
MUR refused RTI’s offer on the basis that the contract required RTI to make the payment in US dollars. MUR refused to unload RTI’s cargoes onto its vessels, forcing RTI to make alternative arrangements and incur additional costs.
Arbitral award in favour of RTI
The parties referred the dispute to arbitration. The arbitral tribunal found in RTI’s favour and ordered MUR to pay damages. It held that while the imposition of US sanctions preventing or delaying payment in US dollars came within the types of events covered by the contract’s force majeure definition, it could have been overcome by reasonable endeavours.
High Court overturns the arbitral award1 – commercial uncertainty is to be avoided
MUR successfully appealed to the High Court on a point of law under section 69 of the Arbitration Act 1996.
The High Court upheld the appeal, finding 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. It added that:2
if the loss of a contractual right turns purely on what is reasonable in a case, then the contractual right becomes tenuous, and the contract is then necessarily beset by uncertainty which is generally to be avoided in commercial transactions.
However, RTI went on to make a successful appeal at the Court of Appeal.
On the wrong tack: Court of Appeal restores the arbitral award3
In an uncomfortably non-unanimous judgment, the majority of the Court of Appeal found that the force majeure clause and reasonable endeavours proviso should be applied in a purposive and common sense way.
On that basis the majority found that MUR had been required to accept RTI’s non-contractual performance (payment in euros, converted to US dollars) because it involved no detriment to MUR and achieved the same result as contractual performance (payment in US dollars).
The Court of Appeal insisted that its decision was confined to the drafting of this particular force majeure clause and reasonable endeavours proviso, stating: we are not concerned with reasonable endeavours clauses in general, or even with force majeure clauses in general. It also highlighted that its decision would be different if RTI’s proposal would have resulted in any detriment to MUR or in something different from what was required by the contract.
However, in his dissenting judgment, Lord Justice Arnold firmly stated that a party is entitled to insist on contractual performance, and that MUR should not be required to accept non-contractual performance in the absence of clear drafting of that intention.
Supreme Court overturns the Court of Appeal decision4
The Supreme Court rejected that the Court of Appeal’s decision was confined to the drafting of this particular contract, finding that the express reasonable endeavours proviso in MUR Shipping is very common and is implied into force majeure clauses generally. On that basis, the Supreme Court acknowledged that MUR Shipping raises a fundamental point of principle, and that there is no caselaw which directly and explicitly answers the question.5
That question is, which of the following approaches is correct?
Approach A
A reasonable endeavours proviso requires acceptance of an offer of non-contractual performance if i) it involves no detriment to the party seeking to invoke force majeure; and ii) it achieves the same result as contractual performance.
This was RTI’s approach, as taken by the arbitral tribunal and the majority of the Court of Appeal.
OR
Approach B
Absent express wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance.
This was MUR’s approach, as taken by the High Court (and the Court of Appeal’s dissenting Lord Justice Arnold).
On the right tack: four guiding principles
The Supreme Court identified four key principles to correctly answer that question:
Principle 1: The object of reasonable endeavours provisos (causation and contractual performance)
Force majeure and reasonable endeavours clauses concern the causal effect of impediments to contractual performance. Contractual performance means performance of the contract according to its terms.
The object of the reasonable endeavours proviso is to maintain contractual performance. To be able to rely on a force majeure clause, the party affected must be able to show that the force majeure event caused the failure of contractual performance. If that party could have taken reasonable steps to avoid the failure, but did not, then the failure is caused by that party’s inadequate response to the event, and not the event itself.
So the relevant question is whether reasonable steps should have been taken to maintain contractual performance:6
The relevant contractual performance was payment in US dollars. The impediment to performance was banking delay resulting from the imposition of US sanctions. Under the reasonable endeavours proviso the relevant question is whether the exercise of reasonable endeavours by MUR would have enabled the payment of US dollars to be made without delay… Making arrangements for non-contractual payment does not, however enable the contract to be performed… it would be absurd to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance.
Principle 2: Freedom of contract (including freedom not to contract)
Parties are generally free to contract on whatever terms they choose and determine for themselves what primary obligations they will accept. The court’s role is to enforce them. This principle includes the freedom not to contract.
MUR was free not to accept RTI’s offer of non-contractual performance of the contract (payment in euros instead of payment in US dollars).
Principle 3: Clear words required to forego valuable contractual rights
Parties do not forego valuable contractual rights unless the contract makes clear (expressly or impliedly) that the party has agreed to give up those rights.
The MUR Shipping contract set out when and how payment of freight was to be made and specified that the currency for payment was US dollars. RTI therefore had the obligation to pay in US dollars and MUR had the right to refuse payment in any other currency:7
In our judgment, clear words would be necessary for MUR to be required to forego that valuable right, including making clear the circumstances in which that would be so required.
Principle 4: Commercial certainty
The Supreme Court emphasised the importance of certainty and predictability in English commercial law, especially since English law is a mainstay in international commercial trade.
Anchored to the contract?8
The Supreme Court noted that in the face of a force majeure event, parties have to be able to confidently make immediate determinations and know in the moment whether they are able to invoke force majeure.
Approach A – anchored to the contract
In favouring Approach A (reasonable endeavours does not require acceptance of non-contractual performance without clear words to the contrary) the Supreme Court noted that it is straightforward because the questions as to what reasonable endeavours are required are anchored to the contract, and being tied to the contract provides certainty.
Approach B – not anchored to the contract
In contrast, Approach B (the offer of non-contractual performance must be accepted if it causes no detriment and achieves the same result as contractual performance) is not anchored to the contract… and gives rise to considerable legal and factual uncertainty.
It creates a whole raft of questions, which are unpredictable and hard to fathom in the moment and without the benefit of hindsight. Difficulties emerge regarding the meaning, nature and extent of ‘detriment’, whether it includes consequential harm, at what point or over what period it is assessed and the purpose of the underlying contractual obligation (if the purpose even exists and can be identified).
In rejecting Approach B, the Supreme Court observed that the inclusion of a reasonable endeavours proviso already introduces an element of uncertainty, and there is no justification for creating needless additional uncertainty by departing from the terms of the contract.
Conclusion
The Court of Appeal’s decision was widely criticised for going against the tide of commercial certainty. The Supreme Court agreed that the Court of Appeal had lost its bearings, and has now put things back on an even keel.
The Supreme Court’s decision should be kept in mind when drafting a force majeure clause (or responding to a force majeure event). In the current climate of epidemics, war and natural disasters, parties should consider whether they wish to take a flexible, purposive approach to reasonable endeavours, in which case express wording in the contract will be required.
References
[1] MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) at [98].
[2] MUR Shipping, above n 1, at [131].
[3] MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406.
[4] RTI Ltd v MUR Shipping BV [2024] UKSC 18.
[5] The Supreme Court agreed with MUR that there is implicit support for its approach in the cases of Bulman & Dickson v Fenwick & Co [1894] 1 QB 179 and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691.
[6] MUR Shipping, above n 4, at [39].
[7] At [45].
[8] At [48]–[58].
