Navigating sanctions and contractual obligations: the practicalities
The Court of Appeal has overturned a decision of the Commercial Court, with potentially important consequences for businesses seeking to navigate issues involving sanctions and contractual obligations to use “reasonable endeavours” to avoid a force majeure. Specifically, the Court of Appeal overturned the Commercial Court’s decision that a contractual clause requiring parties to use reasonable endeavours to overcome a force majeure did not require a party to accept payment in a currency other than stipulated in the contract.
Instead, the Court of Appeal held that in these circumstances the contracting parties should consider how overcoming the force majeure can be practically achieved. Payment by way of an alternative currency was a practical course to avoid a force majeure event, where payment in US dollars could not take place due to US sanctions.
MUR Shipping BV (MUR) had entered into a Contract of Affreightment with RTI Ltd (RTI) relating to the shipping of goods from Guinea to Ukraine. This contained an arbitration clause, as is usual for shipping contracts. On 6 April 2018, the US government applied sanctions to RTI’s parent company, adding it to the Specially Designated Nationals and Blocked Persons List. As a result of the sanctions, MUR was unable to receive dollar payments from RTI as required under the contract, because virtually all US dollar transactions are routed through US banks, which would breach sanctions legislation. Therefore, MUR sent RTI a force majeure notice in accordance with the terms of the contract, on the basis that it would be a breach of sanctions for MUR to continue with its performance.
RTI contested MUR’s reliance on sanctions as a force majeure event and responded on the basis that sanctions would not interfere with cargo operations, that payment could be made in Euros, and that the owners of the vessel concerned, a Dutch company, were not a “US person” caught by sanctions.
The arbitral tribunal upheld all of MUR’s arguments regarding force majeure, except for one: applying the terms of the force majeure clause, the tribunal considered that the force majeure clause could have been overcome by reasonable endeavours. Specifically, the tribunal held that reasonable endeavours required MUR to accept payment in a non-US currency in order to avoid a force majeure event. MUR then appealed to the Commercial Court under s69 of the Arbitration Act 1996, on the basis that the award contained an error of law.
Commercial Court decision
The Commercial Court overturned the tribunal’s decision on reasonable endeavours. The Court held that, if there was a contractual right to payment in that currency, then this was a right and obligation which formed part of the parties’ bargain. The exercise of reasonable endeavours required endeavours towards the performance of that bargain; not towards the performance directed towards achieving a different result which formed no part of the parties’ agreement. Therefore, as the parties had agreed that payment should be made in US dollars, there was no requirement for MUR to accept payment in a different currency, varying the terms of the contract to avoid a force majeure event.
Court of Appeal decision
RTI appealed this decision on the basis that the force majeure event, the inability to comply with the requirement for payment to be made in US dollars due to US sanctions, could have been avoided by paying in Euros, with no detriment arising as a result. The Court of Appeal agreed with this position; performance that is inconsistent with the contract’s strict terms may be required if the alternative performance would result in avoiding a force majeure event. The contractual term requiring the parties to use their reasonable endeavours to avoid a force majeure event took precedence over the contractual term requiring payment in US dollars. In this regard, the Court of Appeal considered the overarching objective of the contract and sought to uphold that bargain.
- It is essential to consider the potential impact of US sanctions on all transactions involving US dollars. Many non-US contracts require payment in US dollars, and these payments are likely to be routed through US banks which will be bound by US sanctions.
- Where a contract requires parties to use reasonable endeavours to avoid a force majeure event, then parties should consider what alternative performance may take place to achieve the same outcome. This could include payment in alternative currencies that would attract sanctions.
- Force majeure clauses provide an important termination route for parties engaged in transactions with sanctioned individuals and entities, but contractual requirements to use “reasonable endeavours” may require the parties to adjust their performance in order to achieve the same outcome as intended by the parties when agreeing the terms of the contract.
Whilst the English courts will enforce well drafted force majeure provisions, parties that agree to use “reasonable endeavours” to avoid or overcome a force majeure are required to do so, even if the necessary steps require performance that differs from the contract’s strict terms. It was a key consideration that payment in Euros, rather than US dollars, would not have presented any disadvantages to MUR.
This decision will be a valuable guide for any party looking to terminate for force majeure. If reasonable endeavours are required to avoid a force majeure event, then a cautious approach should be taken to ensure that alternative ways of performing the contract to avoid a force majeure event are considered, rather than the parties only seeking to hold their counterpart to a contract’s strict terms. As both sanctions and the after-effects of the pandemic continue to create unforeseen commercial risks, it is guidance likely to be relevant to many situations over the coming months.