When push comes to shove: force majeure and reasonable endeavours
The Supreme Court handed down judgment in RTI Ltd v MUR Shipping BV [2024] UKSC 18 last week, finding that a party could not circumvent a force majeure clause by making payment in Euros when it was obliged to pay in US dollars. Force majeure events under the contract needed to meet the criterion of not being able to be “overcome by reasonable endeavours” from the affected party. Accepting payment in a different currency was held not to be within the scope of this proviso.
The alternative offered by RTI Ltd (“RTI”) to MUR Shipping BV (“MUR”) was not just for RTI to make the payments in Euros but also for RTI to bear any additional foreign exchange costs of conversion into US dollars. RTI argued this fell well within the ambit of the proviso, following US sanctions imposed on its parent company which made it impossible for RTI to fulfil the contract in US dollars as originally intended. The Supreme Court rejected this argument, reaffirming the importance of certainty in commercial contracts and the primacy of the contractual wording used by the parties.
Background
MUR, the ship owners, entered into a contract of affreightment with RTI, the charterers, relating to the bulk shipping of bauxite from Guinea to Ukraine between 1 July 2016 and 30 June 2018. On 6 April 2018, the US government applied sanctions on Oleg Deripaska and various companies which he controlled, either directly or indirectly, including RTI’s parent company.
The parent company was added to the Specially Designated Nationals and Blocked Persons List. Accordingly, 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 and this would have constituted a breach of sanctions legislation. On 10 April 2018, 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 of the contract for a number of reasons including that that the sanctions prevented US dollar payments.
RTI contested MUR’s reliance on sanctions as a force majeure event for a variety of reasons, including that payment could be made in euros. In subsequent correspondence, RTI made clear that it would bear any additional costs or exchange rate losses in converting euros to US dollars. Nevertheless, MUR ended up suspending performance of the contract for around two weeks in reliance on the force majeure provisions. RTI commenced arbitration proceedings claiming damages for the cost of chartering-in replacement vessels in the period during which MUR suspended performance.
An extension of permissions to maintain or wind down sanctioned activities was issued by the relevant US Department on 23 April 2018, resulting in MUR resuming performance of the contract. Interestingly, MUR accepted payment in euros following the resumption of the contract.
The LMAA arbitral tribunal upheld all of MUR’s arguments regarding force majeure, except for one: that the force majeure event could have been overcome by reasonable endeavours. Specifically, the tribunal held that reasonable endeavours required MUR to accept payment from RTI in euros to avoid a force majeure event. Damages were assessed in RTI’s favour – in US dollars no less – in the sum of $2,170,050.03, although this amount included sums for claims that were not relevant for the purposes of the three subsequent appeals.
Appellate history
In the first of the trio of appeals, MUR appealed to the High Court on a point of law pursuant to s69 of the Arbitration Act 1996. The Court found in favour of MUR on the issue. Succinctly put, “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.” We covered this decision in our previous Perspective here.
RTI appealed to the Court of Appeal, with permission granted by the High Court. In a split decision with LJ Arnold dissenting, LJ Males and LJ Newey found that the word “overcome” in the reasonable endeavours proviso should be read as overcoming the state of affairs resulting from the imposition of sanctions on RTI’s parent. The majority found that the strict interpretation of the contract at first instance was too narrow and payment in euros fell within the reasonable endeavours proviso, not least because it would have caused MUR no detriment. A detailed discussion of this judgment can be found in our previous Perspective here.
Supreme Court decision
A panel of five Supreme Court Justices unanimously overturned the Court of Appeal’s more flexible approach in favour of the Judge at first instance, giving four principled reasons:
- The object of a reasonable endeavours proviso is to maintain the performance of the contractual terms agreed between the parties by reference to those terms, not to change the performance originally required.
- The principle of freedom of contract includes the freedom not to contract. This extends to the freedom for a party not to accept non-contractual performance.
- Clear wording is required for a party to be required to give up its contractual rights. MUR could fairly insist on payment in US dollars and refuse any other currency. Had the parties intended for payment in euros to be accepted then such a term could easily have been included in the contract.
- Certainty is paramount. MUR’s case was straightforward: absent clear wording, the reasonable endeavours proviso did not require acceptance of RTI’s offer of noncontractual performance. The contract itself demarcates the limits of what should be required by any reasonable endeavours inquiry.
Comment
This decision provides valuable guidance in a complex area, following on from our articles on the Commercial Court and Court of Appeal decisions, which we covered at the time.
The key take-away from the Supreme Court decision in terms of force majeure clauses is that the reasonable endeavours proviso will only apply where a way for the obligor to fulfil the same end result is available: it will not apply where an alternative end result ensues, even if that alternative end result causes the obligee no detriment. This is likely to have wider implications for contractual reasonable endeavours obligations generally.
Thus, by way of contrast to the 4th reason given by the Supreme Court, the nature of RTI’s case necessarily departed from the express wording of the contract for payment to be made in US dollars. The Supreme Court found this inherently unattractive given the potential legal and factual uncertainty that might be introduced into clauses with reasonable endeavours obligations in future.
This is an example of the tension between contractual certainty and upholding the commercial purpose of contracts. More generally, the judgment can be seen as the latest in a line of Supreme Court authority, including Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24, which has tended to prefer a literal reading of language over a purposive approach. That should be borne in mind where appeals based on contractual interpretation are being considered.