When sanctions bite: the limits of reasonable endeavour on contractual obligations
As the war between Russia and Ukraine is resulting in sanctions being imposed to an unprecedented extent, a new Commercial Court judgment provides welcome guidance to how sanctions interact with contractual obligations. In MUR Shipping BV v RTI Ltd the Commercial Court considered whether a contractual obligation to use reasonable endeavours to overcome a force majeure event required a party to accept payment in a non-US currency, where payment in US dollars was required under the terms of the contract but prohibited due to sanctions.
The Commercial Court held that the exercise of reasonable endeavours did not require a party to sacrifice its contractual right to receive payment in US dollars. Therefore MUR Shipping BV (MUR) was entitled to assert that the contract was incapable of performance on the ground of force majeure.
- It is essential to consider the potential impact of US sanctions on all transactions involving US dollars, irrespective of whether the parties or the contract have any connection to the United States. 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.
- Force majeure clauses provide an important termination route for parties engaged in transactions with sanctioned individuals and entities.
- Contractual requirements to use “reasonable endeavours” will not require the parties to vary the terms of the contract, and remain limited to fulfillment of the bargain that was struck between the parties.
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’s decision
Mr Justice Jacobs in the Commercial Court ultimately 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, and to vary the terms of the contract to avoid a force majeure event.
Whilst the English courts will not lightly excuse non-performance, they will enforce well drafted force majeure provisions, which reflect the parties’ agreed division of risk at the contract formation stage. Here force majeure applied because payment could not be made in US dollars, the currency required by the contract, even though the arbitral tribunal had held that accepting payments in Euros would have presented no disadvantages to MUR.
This decision will be a valuable guide for any party looking to terminate for force majeure, and 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.