In recent years, we have seen various global events that have placed unforeseen obstacles in the way of strict contractual performance. As a result, contracting parties have often sought to rely on force majeure or similar provisions to avoid the consequences of breach.
In its timely decision in RTI Ltd v MUR Shipping BV, the UK Supreme Court has considered and clarified the role of such clauses, holding that a party affected by a force majeure event is not required to accept alternative non-contractual performance before it can invoke the force majeure protection.
The background
MUR (a shipowner) and RTI (a charterer) entered into a contract of affreightment for the carriage of bauxite from Guinea to Ukraine. RTI was required to pay MUR in USD.
The US subsequently imposed sanctions on RTI’s parent entity, making it highly probable that RTI would face difficulties in making timely contractual payments in USD. RTI offered to pay in EUR and to bear any additional costs or exchange rate losses suffered by MUR. MUR rejected this offer, declared an event of force majeure and refused to nominate vessels for further shipments. Under the contract, the party affected by force majeure had to show (among other things) that the event could not “be overcome by [its] reasonable endeavors”.
RTI commenced arbitration, seeking damages for the cost of chartering replacement vessels. The tribunal awarded damages on the basis that the alleged force majeure event could have been overcome by MUR’s reasonable endeavours if it had accepted RTI’s offer to pay in EUR. This decision was successfully challenged before the High Court (Jacobs J), whose judgment was in turn overruled by the Court of Appeal (Males and Newey LJJ, with Arnold LJ dissenting). MUR appealed to the Supreme Court.
The Supreme Court’s decision
The Court unanimously allowed the appeal, holding (Lords Hamblen and Burrows, with Lords Hodge, Lloyd-Jones and Richards agreeing) that MUR’s refusal to accept non-contractual performance did not amount to a failure to exercise reasonable endeavours to overcome the force majeure event.
The Court’s decision was primarily grounded in a number of key principles (as well as being supported by previous authority):
- First, that force majeure clauses are rooted in notions of causation. The failure to perform properly (i.e. in accordance with the contract’s terms) must have been caused by the force majeure event and be incapable of being avoided by the exercise of reasonable endeavours. Here, MUR could not, by exercising reasonable endeavours, have done anything to enable USD payments to be made without delay. As the Court pointed out, it would be absurd to say that MUR caused the non-performance by failing to accept an offer of non-contractual performance.
- Second, freedom of contract, which (the Court pointed out) includes the freedom not to accept non-contractual performance.
- Third, that clear words are needed to forego valuable contractual rights. MUR could not be required to give up its right to payment in USD without clear contractual wording to that effect.
- Fourth, the importance of certainty for contracting parties. Requiring a party to accept non-contractual performance would necessitate complex forensic enquiries around whether any detriment was suffered and whether the alternative performance achieved the same result as was contemplated in the contract.
Key implications
The Supreme Court has reinforced contractual orthodoxy and underscored the importance of holding parties to their bargains. A party affected by possible force majeure must take reasonable endeavours to overcome it. But in doing so the party will not be required to forego valuable contractual rights and accept alternative performance (in the absence of express words to the contrary), even where non-contractual performance is possible and would cause no detriment to the affected party.
The decision has significance for all parties whose contracts contain force majeure provisions. The Supreme Court’s reasoning focussed on features common to force majeure clauses generally, rather than the specific wording of the contract. In this regard, while the force majeure clause at issue contained an express ‘reasonable endeavours’ requirement, the Court made clear that such a requirement would have been implied in any event: it is inherent in the notion of force majeure that the relevant event is beyond the affected party’s reasonable control.
