Force majeure (FM) clauses in commercial contracts are currently receiving more judicial attention than they have for many years. International sanctions, extreme weather conditions and a global pandemic have caused huge uncertainty and led many parties to seek to rely on FM provisions in their contracts. The scope of the protection provided by a FM clause will depend on its wording and its application to the circumstances of each case but recent judgments provide important pointers to parties considering relying on FM.
The Court of Appeal’s judgment in MUR Shipping, which overturned the Commercial Court’s decision covered in our earlier blog post, suggests that the courts will endeavour to take a practical and commercial approach and that it may be more difficult for parties to avoid performing their contractual obligations.
In MUR Shipping, a dispute arose between the charterers of a ship and the shipowner. The charterers had contracted with the shipowner to carry monthly shipments of bauxite under a charterparty agreement which included a FM clause. The FM clause stated that an event would only be a FM event if “it cannot be overcome by reasonable endeavours from the Party affected”. The contract required the charterer to make payment in US dollars. That became impossible following the imposition of US sanctions on the charterer’s parent company. The charterer offered to make payment in Euros instead, meeting the contractual payment deadlines and covering any currency exchange costs if the shipowner wished to convert the Euros it received into US dollars.
In LMAA arbitration proceedings, the tribunal accepted the sanctions amounted to a contractual FM event but adopted a commercial approach, finding that the FM event could have been overcome by the reasonable endeavours of the shipowners in accepting the charterers’ proposal to pay in Euros. The High Court, however, held that the reasonable endeavours wording in the FM clause did not require the shipowner to accept non-contractual performance (that is, payment in a currency other than US dollars). The shipowner was therefore entitled to rely on the FM clause to avoid liability for declining to perform its contractual obligations.
In a majority decision, the Court of Appeal held that in the circumstances of this case, the FM could have been overcome by the acceptance of the charterer’s offer to pay in Euros. Males LJ, giving the lead judgment, held that it would be too narrow an approach to say that the state of affairs (that is, the US sanctions on the charterer’s parent company) could only be overcome if the charterer found some way to pay in US dollars as the letter of the contract required. The words “state of affairs” and “overcome” that were used in the FM clause are broad, non-technical terms and the clause should be applied in a commercial and common sense way. In this case, he thought that the state of affairs would be overcome if its adverse consequences could be completely avoided. The charterer’s proposal to pay in Euros and to meet any costs resulting from their conversion into US dollars would have achieved exactly the same result for the shipowners as proper performance of the contractual obligation to pay in US dollars. They would have suffered no damage so the state of affairs would have been overcome.
In his dissenting judgment, Arnold LJ agreed that the shipowner would have suffered no detriment if it had accepted the proposal. However, he concluded that the shipowner should only have been required to accept non-contractual performance if there were clear express words in the contract requiring them to do so.
So what are the lessons for contracting parties? Males LJ was careful to emphasise that this decision was based on the specific words of the FM clause and the facts of the case. However, the judgment does indicate that the courts will be prepared to take a commercial and common sense approach when asked to apply the terms of a FM clause. FM clauses will continue to offer sanctuary should the worst happen. However, parties should look carefully at what is required by the specific clause in their contracts and consider whether they should make or accept a commercial proposal before refusing to perform their contractual obligations.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
This content first appeared on the Practical Law Dispute Resolution blog on 23 November.
© Farrer & Co LLP, December 2022