Contractual provisions take precedence in force majeure clauses

Force majeure (FM) clauses in commercial contracts release a party from performing its contractual obligations when a specified event (typically an event outside the parties’ control such as a natural disaster, a war or strike action) prevents the party from complying with the contract. They often include an express requirement that the provision can only be relied on if the affected party could not have avoided the event by reasonable endeavours. The Supreme Court has confirmed in RTI v MUR Shipping [2024] UKSC 18, that an obligation on a party to use reasonable endeavours to avoid the effect of a FM event will not generally require that party to accept non-contractual performance.

This case is the most recent in a long history of authorities which deals with the tension between certainty and flexibility in English contracts. The current Supreme Court prefers certainty in commercial contracts. Parties will generally be bound by the wording of their contractual agreements and cannot be required to forgo rights unless the contract makes explicit provision that they must.

Sanctions prevent performance

Due to the imposition of US sanctions (the FM event), RTI (the Charterer) was prevented from making payment to MUR Shipping (the Owner) in US dollars as required by the contract. The Charterer offered to make payment in Euros within the contractual payment deadlines and to cover any currency exchange costs. The Owner refused to accept payment in Euros and issued a FM Notice which the Charterer rejected. The Charterer was forced to obtain alternative tonnage and brought a claim against the Owner for the additional costs of doing so.

In LMAA arbitration proceedings, the tribunal accepted that the sanctions amounted to a contractual FM event. However, it concluded that in refusing to accept the Charterer’s proposal to pay in Euros, the Owner failed to use reasonable endeavours to overcome the FM event. The Charterer’s claim therefore succeeded. On appeal, the Commercial Court disagreed and held that the reasonable endeavours wording in the FM clause did not require the shipowner to accept non-contractual performance.

Reversing that decision, the Court of Appeal held that in the circumstances of this case, the state of affairs caused by the FM could reasonably have been overcome by the acceptance of the Charterer’s offer to pay in Euros. This conclusion was based on the Court’s view that it was dealing with an issue of interpretation that turned on the specific terms of the FM clause. 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.

The question before the Supreme Court was whether the scope of reasonable endeavours should oblige a party to accept an offer of non-contractual performance.

The Supreme Court’s decision: certainty over flexibility

The Supreme Court held that the Owner’s rejection of the Charterer’s offer of non-contractual performance did not amount to a failure to exercise reasonable endeavours to mitigate the effects of the FM event.

The Supreme Court disagreed with the Court of Appeal’s view that the effect of the reasonable endeavours proviso should be approached as a narrow issue of interpretation of the specific contractual wording in this case. Reasonable endeavours clauses are commonly found in FM clauses and the interpretation of this clause should be addressed as a matter of principle. In the Supreme Court’s view, those principles supported the Owner’s case:

1. The party affected by a FM Event must show that its failure to perform its specific obligations under the contract could not have been avoided by the exercise of reasonable endeavours. The aim of a reasonable endeavours clause is to maintain the performance provided for under the contract (in this case payment in US dollars), not to require a party to accept different performance.
2. Clear words are required to forego contractual rights. Under this contract, the Owner had the right to insist on payment in US dollars and to refuse payment in another currency. The reasonable endeavours provision was not sufficiently clear wording to oblige the Owner to give up that right.
3. In the context of English commercial law, certainty and predictability are particularly important. In the absence of clear wording, a reasonable endeavours clause does not require a party to accept non-contractual performance.
   
   

Practical takeaways

The Supreme Court unanimously came down on the side of certainty over flexibility. The judgment may appear to be a harsh outcome for the Charterer. It remained willing and able to pay what was due under the contract, albeit in a different currency. By offering to pay in Euros and to cover any currency conversion costs, it did what it could to ensure that the Owner would suffer no financial detriment. However, in other circumstances the commercial flexibility provided by the Court of Appeal’s judgment could have operated harshly in the other direction.

There is no perfect solution, but the Supreme Court’s view is that the onus is on contracting parties to ensure their contracts deal with the allocation of risks and liabilities as clearly as possible. Once agreed, the parties should be bound by those terms and the courts may be more reluctant to intervene.

For a more detailed summary of the facts of this case, see our earlier analyses of the decisions of the Commercial Court, here and Court of Appeal, here.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2024