An event of force majeure set out in the contract can be overcome by non-contractual performance

In overturning the decision of the High Court, the Court of Appeal found, by a majority, that payment for freight in Euros could overcome an event of force majeure, even where the term of the contract stipulated payment in US dollars. Although the case may be confined to its facts and the wording of the specific clause under consideration, it may have wider implications in commercial contracts as the Court has effectively ruled that the courts will accept non – contractual performance as mitigating an event of force majeure.

Facts

The decision by the Court of Appeal related to a dispute between Mur Shipping BV (“MUR”) and RTI Ltd (“RTI”). In 2016 the parties had entered into a Contract of Affreightment (“COA”) under which RTI was to ship, and MUR was to carry, consignments of bauxite from a port in Guinea to the Ukraine.

The COA provided for payment in US dollars to be deposited in MUR’s bank in Amsterdam. Clause 36 of the COA contained the force majeure clause which was in standard terms and included at clause 36.3 the following:

“36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

a) It is outside the immediate control of the Party giving the Force Majeure Notice;

b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;

c) It is caused by one or more of acts of God, extreme weather conditions, war, lockout, strikes or other labour disturbances, explosions, fire, invasion, insurrection, blockade, embargo, riot, flood, earthquake, including all accidents to piers, ship loaders, and/or mills, factories, barges, or machinery, railway and canal stoppage by ice or frost, any rules or regulations of governments or any interference or acts or directions of governments, the restraint of princes, restrictions on monetary transfers and exchanges;

d) It cannot be overcome by reasonable endeavors [sic] from the Party affected.”

Following the imposition of sanctions by the US Government on RTI’s parent company in April 2018 MUR sought to invoke the force majeure clause and claimed that it would be a breach of sanctions if it were to continue with the performance of the COA, adding that the “sanctions will prevent dollar payments, which are required under the COA”. RTI responded that there was no force majeure event as payment could be made in Euros (they also offered to pay any associated bank charges or exchange rate losses), that the sanctions wouldn’t interfere with cargo operations and that MUR, being a Dutch company, was not a ‘US Person’ caught by the sanctions.

The case originally proceeded by way of arbitration, where the tribunal found that under clause 36.3(d), MUR was required to accept RTI’s proposal to pay in Euros which was a “completely realistic alternative”. MUR appealed to the Commercial Court under s.69 of the Arbitration Act asking the court to determine “whether 'reasonable endeavours' from the Party affected within Clause 36.3(d) of the Contract of Affreightment can include accepting payment in € instead of the US$ for which the contract provides”.  The Commercial Court overturned the award of the arbitral tribunal and agreed with MUR. The Court held that the parties’ agreed contractual obligations were paramount and not just one factor to be taken into consideration. The reasonableness or otherwise of a party’s conduct was not the key consideration but rather what the contract entitled that party to do – any other conclusion would lead to the contractual right becoming ‘tenuous’ and the contract itself being ‘beset by uncertainty’. Therefore, MUR was not required by the exercise of reasonable endeavours to accept non- contractual performance to avoid the effect of the force majeure clause.  

Further background to the claim in both its arbitration proceedings and subsequent action in the High Court is set out in more detail in our previous article (accessible here).

Decision of the Court of Appeal

RTI appealed the decision of the Commercial Court. Interestingly, the Court of Appeal did not reach a unanimous decision, however the majority (Lord Justice Males and Lord Justice Newey) overturned the decision of the Commercial Court and restored the award made by the Tribunal. In reaching this decision Males LJ considered the background general law and the proper approach to construe the specific terms of the force majeure clause. He emphasised that the Court was “not concerned with reasonable endeavours clauses in general, or even with force majeure clauses in general”. The interpretation of the clause by the Commercial Court had been too narrow. Instead, he took a purposive approach to the interpretation of the force majeure clause in question.

The specific wording of the clause meant that any ‘reasonable endeavours’ employed by the parties would have to be successful in ‘overcoming’ the force majeure event or state of affairs:

“Terms such as "state of affairs" and "overcome" are broad and non-technical terms and clause 36 should be applied in a common-sense way which achieves the purpose underlying the parties' obligations – in this case, concerned with payment obligations, that MUR should receive the right quantity of US dollars in its bank account at the right time. I see no reason why a solution which ensured the achievement of this purpose should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided.” [at 56]

In the view of the majority, an event could be "overcome" if its adverse consequences were completely avoided and the underlying purpose of the parties' contractual obligations was achieved, even if the contract was not performed in strict accordance with its terms. This finding departs from earlier decisions regarding non-contractual performance on the basis that those force majeure clauses were in different terms and did not require any consideration of whether the force majeure event could be overcome. In this case the performance offered by RTI entirely overcame the event of force majeure and was of no detriment to the other party.

In his dissenting opinion, Lord Justice Arnold asserted that the party invoking the force majeure clause had a right to insist on contractual performance, i.e., MUR had a right to receive payment in US dollars, as stipulated under the COA. In his view, the event causing the invocation of the force majeure clause was not “overcome” by a deviation from the contractual obligations of the parties, particularly where the deviation was proposed by the party affected by the event of force majeure. Arnold LJ accepted that the offer may have solved the issue facing the parties and would not have caused any detriment to MUR. However, he maintained that MUR was under no obligation to accept non-contractual performance.

Implications of the Court of Appeal decision for commercial parties

 The Court of Appeal dealt with the issue as a matter of interpretation. Importantly, as has long been the approach with force majeure clauses, each case will be considered on its own facts and the drafting of the specific clauses in dispute. The lack of unanimity of the court emphasises the difficulty in addressing this legal question. The decision shows that Courts may accept that non -contractual performance could be sufficient to mitigate an event of force majeure. In MUR non-contractual performance was the commercially sensible option but there will be cases where this will not be the case and it will be for the courts to consider the extent to which parties can deviate from their contractual obligations in that situation. As such, particular care should be taken when drafting force majeure clauses to ensure that possible mechanisms for overcoming events of force majeure are considered.

It is yet to be seen whether MUR will appeal this decision to the UKSC and whether the parameters of this judgment will be confined only to its specific circumstances.

Thank you to Frederique Delmotte for her input to this article.