Reasonable Endeavours in a force majeure clause did not require a party to accept non-contractual performance

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louise lanzkron Module
Louise Lanzkron

Dispute Resolution Knowledge & Development Lawyer UK

Force Majeure clauses are again in the spotlight as sanctions are made against businesses with Russian ties resulting in non-performance of commercial contracts. It has been widely reported that this has severely affected the aviation industry, the tech community and the retail & consumer sector but the effects will reach many other areas of commercial life.

Sanctions are of course not new. In a timely judgment, relating to sanctions imposed on Russia in 2018, the Commercial Court, in MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm), has recently confirmed that the requirement to use reasonable endeavours to overcome the effects of a force majeure event did not extend to requiring a party to a contract to accept non-contractual performance in order to be able to rely on the force majeure clause. The case arose following a challenge to an arbitral award under section 69 of the Arbitration Act 1996 (the “Act”) on a question of law – did ‘reasonable endeavours’ extend to accepting payment in non-contractual Euros rather than contractual US Dollars.

Whilst the facts of this case relate to sanctions imposed in 2018 the judgment will be of wide interest given recent sanctions imposed against Russia by governments worldwide and demonstrates the importance of clearly drafted force majeure clauses for parties who may seek to rely on them.

Background

MUR Shipping BV (‘Owners’) and RTI Ltd (‘Charterers’) entered into a Contract of Affreightment (‘COA’) in June 2016. The Owners contracted to carry thousands of tons of bauxite from Guinea to Dneprobugsky in Ukraine. The COA provided for payment in US$ to be paid to the Owner'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 words which led to the part of the dispute this article will consider:

“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, shiploaders, 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 the Owners sought to invoke the force majeure clause and claimed that it would be a breach of sanctions for the Owners to continue with the performance of the COA, adding that the ‘sanctions will prevent dollar payments, which are required under the COA’. The Charterers 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 the Owners, being a Dutch company, were not a ‘US Person’ caught by the sanctions.

The arbitration

The matter proceeded to arbitration. The tribunal accepted that the sanctions would have an impact on the Charterer’s ability to make payment in US Dollars and that it was ‘highly probable’ that a US bank would initially stop the transfer via the exercise of ‘extreme caution’ so as not to fall foul of sanctions legislation. The Owners (as a potential ‘secondary’ party) were entitled to take time to review their position to determine whether they could continue dealing with the sanctioned party.

However, despite the Owners’ case on force majeure succeeding in all other aspects, the tribunal determined that the case must fail. The Owners had not exercised reasonable endeavours to overcome the force majeure event under clause 36.3(d) as the Owners had refused to accept payment in Euro (which was described by the tribunal as a ‘completely realistic alternative’ to payment in US Dollars). Although the Charterers could not insist as of right on making payments in Euro (due to the terms of the contract), the tribunal decided that the ‘reasonable endeavours’ clause required the Owners to accept the Charterer’s proposal as they would suffer no detriment by doing so given (a) the Charterers would bear any associated costs; and (b) a number of payments had previously been made in Euro and converted on receipt by the Owners’ bank.

Application to the Commercial Court under s.69 of the Act

The Owners applied to the Commercial Court under s.69 of the Act appealing the tribunal’s decision on a question of law. The question for the court was “whether reasonable endeavours extended to accepting payment in (non-contractual) € instead of (contractual) US$”. The Owners were successful. The court held that the exercise of reasonable endeavours related only to endeavours towards the performance of the agreed bargain (i.e., contractual terms) between the two parties.  In this case the Owners were not required to sacrifice their contractual right to payment in US Dollars and by extension their right to rely on the force majeure clause.

Meaning of reasonable endeavours

In reaching his decision Jacobs J confirmed established principles from case law, most notably reiterating the finding in Bulman v Fenwick [1894] 1 QB 179 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 is 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’. Bulman confirms (as did the ‘Vancouver Strikes’ [1963] AC 691) that a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure clause (no matter how reasonable the alternative might be).

One argument advanced by the Charterers was that obligations relating to the loading or discharge of cargo should be categorised as critical and qualitatively different to the payment currency obligation, such that even if a party might not be required to accept non-contractual performance in respect of the former, it should be so required in respect of the latter as it only related to payment and Euros could be easily converted to US Dollars. The judge rejected this argument. He found no basis for concluding that reasonable endeavours did not require a change in contractual performance in respect of loading/discharge but did require a party to accept a change in contractual performance in relation to currency of payment. In doing so the judge once again emphasised the importance of contractual certainty.

Was the force majeure event caused by the Owners?

The Charterers also argued that as clause 36.3(c) was “confined to matters which physically prevent or delay loading or discharge of the cargo” [152] the force majeure event was ‘self-induced’ and in the control of the Owners, so not a force majeure event at all. The Owners had chosen not to receive payment following the imposition of sanctions, and then had chosen not to load the cargo. Relying on the case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 the Charterers submitted that any prevention or delay was caused by the Owners election, not by the sanctions, rather the Owners response to them. The court did not accept this line of argument. The Judge concluded that loading and discharge was physically possible but that as the force majeure event prevented payment, the parties nevertheless contemplated that the restrictions might prevent or delay loading or discharge. A party’s decision, which stems from a force majeure event, does not mean that reliance cannot be placed on a force majeure clause. Instead, the Court, referring to the decision by the Court of Appeal in Intertradex SA v Lesieur-Torteaux Sarl [1978] 2 Lloyd's Rep 509, concluded that a “decision by the owners, as a reaction to a force majeure event, does not disqualify reliance on the clause” [159].

Practical Implications on Force Majeure Clauses

‘Sanctions’ as a Force Majeure event - The force majeure clause in this case was drafted widely and included a reference to ‘any rules or regulations of governments’ and/or ‘restrictions on monetary transfers and exchanges’ force majeure events. It is interesting to note that both the tribunal and the court accepted that this wording covered sanctions, and this is particularly pertinent now with the imposition of wide-ranging sanctions against Russia. Parties to commercial contracts should consider whether their force majeure clauses as currently drafted cover the imposition of sanctions. Both the arbitral award and judgment take into consideration the effects and consequences of sanctions not just on ‘primary’ or directly affected parties but also ‘secondary’ parties (i.e., those dealing with sanctioned parties, or banks). 

Performance of the Contract - It’s also important to consider whether the contract can still be performed despite the force majeure event. The case is helpful in determining what ‘reasonable endeavours’ means in this context. Where there is a requirement to use ‘reasonable endeavours’ to overcome a force majeure event, the judgment is clear that this won’t extend to accepting non-contractual performance. If the parties intend to allow for adjustments to the express terms this should be clearly set out within the force majeure clause (indeed this did happen within one sub-clause in the present case which further highlighted that the parties did not intend to require acceptance of non-contractual performance in relation to the payment currency clause). In addition, although performance of the contract was possible as the cargo could still be loaded and unloaded, the Owners considered that the effect of the force majeure event (the sanctions) might prevent or delay this. As a result, the Court held in this case that the Owners could rely on the force majeure clause.

The force majeure notice - A final important consideration concerns the content of the force majeure notice, which both the arbitral award and judgment considered. In the present case, the notice claimed force majeure and identified the impact of sanctions on both loading and payment. The judgment confirms that a force majeure notice is not required to spell out the detailed case against the other party, particularly as there is ordinarily a short timeframe in which force majeure must be invoked. It simply needs to fulfil the purpose of a force majeure notice: to enable the counterparty to investigate the alleged force majeure and its impact, and to challenge whether it did in fact prevent or delay performance or whether there are other means of enabling performance. 

For further disputes related material please visit Disputes+, Bird and Bird LLP disputes knowledge portal.

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