MUR Shipping v RTI – force majeure clauses
The Court of Appeal has held that a "reasonable endeavours" obligation in a force majeure clause required a party to accept payment in Euros, despite its contractual right to receive US Dollars.
Robust force majeure provisions can be crucial in contracts governed by English law. As more and more activities fall within the scope of global sanctions, parties may be expected to increasingly rely on force majeure clauses to excuse non-performance (among other contractual provisions). This case has important consequences for parties whose force majeure clauses require them to use "reasonable endeavours" to mitigate or overcome a force majeure event.
In Mur Shipping, the parties had executed a contract of affreightment, which required MUR Shipping (the shipowner) to make its vessels available to RTI (the charterer) in exchange for payment in US Dollars. The contract provided that neither party would be liable for a failure to perform caused by a "Force Majeure Event" (discussed further below).
In April 2018, MUR invoked force majeure citing US sanctions. RTI was controlled by a designated Russian oligarch, and MUR believed that continued performance of the contract with RTI would be a breach of US sanctions. In particular, MUR considered that the sanctions would prevent payment in US Dollars, as required under the contract.
RTI disputed that the sanctions applied, but offered to pay MUR in Euros instead and to absorb any costs associated with the currency conversion. MUR did not accept that proposal, and an arbitration ensued regarding MUR's claim of force majeure.
The contract's force majeure clause offered relief only to the extent that the relevant event or state of affairs "cannot be overcome by reasonable endeavors from the Party affected". The arbitral Tribunal rejected MUR's force majeure claim because the state of affairs (i.e. the concern that payments in US Dollars would be subject to US sanctions) could have been overcome by accepting payment in Euros. This was said to be a "completely realistic alternative": MUR would have suffered no detriment, because RTI had agreed to bear any additional costs associated with the change in currency. Further, RTI had previously made payments in Euros, and there was no evidence that MUR had rejected those payments.
The Tribunal's award was challenged before the High Court, and subsequently the Court of Appeal, on the basis that the Tribunal had made an error in law (parties to English-seated arbitration agreements often exclude their statutory right to such a challenge, but MUR and RTI had not done so).
In the Court of Appeal, Males LJ viewed the issue as a simple matter of contractual interpretation, and determined that the word "overcome" did not exclude the possibility of taking actions that were not in strict accordance with the terms of the contract. Bound to accept the Tribunal's findings of fact that (i) there was no difference between what MUR would have obtained from accepting RTI’s offer to pay in Euros and what it was entitled to under the contract, and (ii) accepting Euros would have overcome the force majeure event, Males LJ restored the arbitrators' award that "MUR's case on force majeure … failed because it could have been ‘overcome by reasonable endeavours from the Party affected'".
Implications of the Decision
This was a case where MUR no longer wanted to perform its contract with RTI, and was therefore disinclined to agree to RTI's suggestion as to how to mitigate the impact of sanctions. The judgment gives food for thought for any parties who find themselves in a similar position. It is also a reminder to parties negotiating new contracts that force majeure clauses are far from "boilerplate": their precise drafting can be crucial.
Reassuringly for parties grappling with the constantly evolving landscape of global sanctions, the Tribunal in this case took a commercial and pragmatic approach:
- First, it held that MUR was entitled "to take time to review the position and opt for caution" when it appeared that RTI was within the scope of US sanctions. The Tribunal recognised the "drastic" freezing effect of US sanctions, which can have extra-territorial reach and affect US Dollar transactions, and the fact that it can take time to establish the full implications of changes to sanctions regimes.
- Second, the Tribunal found that "reasonable endeavours" did not require MUR to seek guidance from the relevant authority (OFAC in this case). The Tribunal doubted whether OFAC would have been prepared to give guidance on which MUR could rely within the required timeframe.
While those findings are in no way binding (another Tribunal could decide the same points differently), they reflect an understanding of the difficulties currently faced by commercial parties operating internationally.
The Court of Appeal's decision does not create a blanket rule for the interpretation of force majeure clauses. Males LJ cautioned that "[e]ach such clause must be considered on its own terms", and Arnold LJ (one of the three presiding justices) dissented entirely, finding that the clause could not require a party to accept non-contractual performance.
Nevertheless, this decision is likely to be considered carefully by judges and arbitrators faced with similarly-worded force majeure provisions. It is likely to fuel creative proposals from sanctioned counterparties as to how their contracts could continue to be performed notwithstanding the application of sanctions, with suggestions of alternative performance that their counterparties may not be contractually obliged to accept but that might fall within the scope of a "reasonable endeavours" obligation.