Don’t Force It: UK Supreme Court Confirms Force Majeure Does Not Require a Party to Accept Non-Contractual Performance

The UK Supreme Court in RTI Ltd v MUR Shipping BV has unanimously held that, as a general point of principle, parties to a contract cannot be prevented from relying on a force majeure clause if they refuse to accept non-contractual performance by their counterparty. The judgment of 15 May 2024 reaffirms the English courts’ strict contractual approach to interpreting force majeure clauses in commercial agreements impacted by sanctions and increases commercial certainty for parties seeking to rely on such clauses.

Judgment

Factual Background

In June 2016, shipowners MUR Shipping BV (“MUR”) entered into a contract of affreightment with RTI Limited (“RTI”) under which MUR would make monthly shipments of bauxite from Guinea to Ukraine. RTI agreed to make monthly payments to MUR, which the contract expressly provided would be in US dollars. The contract contained a force majeure clause, providing that an event or state of affairs could only be a force majeure event if it could “not be overcome by reasonable endeavours from the party affected” (emphasis added).

In 2018, RTI’s parent company was sanctioned by the US Treasury’s Office of Foreign Asset Control, rendering RTI, its majority-owned subsidiary, subject to the same restrictions. At the time of the Supreme Court judgment, it was common ground between the parties that it was highly likely US sanctions would have caused difficulties and delays in RTI making payment to MUR in US dollars. MUR claimed that the effect of the sanctions imposed was a force majeure event excusing it from performance.

RTI rejected MUR’s force majeure notice and offered to pay MUR in euros, and to bear any additional costs or exchange rate losses suffered by MUR. MUR rejected this offer. RTI then asserted that MUR could not rely on the force majeure clause as, in rejecting RTI’s offer for payment in an alternative currency, MUR had not used reasonable endeavours to overcome the sanctions-related event.

Procedural History

RTI commenced arbitration proceedings against MUR for breach of contract. The arbitral tribunal ruled in favour of RTI, finding that MUR had not satisfied the “reasonable endeavours” proviso of the force majeure clause in rejecting non-contractual performance of RTI’s payment obligations. MUR appealed this decision to the High Court.

The High Court allowed the appeal, holding that the contractual bargain between the parties gave MUR a right to payment in US dollars. Jacobs J reasoned that exercising reasonable endeavours meant endeavours towards the performance of the contractual bargain as agreed between the parties, not to a different result not contained in that agreement. Allowing contractual rights to be varied by considerations of what is reasonable in a case would introduce unwelcome uncertainty into commercial transactions.

The Court of Appeal overturned the High Court’s judgment by a majority, on the basis that:

1. the appeal concerned the specific terms of the force majeure clause in question and the Court was, therefore, considering that clause “on its own terms,” rather than force majeure clauses in general; and
2. MUR accepting payment in euros (and any currency conversion costs) would have “overcome” the state of affairs caused by the imposition of sanctions and the wording of the force majeure clause was broad enough to allow for this. The word “overcome” did not necessarily mean that the contract must be performed in strict accordance with its terms, where the force majeure event could be “overcome” in a “practical sense”, i.e., in circumstances where MUR accepting RTI’s proposal for alternative payment would cause no detriment to MUR and would achieve the same result as payment in US dollars.

The Supreme Court’s Decision

The Supreme Court unanimously allowed MUR’s appeal, holding that MUR’s rejection of RTI’s offer of non-contractual performance of the contract did not constitute a failure to exercise reasonable endeavours and that, therefore, MUR could rely on the force majeure clause.

In particular, the Court held that:

1. “reasonable endeavours” provisos are commonly found, expressly and impliedly, in force majeure clauses. As such, the issue in this case – whether the exercise of reasonable endeavours requires the party affected by a force majeure event to accept non-contractual performance to overcome the effects of the event or state of affairs – should be considered as a principle of general application; and
2. absent express wording to the contrary, “reasonable endeavours” does not require acceptance of an offer of non-contractual performance. Specifically:
• a party attempting to rely on a force majeure clause must show that the event caused the failure to perform its contractual obligations, and that this failure could not have been avoided by reasonable endeavours. Failure to perform means failure to perform in accordance with the contract terms. The reasonable endeavours proviso is concerned with maintaining contractual performance, not substituting a different performance;
• the principle of freedom of contract includes the freedom to not accept an offer of non‑contractual performance of the contract;
• clear wording is needed to forego a party’s valuable contractual right and, in this case, the contract contained no such words. MUR undoubtedly had a right to insist on payment in US dollars;
• commercial certainty and predictability dictate that determining what constitutes “reasonable endeavours” should be limited to steps which can be reasonably taken to towards achieving contractual performance as it is defined by the contract. Allowing a broader interpretation to cover non-contractual performance would produce unwanted uncertainty and “undermine the expectations of reasonable business people”; and
• inquiries into whether a contracting party would suffer detriment from accepting non‑contractual performance, and whether the same result could be achieved through that non-contractual performance, create needless subjectivity and uncertainty.

The Court also distinguished Gravelor Shipping Ltd v GTLK Asia M5 Ltd (2023). This was a summary judgment application following MUR in which the High Court ruled that a party could be required to perform outside its contractual obligations where the imposition of sanctions on a counterparty prohibited performance in the contractually prescribed manner (for further information on Gravelor, see our previous client alert). The ruling was distinguished on the basis that, unlike the general force majeure clause in this case, the sanctions clause in Gravelor:

1. was much more specific, not only addressing the impact of sanctions but also directly addressing the payment obligation that was to be carried out; and
2. imposed a requirement on the contracting parties to “‘cooperate’ and to take ‘all necessary steps’ in order for payments to be resumed.”

Implications

The Supreme Court has, applying the key English contract law principles of certainty and freedom of contract, introduced further clarity as to how the English courts should restrictively interpret reasonable endeavours provisos in force majeure clauses—an issue that has come very much to the fore in recent years following the unprecedented breadth of sanctions imposed on various Russian entities. This should give commercial parties some comfort that the English courts will uphold their rights to insist on performance of the contract as defined by its terms, absent clear wording to the contrary.

As the judgment makes clear, when seeking to determine whether reasonable endeavours provisos have been met, the parties should consider whether failure to perform contractual obligations can be prevented by taking reasonable steps. For example, in sanctions-related cases, as expressly noted by the Supreme Court, this may include consideration of whether a specific licence could, and should, by reasonable endeavours be obtained from the relevant sanctions authority to overcome the impediment to performance.

Importantly, parties should pay due attention at the contract drafting stage to ensure that their contracts expressly provide for their desired consequences in the event that sanctions issues arise, such as through the inclusion of express sanctions compliance and termination clauses or express terms on alternative methods of contractual performance.

Nafeesa Deen, London Trainee Solicitor, contributed to the drafting of this alert.