An important judgment was reached in the recent case of RTI Ltd v MUR Shipping BV [2024] UKSC. In this case, the Supreme Court considered the interpretation of a force majeure clause in a shipping contract, which contained a provision that parties are to make reasonable endeavours to overcome the force majeure event.

The Court concluded that where a contract includes a provision under which “reasonable endeavours” can be used to overcome a force majeure event, the scope of reasonable endeavours is limited by the contract and so the affected party can refuse to accept non-contractual solutions offered to overcome the force majeure event.

What is a force majeure clause?

A force majeure clause relieves a party from its obligation to perform under a contract on the occurrence of specified events that are beyond the control of the parties, such as acts of God or war.

Background to the case

A shipowner, MUR Shipping BV (MUR) and charterer, RTI Ltd (RTI), had entered into a contract under which MUR would ship cargoes of bauxite from Guinea to Ukraine on a monthly basis. The contract provided that RTI would make freight payments to MUR in US dollars.

The contract contained a force majeure clause with a reasonable endeavours provision, stipulating that the force majeure event would only be designated as such if “it cannot be overcome by reasonable endeavors [sic] from the Party affected.”

Following the imposition of US sanctions on RTI’s parent company, RTI struggled to make timely payments in USD under the contract due to banking delays. MUR subsequently invoked the force majeure clause by serving a force majeure notice. This was rejected by RTI, instead offering to pay MUR in euros and to cover, under an indemnity, any loss associated with the currency transfer. MUR declined, suspending operations under the contract.

RTI commenced arbitration seeking damages for the cost of chartering seven replacement vessels during the period that contractual operations were suspended. The arbitral tribunal found that accepting payments in euros as proposed by RTI was a realistic alternative that MUR could have accepted without detriment. It concluded that MUR’s force majeure case failed on the basis that the event could have been overcome by reasonable endeavours and ordered MUR to pay damages.

The High Court’s decision

MUR appealed to the High Court, and the question before the Court was whether reasonable endeavours extended to accepting non-contractual performance – in this case, payment in euros rather than US dollars.

The High Court allowed the appeal on the basis that the reasonable endeavours provision did not require MUR to accept an offer of non-contractual performance before it could rely on the force majeure clause.

The Court of Appeal’s decision

The High Court’s decision was reversed by a majority of the Court of Appeal, which held that the force majeure event could have been overcome by accepting RTI’s offer as this would have achieved the same result and would have involved no detriment to MUR. It therefore would have constituted reasonable endeavours in this case.

The Supreme Court’s decision – the final decision

The central question before the Supreme Court on appeal was whether the exercise of reasonable endeavours requires the party affected, if able to rely on a force majeure clause, to accept non-contractual performance from the other contracting party, in order to overcome the effects of the event or state of affairs.

In allowing the appeal, the Supreme Court agreed with MUR’s that the provision was a common feature of force majeure clauses and that the issue was one of general application to be addressed as a matter of principle. It was not, as the Court of Appeal had found, a narrow issue of interpretation of the specific wording of the force majeure clause.

The Supreme Court held there were “good reasons of principle” supporting MUR’s case that “reasonable endeavours” do not include accepting an offer of non-contractual performance (absent clear wording to that effect).

The analysis undertaken by the Supreme Court focused on the following four key principles:

(1) The object of the reasonable endeavours provision

Force majeure provisions are to be interpreted by reference to reasonable endeavours to overcome it, due to the doctrine of causation. A party is excused from contractual performance by a force majeure event if the failure to perform is caused by the force majeure event. Reasonable endeavours provisos are not concerned with actions that could have been taken to achieve an alternative, non-contractual performance; rather whether reasonable steps can be taken to secure contractual performance

The impediment to performance was the inability to pay in USD due to banking delays. The object of the reasonable endeavours proviso was to require the party affected to take reasonable steps to overcome the impediment to be able to pay in USD.

The offer by RTI to pay in euros was an offer to substitute a different performance. It did not overcome the impediment to performance as it did not have the relevant causal impact.

(2) Freedom of contract

The Supreme Court noted that the principle of freedom of contract includes freedom not to contract. Freedom not to contract, it held, includes freedom not to accept an offer of a non-contractual performance of the contract. On this basis, MUR was free to reject RTI’s offer of non-performance.

(3) Clear words needed to forego valuable contractual rights

The Supreme Court noted that the effect of RTI’s argument was that, in certain circumstances and due to the reasonable endeavours clause, MUR was required to forgo its valuable contractual right to receive timely payment in US dollars. However, there was no express provision to this effect, which, the Supreme Court held, was required.

If MUR were required to forego valuable contractual rights and, instead, accept non-contractual performance, then the contract should have dealt with this expressly.

(4) The importance of certainty in commercial contracts

The Supreme Court were of the view that RTI’s case gave rise to considerable legal and factual uncertainty.

Contracting parties need to know with a degree of confidence whether a force majeure clause can be relied upon when the relevant event happens, rather than at some point in the future after the determination of these consequential issues.

Summary

In the current period of global instability, force majeure clauses are being deployed by contracting parties far more frequently. Although parties can contract to provide that reasonable endeavours to overcome the force majeure event include acceptance of an offer of non-contractual performance, clear wording to that effect is needed.

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If you have any questions or would like support or further advice, please do not hesitate to contact the Geldards Commercial Team.