MUR Shipping BV v. RTI Ltd: UK Supreme Court Allows Appeal

In a final twist to this long and winding litigation, the UK Supreme Court has allowed MUR Shipping’s appeal, holding that ‘reasonable endeavours’ provisions in force majeure clauses (express or implied) do not require parties to accept noncontractual performance.

Background

The case concerned a charterparty between the shipowners, MUR Shipping BV, and the charterers, RTI Ltd. The payment terms, which were central to the dispute, required the charterers to pay for the freight in US dollars within five days of loading. The contract contained a force majeure clause, in which a force majeure event was defined as an event meeting the following criteria:

1. It is outside the immediate control of the party giving the force majeure notice.
2. It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port.
3. It is caused by one or more of ¦ any rules or regulations of governments or any interference or acts or directions of governments ¦ restrictions on monetary transfers and exchanges.
4. It cannot be overcome by reasonable endeavours from the party affected.

In April 2018, the US Office of Foreign Assets Control added the majority owners of RTI to the Specially Designated Nationals and Blocked Persons List.

MUR sent RTI a force majeure notice, asserting – among other things – that the US sanctions would prevent RTI from making payment in US dollars, as required under the contract, and that would prevent MUR from loading further cargo, on the grounds that it would not do so if it was clear that it would not be paid.

RTI rejected the force majeure notice, proposing that it could make payment in euros that MUR’s bank could transfer into US dollars immediately upon receipt, with RTI bearing any currency exchange costs.

The issue at the heart of the dispute was, therefore, deceptively simple: Did the obligation to use ‘reasonable endeavours’ to overcome the impact of the event require MUR to accept noncontractual performance (i.e., payment in euros rather than US dollars)?

Arbitral award and appeal judgments

As required under the terms of the contract, the dispute was first submitted to arbitration. The arbitral tribunal found that accepting payments in euros was a realistic possibility and would have presented ‘no disadvantages’ to MUR. Accordingly, MUR should have accepted RTI’s offer of noncontractual performance.

MUR appealed successfully to the High Court, which found that MUR was entitled to insist on performance in accordance with the terms of the contract – namely, payment in US dollars.

RTI appealed to the Court of Appeal. Lord Justice Males, giving the lead judgment, emphasised that the court was not concerned with force majeure and reasonable endeavours clauses in general, but only with the interpretation of the specific wording in the clause in question. The questions the court had to answer were whether the acceptance of RTI’s proposal regarding payment would ‘overcome’ the state of affairs caused by the sanctions. The majority determined that the word ‘overcome’ did not mean that the contract had to be performed in strict accordance with its terms, and that acceptance of RTI’s proposal would achieve the same result as performance of the obligation to pay in US dollars and present no disadvantage to MUR. Accordingly, MUR could have overcome the impact of the sanctions by accepting noncontractual payment in euros, and therefore could not claim the protection of the force majeure clause.

The Supreme Court’s judgment

In a unanimous decision, the Supreme Court allowed MUR’s appeal.

The Supreme Court disagreed with the Court of Appeal that this was a matter of interpretation of the specific clause in question only. The requirement that the impact of the force majeure event be outside the reasonable control of the nonbreaching party is a standard feature (usually expressed but, if not, implied) of force majeure clauses. Accordingly, the issue is one of general application.

Turning to the substance of the issue, the Supreme Court determined that there were several principles that supported MUR’s case that it should not be required to accept noncontractual performance, namely:

• The object of the reasonable endeavours provisions was to require the affected party to show that the force majeure event (as opposed to its inadequate response to it) caused its failure to perform. It is concerned with the steps which the affected party should have reasonably taken to enable the contract to continue to be performed. It is not concerned with the steps that could or should have been taken to secure some different noncontractual performance.
• The principle of freedom of contract, which is fundamental to English law, includes freedom not to accept the offer of noncontractual performance.
• It is a principle of contractual interpretation that clear words are needed for a court to determine that a contracting party has foregone a valuable contractual right. MUR had an undoubted right to insist on payment in US dollars, which was a valuable right. The force majeure clause did not address this, clearly or otherwise.
• The need for certainty is extremely important in English commercial law. The introduction of a potential requirement to accept noncontractual performance (which would entail an analysis of whether it caused any detriment and whether it achieved the same result), gives rise to unnecessary and unwelcome legal and factual uncertainty.

While it was common ground that there was no authority directly on point, the Supreme Court considered that two authorities – Bulman and Dickson v. Fenwick & Co [1894] 1 QB 179 and Reardon Smith Line Ltd v. Ministry of Agriculture, Fisheries and Food [1963] AC 691 – provided implicit support for MUR’s case that it was not required to accept noncontractual performance. Both of these cases were concerned with exceptions clauses in charterparties and whether the charterers were entitled to perform strictly in accordance with the contract in circumstances where that strict performance necessarily resulted in delay. In both cases, it was held that the charterers were entitled to do so.

Takeaway

As we commented in this November 2022 On the Record blog post on the Court of Appeal’s judgment, while that judgment may have appealed to common sense, it came at the expense of certainty. This judgment should be embraced for restoring that most valuable cornerstone of English commercial law. And, for those who preferred the Court of Appeal’s approach, you can make provision for noncontractual performance in your contracts!