In an important and timely judgment in MUR Shipping BV v RTI Ltd[1], the High Court of England and Wales has provided guidance as to the scope of a ‘reasonable endeavours’ obligation in the context of a force majeure clause triggered by the imposition of sanctions. In short, a party subject to such an obligation is not required to accept non-contractual performance to circumvent the effect of a force majeure event.
Background
The contract was a charterparty between the ship owners, MUR Shipping BV (‘MUR’), and the charterers, RTI Ltd (‘RTI’). The payment terms, which were central to the dispute, required the charterers to pay for the freight in US dollars within 5 days of loading. The contract contained a force majeure clause, in which a force majeure event was defined as an event that met 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 …any rules or regulations of governments or any interference or acts or directions of governments … restrictions on monetary transfers and exchanges;
d) It cannot be overcome by reasonable endeavors from the Party affected.’
In April 2018, the US’s Office of Foreign Assets Control added the majority owners of RTI to the Specially Designated Nationals and Blocked Persons List. MUR promptly sent RTI a force majeure notice, asserting (among other things) that the US sanctions would prevent payment in US dollars, as required under the contract, and that would prevent MUR from loading further cargo.
The dispute
RTI rejected the force majeure notice, arguing that payment could be made in Euros rather than US dollars. Further and alternatively, payment was to take place after loading and therefore could not prevent it.
MUR refused to accept payment in Euros, insisting on payment in US dollars. Regarding the fact that payment was due after loading, MUR argued that it could not be required to load cargo knowing that it would not subsequently be paid and the force majeure clause specifically listed restrictions on money transfers as an event that could prevent or delay the loading of cargo.
The questions before the arbitral tribunal were (1) whether MUR was obliged to accept payment in Euros in order to overcome the force majeure event, and (2) whether a payment due after loading could delay or prevent that loading.
The arbitration
The arbitral tribunal found that the dollar payments would likely have been held up (if not blocked altogether) and that this would have delayed loading.
However, the Tribunal further found that accepting payments in Euros was a realistic possibility and would have presented no disadvantages to MUR.
Accordingly, although MUR’s case on force majeure succeeded in all other respects, it failed because it could have been overcome by reasonable endeavours.
The appeal
MUR appealed on a single question of law: did the reasonable endeavours obligation require MUR to accept payment in Euros instead of the contractually specified US dollars?
RTI submitted that the relevant contractual obligation (in this case, to make payment in US dollars) is simply a factor to be weighed in the balance when coming to an overall assessment of reasonableness. In the alternative, RTI submitted that, even if a party might not be required to accept non-contractual performance of critical obligations (such as place of discharge or the nature of the cargo to be loaded), the same conclusion does not necessarily follow in all cases and should not follow in the present case given that Euros could readily be converted to US dollars.
The High Court’s decision
The judge found no authority that supported RTI’s submission that contractual obligations are simply one factor to be weighed in the balance and he considered this to be contrary to the principles of law apparent from Bulman v Fenwick [1894] 1 QB 179. In Bulman, charterers relied on a strike clause despite proceeding to a port that they knew was subject to strike action even though they had alternative ports available to them. In that case, the judge held that ‘it is not a question … as to what is reasonable or unreasonable, it is a question of contract between the parties’. Jacobs J concluded that Bulman demonstrated 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. A relevant contractual obligation is not simply a factor to be weighed in the balance when coming to an overall assessment of reasonableness. The nature of the contractual obligation determines the question of the nature of the steps which a party must take to avoid the impact of a force majeure event. Accordingly, a party does not have to perform the contract otherwise than in accordance with the contract in order to avoid a force majeure event.
The judge also rejected RTI’s alternative argument that even if a party may not be required to accept non-contractual performance of critical obligations, the same conclusion does not follow in all cases. He reasoned that it would be both undesirable and difficult for parties to be required to weigh up the relative importance of different aspects of the contract to determine whether to accept an offer of non-contractual performance. This would lead to intolerable uncertainty. In any event, the judge considered that the currency in which payment is to be made is in fact a critical obligation.
Finally, the judge rejected RTI’s argument that as payment was due after loading it could not prevent or delay loading. He held that if it is clear that a party will not receive payment for cargo after it is loaded, that party does not have to proceed with loading.
Accordingly, the judge held that as the contract required RTI to make payment in US dollars and MUR was entitled to insist on payment in that currency. As US dollar payments would almost certainly be delayed as a result of the sanctions, MUR was not required to load the cargo in circumstances where payment would almost certainly not be made in accordance with the contract. Loading was accordingly delayed by the sanctions, which were outside MUR’s control, and it was therefore entitled to rely on the force majeure provisions in the contract.
Takeaways
The judgment is something of a double-edged sword: on the one hand, it provides welcome certainty in that parties can now be confident in rejecting attempts to be pressured into acceptance of non-contractual performance of any obligation in the event of force majeure; on the other, it unhelpfully excludes the possibility of reasonable flexibility, so that a party may claim force majeure on the basis of an event that could easily be overcome by alternative performance.
To avoid unwelcome claims of force majeure that might reasonably be overcome, parties should consider specifying alternative methods of performance in certain circumstances.
[1] [2022] EWHC 467 (Comm)
Contributors
Alex Radcliffe