On 15 May 2024, the Supreme Court handed down its judgment in RTI Ltd v MUR Shipping BV [2024] UKSC 18. The case concerned the interpretation of a force majeure clause in a charterparty between RTI (as charterer) and MUR (as shipowner). The charterparty, required freight payment in USD.
The force majeure clause provided that neither party would be liable for any loss, damage, delay or failure to perform under the charterparty caused by a Force Majeure Event. The clause defined a Force Majeure Event as ‘an event or state of affairs which [inter alia] cannot be overcome by reasonable endeavors from the Party affected.’
On 6 April 2018, RTI’s parent company became subject to US sanctions, thus subjecting RTI to restrictions as the majority-owned subsidiary of a sanctioned entity. On 10 April 2018, MUR gave notice of a Force Majeure Event on the basis that payment in USD was precluded by the US sanctions regime. RTI rejected this notice, saying that it would pay in EUR and bear any additional costs or exchange rate losses suffered by MUR in converting EUR to USD. MUR, in turn, maintained that the force majeure clause had been triggered. The parties submitted their dispute to arbitration.
The arbitrators held that MUR could not rely on the force majeure clause as the event could have been avoided through MUR’s reasonable endeavours by accepting payment in EUR. On appeal, the High Court annulled the award on the basis that the exercise of reasonable endeavours would not require acceptance of non-contractual performance. On a further appeal, the Court of Appeal took a purposive approach to the force majeure clause, holding that a ‘state of affairs’ is ‘overcome’ where its adverse consequences are completely avoided. As MUR would face no detriment from receiving the payment in EUR, it had failed to make reasonable endeavours in refusing such payment. MUR was thus not entitled to rely on the force majeure clause.
The question for the Supreme Court was whether the acceptance of non-detrimental but non-contractual performance fell under a reasonable efforts provision in a force majeure clause.
At [26], the Supreme Court noted that force majeure clauses will generally be interpreted to include an obligation on a party seeking to invoke such a clause to make reasonable endeavours to overcome the alleged force majeure event. Similarly, at [29], it was held that the use of the word ‘overcome’ in the force majeure clause was generic such that the special meaning attributed to it by the Court of Appeal could not be sustained. The decision is therefore of general application to force majeure clauses.
At [36]-[39], the Supreme Court explained that the purpose of a force majeure clause, and particularly a reasonable endeavours provision in such a clause, concerns the ability of the parties to provide contractual performance. The relevant question is therefore whether reasonable endeavours would have allowed the continuation of contractual performance. MUR was under no obligation to accept non-contractual performance under the reasonable endeavours provision of the force majeure clause.
The Supreme Court reasoned its conclusion by reference to:
- Freedom of contract (at [41]-[42]). Parties are free to stipulate what constitutes contractual performance and the courts should not interfere with their bargain.
- The need for clear words to deprive a party of a contractual right (at [43]-[46]). MUR had the right to payment in USD, and the requirement for reasonable endeavours was not sufficiently clear to justify forcing MUR to give up this right.
- The need for certainty in commercial contracts (at [47]-[59]). The purposive approach of the Court of Appeal would lead to uncertainty for parties to commercial contracts. As force majeure clauses often require invocation soon after a force majeure event arises, uncertainty as to what constitutes such an event would undermine the efficacy of English law. The Court of Appeal’s approach: required a court to consider what constituted sufficient detriment to exclude a particular form of non-contractual performance from reasonable endeavours; would prove difficult to apply where a force majeure’s purpose is unclear; and left it open as to whether it sufficed that a force majeure’s predominant purpose should be satisfied where that clause had multiple purposes.
Beyond the above core findings, the Supreme Court made the following useful comments on force majeure clauses when reviewing the caselaw cited by either side:
- Where one party may elect between contractual performance A and B and an event prevents contractual performance A, reasonable endeavours will not require that party to accept contractual performance B; on the other hand, where a party is obliged to accept either contractual performance A or B, the party will be unable to rely on the force majeure clause where only contractual performance A is prevented by an event (at [66]-[73] and [95]-[97]).
- Frustration and force majeure are not sufficiently analogous that cases on the former will guide the development of the law concerning the latter (at [92]). Frustration terminates a contract in limited circumstances as a matter of law; a force majeure clause allows parties to decide the circumstances in which their obligations to one another are suspended. Though they both relate to changes in circumstances preventing contractual, frustration and force majeure are materially different in nature and effect.
- There may be an important difference between an obligation on one party to make reasonable endeavours to overcome an event and an obligation for the parties to cooperate and take all necessary steps to overcome an event (at [98]-[101]). In Gravelor Shipping Ltd v GTLK Asia M5 Ltd [2023] EWHC 131 (Comm) a charterparty required both parties to ‘cooperate and promptly take all necessary steps in order for the payments to be resumed’ where payment had been prevented by sanctions. The High Court held that this required the acceptance of non-contractual performance in the form of payment into a different bank account than the one stipulated in the contract. The Supreme Court distinguished Gravelor on the basis of both the restricted scope of the clause (i.e. payment difficulties arising from sanctions) and the obligation to cooperate to take all necessary steps. It is unclear whether the acceptance of non-contractual performance would be required by a force majeure clause with a similarly wide scope to that in RTI but which requires the parties to cooperate to take all steps necessary.
