The Supreme Court has held that a shipowner under a contract of affreightment is entitled to rely on a force majeure clause to suspend its performance of the contract where a charterer cannot pay freight in the contractually agreed currency, even where the charterer offers to pay freight in an alternate currency and any additional costs or exchange losses.
Key Points
- The decision answers the question of whether, in the context of a force majeure clause, a party who is required to undertake ‘reasonable endeavours’ to overcome a force majeure event can be required to accept non-contractual performance or to vary the terms of the contract. In a unanimous decision, the Supreme Court held that the answer to that question is ‘no’, overturning the decision of a majority of the Court of Appeal.
- The decision has important repercussions for parties who are drafting force majeure clauses or considering whether to accept an offer of non-contractual performance following a declaration of ‘force majeure’. It has the effect that, where the parties to a contract intend to require each other to accept non-contractual performance to ‘overcome’ a force majeure event, clear wording must be used to this effect. In the absence of clear wording, a party cannot be compelled to accept non-contractual performance, no matter how slight and/or technical the proposed deviation from the terms of the contract may be.
Factual Background
By a contract of affreightment, the Appellant, MUR Shipping BV (‘MUR’) agreed to carry certain quantities of bauxite from Conakry, Guinea to Dneprobugsky, Ukraine between 1 July 2016 and 30 July 2018 (‘the Contract of Affreightment’). The Respondent, RTI Ltd (‘RTI’) was the Charterer under the Contract, pursuant to which it was to pay freight to MUR in United States Dollars (‘USD’).
On 6 April 2018, the United States imposed sanctions on a company by the name of United Company Rusal plc (‘Rusal’), who was the parent company of RTI.
On 10 April 2018, purportedly in reliance upon a force majeure clause set out in Clause 36 of the Contract of Affreightment, MUR gave notice to RTI that it would no longer nominate or load vessels under the Contract. This was on the basis that, as a subsidiary of Rusal, RTI was to be treated as if it was also sanctioned. As set out in the notice, MUR’s view was that it would be in breach of the United States’ sanctions if it continued to perform the Contract of Affreightment. In its notice, MUR also stated that the sanctions would ‘prevent [United States] dollar payments, which are required under the COA’.
RTI rejected this notice. In an email sent to MUR, it explained that as a Dutch company, MUR was not a ‘US person’ caught by the sanctions, that the sanctions would not interfere with cargo operations, and in any event, that payment could be made in euros. MUR responded in turn, stating that freight was specified in USD, that ‘restrictions on monetary transfers’ were a force majeure event under Clause 36, and that these restrictions might prevent loading and discharging because RTI could not be expected to load and discharge cargo without receiving payment in accordance with the Contract of Affreightment. Accordingly, in MUR’s view, Clause 36 was engaged.
There were further exchanges between the parties in which RTI continued to protest that the sanctions against Rusal did not prevent performance of the Contract of Affreightment. In those exchanges, RTI made clear that it would bear any additional costs or exchange rate losses which would result from the payment being made to MUR in euros. MUR, however, was not prepared to accept payment in euros and continued to refuse to nominate vessels under the Contract of Affreightment.
During this period, RTI was forced to make alternative arrangements to obtain tonnage. In June 2018, RTI commenced arbitral proceedings against MUR, seeking to recover the costs of obtaining alternative tonnage. MUR alleged that it was not liable because it was entitled to rely upon the force majeure clause in the Contract of Affreightment.
The Tribunal’s Decision
A number of issues arose for determination before the Tribunal, only one of which was relevant on appeal to the Supreme Court. This was whether MUR was entitled to rely upon the force majeure clause set out in Clause 36 of the Contract of Affreightment.
Clause 36 provided, inter alia, that:
36.3 A Force Majeure Event is an event or state of affairs which meets all of 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.
As a matter of US law, the Tribunal found that RTI was not in fact prevented from paying freight in USD by the sanctions. This was the subject of expert evidence in the proceedings, and was a matter on which all of the experts agreed.[1] The Tribunal did accept, however, that if RTI had tried to make payments in USD to MUR in that period, it would have been ‘highly probable’ that there would have been a delay in MUR receiving those payments. This was because any transfer of funds through a US intermediary bank would have been paused until the bank could ascertain whether or not the transaction complied with the sanctions regime. For the purposes of Clause 36, therefore, the relevant force majeure ‘event or state of affairs’ was the imposition of US sanctions on Rusal which then would have caused the probable delay of payments by RTI in USD.[2]
The Tribunal found that there was no force majeure event or state of affairs within the meaning of Clause 36 because the probable delay in payments by RTI to MUR could have been overcome by ‘reasonable endeavours’. RTI’s offer presented ‘no disadvantages’ to MUR, and it could have adopted RTI’s proposal without detriment. This was in large part because RTI had offered to bear any additional costs or exchange rate losses which might result from the payment being made in euros. In those circumstances, although all of the other requirements of Clause 36 were satisfied, the Tribunal held that MUR was not entitled to rely on the clause to suspend operations under the Contract of Affreightment because the force majeure event could have been ‘overcome by reasonable endeavors from the Party affected’.[3] In the result, it was liable to pay RTI for the costs of obtaining alternative tonnage.
Appeal to the High Court
MUR appealed the Tribunal’s decision to the High Court. The question of law presented to the Court was ‘whether ‘reasonable endeavours’ from the Party affected within clause 36.3(d) of the Contract of Affreightment can include accepting payment in € instead of the US$ which the contract provides’.
MUR’s case before Jacobs J was that this question should be answered in the negative because the exercise of ‘reasonable endeavours’ does not require an affected party to agree to vary the terms of the contract or agree to non-contractual performance. This, it was said, is true of force majeure clauses more generally, and also therefore Clause 36. In support of this submission, MUR placed reliance upon both the existing case law and general principles such as contractual certainty.
In response, RTI contended that there was no reason in principle why the exercise of ‘reasonable endeavours’ could not involve a variation of contractual terms. In other words, it submitted that the answer to the question put to the Court was ‘yes’. In its view, the terms of the Contract of Affreightment were just one matter to be considered in the assessment of what was reasonable in the circumstances. Given that RTI’s proposal caused no detriment or damage to MUR, RTI argued that the Tribunal’s conclusion that it was within the scope of the ‘reasonable endeavours’ contemplated by the Clause was sound.
Jacobs J allowed the appeal. He found that the Contract of Affreightment required payment in USD and 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 or similar clause’.[4] In the result, MUR had not been obliged to accept RTI’s offer to pay in euros, and could rely upon Clause 36 to suspend its obligations.
In reaching this conclusion, Jacobs J attached particular weight to two prior decisions which had featured as a part of MUR’s case: Bulman v Fenwick[5] and The Vancouver Strikes case.[6] In his view, Bulman v Fenwick showed 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 or similar clause.[7] He considered that the decision in The Vancouver Strikes case was ‘in substance, to the same effect’.[8]
RTI appealed to the Court of Appeal.
The Court of Appeal Decision
By a 2:1 majority, Arnold LJ dissenting, the Court of Appeal held that MUR was not entitled to rely upon Clause 36 of the Contract of Affreightment, reversing the decision of Jacobs J. Males LJ, with whom Newey LJ agreed, held that Clause 36 was to be considered on its own terms, and that in accordance with a ‘common sense’ construction of the Clause, there was no force majeure event because the criteria in Clause 36.3(d) was not met.
In reaching this decision, both Males and Newey LJJ adopted a different approach to the one taken by Jacobs J at first instance. Whereas Jacobs J had approached the inquiry by considering the meaning of the term ‘reasonable endeavours’, the Court of Appeal unanimously held that the proper approach was to instead focus upon the meaning of the term ‘overcome’ in Clause 36.3(d).[9] The relevant question was therefore not whether the term ‘reasonable endeavours’ encompassed MUR accepting payment in euros, but rather whether ‘in order to overcome the state of affairs in question, it was essential for the contract to be performed in strict accordance with its terms’ – that is, for RTI to pay freight in USD. Both Males and Newey LJJ answered this question in the negative.
Because of the way in which their Lordships approached the question, both Males and Newey LJJ rejected the submissions which had been advanced by RTI. Those submissions had been directed to the meaning of ‘reasonable endeavours’, not the meaning of the term ‘overcome’.[10] As regards MUR’s case, both judges rejected the argument that the word ‘overcome’ required the contract to be performed in strict accordance with its terms or that the issue was one of ‘general application’ to force majeure clauses at large.[11] Each held that RTI’s proposal achieved the objective underlying the obligation to pay in USD with no detriment to MUR, and that RTI’s proposal was therefore sufficient to ‘overcome’ the force majeure event within the meaning of the Clause – here, the imposition of sanctions on Rusal. In the view of each of their Lordships, nothing in either Bulman v Fenwick or The Vancouver Strikes brought this conclusion into doubt. The issue was about the specific terms of Clause 36, not ‘reasonable endeavours’ or force majeure clauses more generally.
In a dissenting judgment, Arnold LJ agreed with the majority that the relevant question was whether RTI’s proposal could ‘overcome’ the force majeure event, not the meaning of ‘reasonable endeavours’, and that this was a matter of construing Clause 36. However, in his view, a force majeure event could not be ‘overcome’ within the meaning of that clause by an offer of non-contractual performance. As such, while RTI’s offer would have ensured timely payment to MUR, it would not have ‘overcome’ the delay in the payments of USD because it did not accord with the terms of the parties’ bargain. In support of this reasoning, Arnold LJ referred to an example in which cargo was to be transported to a port which was affected by strikes, and the party invoking Clause 36 was presented with an offer to then divert the Vessel to a second port. Arnolds LJ reasoned that, even if carriage to the second port caused no detriment to the party invoking the clause (because, for example, the goods were required at a place equidistant between the two ports), it would not be required to accept that offer. In his view, clear express words would be required before a party could be compelled to accept non-contractual performance. There being no such words in Clause 36, MUR was not compelled to accept the offer proposed by RTI and could rely upon it.
MUR appealed to the Supreme Court.
Supreme Court
On appeal to the Supreme Court, the central issue was whether the exercise of ‘reasonable endeavours’ can require a party to accept an offer of non-contractual performance in order to overcome the effects of a force majeure event or state of affairs.[12] The Supreme Court held that the answer to this question is ‘no’ and allowed MUR’s appeal.
The Parties’ Arguments
Before the Supreme Court, MUR essentially advanced two arguments: first, that the case raised a fundamental point of principle in relation to reasonable endeavours provisos, and in the result, it was inappropriate to focus on the specific wording of Clause 36 (as the Court of Appeal had done) or whether or not detriment or disadvantage might be sustained in a particular case. Instead, the case should be decided by reference to general principles, such as the object of reasonable endeavours provisos, contractual certainty, and freedom of contract. Second, in line with these principles and the decisions in Bulman v Fenwick and The Vancouver Strikes case, the question of whether a party can be required to accept an offer of non-contractual performance ought to be answered ‘no’.[13]
In response, RTI adopted the reasoning and decision of the Court of Appeal. It argued that a reasonable endeavours proviso could require the party invoking the force majeure clause to accept an offer of non-contractual performance if: (i) it involved no detriment or other prejudice to them; and (ii) it achieved the same result as performance of the contractual obligation in question. As regards Bulman v Fenwick and The Vancouver Strikes case, RTI argued that each of those cases could and should be distinguished.[14]
The Court’s Decision
The Court accepted as its starting point MUR’s submission that the issue was one of general application which should be addressed as a matter of principle, and therefore that no ‘particular significance’ was to be attached to the words of Clause 36.3(d), and in particular, the word ‘overcome’.[15] The Court reasoned that it is well-established that a force majeure clause will only be applicable if the party invoking it can show that the event could not be avoided by the taking of reasonable steps, and that it the result, it was dealing with a ‘very common feature’ of force majeure clauses. It therefore proceeded on the basis that the case should be decided by reference to considerations of principle and any relevant authorities.[16]
The Court concluded that there were four ‘considerations of principle’ which provided ‘good reasons for accepting MUR’s case’. These were:
- first, the object of a reasonable endeavours proviso, which is to maintain contractual performance (that being performance according to its terms) not to substitute different performance;[17]
- second, freedom of contract, or rather, ‘freedom not to contract’ which includes the freedom not to accept an offer of non-contractual performance;[18]
- third, that clear words are required to forego valuable contractual rights; and
- fourth, the importance of certainty in commercial contracts and in English commercial law. In particular, the Court considered that in the context of a clause which requires immediate judgments to be made, it is important that the parties know with reasonable confidence whether or not a force majeure clause can be relied upon at the relevant time.
In relation to the authorities, although the Court recognised that there had been no case which directly and explicitly answered the question posed in the appeal, it was of the view that both Bulman v Fenwick and The Vancouver Strikes case provided ‘strong, albeit implicit’ support for MUR’s submissions. This was on the basis that both cases provided support for the view that a reasonable endeavours qualification does not require an affected party to give up a contractual right even if it would be reasonable to do so.[19] The Court distinguished and/or attached limited weight to the authorities relied upon by RTI.
[1] See: the Judgment of Jacobs J at [3].
[2] See: the Court of Appeal Judgment at [29] (Males LJ) and [67] (Arnolds LJ).
[3] See: the Court of Appeal Judgment at [27] (Males LJ).
[4] See: the Judgment of Jacobs J at [98].
[5] Bulman & Dickson v Fenwick & Co [1894] 1 QB 179.
[6] Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food (The Vancouver Strikes Cases) [1963] 1 Lloyd’s Rep 12; [1963] AC 691.
[7] See: the Judgment of Jacobs J at [98].
[8] See: the Judgment of Jacobs J at [99].
[9] See: the Court of Appeal Judgment at [55] (Males LJ), [69] (Arnolds LJ), and [78] (Newey LJ).
[10] See: the Court of Appeal Judgment at [33]-[34] and [52] (Males LJ).
[11]See: the Court of Appeal Judgment at [58] (Males LJ).
[12] See: the Judgment of the Supreme Court at [2] (Lord Hamblen and Lord Burrows).
[13] See: the Judgment of the Supreme Court at [23].
[14] See: the Judgment of the Supreme Court at [24].
[15] See: the Judgment of the Supreme Court at [29].
[16] See: the Judgment of the Supreme Court at [30] and [34].
[17] See: the Judgment of the Supreme Court at [38].
[18] See: the Judgment of the Supreme Court at [42].
[19] See: the Judgment of the Supreme Court at [64] and [74].
Further information
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