This blog was co-authored with Adam Butler, Candidate Attorney.

Introduction

Force majeure clauses are contained in most contracts dealing with international trade, from sale and supply agreements to charterparties and contracts of affreightment.  With the numerous disruptions in the last few years caused by climate change, piracy, war, civil commotions and the pandemic, they provide critical protection against liability for the consequences of events outside the control or contemplation of the parties to those contracts.

In May 2024, the English Supreme Court handed down judgment in RTI Ltd v MUR Shipping BV.[1] The Supreme Court found that MUR Shipping BV (MUR) was entitled to rely on a force majeure clause to suspend its obligations under the contract of affreightment between the parties.

The clause in the contract reads, in part:

“36.1.  Subject to the terms of this Clause 36, neither Owners nor Charterers shall be liable to the other for loss, damage, delay or failure in performance caused by a Force Majeure Event as hereinafter defined. While such Force Majeure Event is in operation the obligation of each Party to perform this Charter Party (other than an accrued obligation to pay monies in respect of a previous voyage) shall be suspended.

…

36.3.  A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

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(d)  It cannot be overcome by reasonable endeavors (sic) from the Party affected.”

Background

MUR declared force majeure following the imposition of sanctions by the US Office of Foreign Assets Control on RTI Ltd’s (RTI) parent company. As a wholly owned subsidiary, RTI was included in the scope of the sanctions. MUR stated in its force majeure notice that the sanctions prevented payment being made in US dollars, which was a requirement of the contract. MUR identified itself as the affected party, in that it was unable to receive the payment due to it.

RTI rejected the declaration, offering to make payment in Euros instead of US dollars. This was not accepted by MUR, which maintained that it was entitled to declare force majeure.

The arbitration proceedings commenced by RTI focused on the question of whether the requirement in clause 36.3(d) had been fulfilled: could the force majeure event “be overcome by reasonable endeavours from the Party affected”.

RTI argued that, had MUR accepted its offer to pay in Euros instead of USD and make good any costs or losses incurred as a result of currency exchange requirements, the force majeure event would have been overcome, as payment would be made on time.

MUR’s position was that payment in US dollars was a contractual requirement. It could not be compelled to accept payment in Euros. Accepting non-contractual performance could not fall within the scope of the reasonable endeavours required of the parties to overcome potential force majeure. The requirement of clause 36.3(d) was therefore met, and MUR was entitled to suspend its obligations.

While the sanctions did not make it absolutely impossible to effect payment in US dollars, it was ultimately accepted by both parties before the Supreme Court that at the very least delays in payment would be experienced. The fact that the sanctions would otherwise have constituted a force majeure event was therefore not in question.

Supreme Court decision

The Supreme Court found that the issue was one of general principle.

It is common for force majeure clauses to contain some form of reasonable endeavours provision – either express or implied – and the question of whether non-contractual performance can be considered within the ambit of reasonable endeavours is therefore one of general application which should be approached on that basis.

First, the court considered that force majeure is fundamentally concerned with the causal effect of impediments to contractual performance. Reasonable endeavours to avoid such impediments must therefore be directed at restoring contractual performance – not substituting alternative performance. In this instance, payment in Euros could not have restored the contractual requirement, being payment in US dollars.

Second, the principle of freedom of contract militates for the parties to be able to agree the terms they wish to perform under. Conversely, it means that parties must be free not to contract under terms they do not agree to, and therefore free to refuse an offer of non-contractual performance.

Third, the court held that in principle, a party should not be required to give up valuable rights without clear wording to that effect in the contract. The phrase “reasonable endeavours” does not clearly stipulate that non-contractual performance must be accepted. To accept such an interpretation would undermine the certainty which is so important to valuable commercial contracts.

As a result, the Supreme Court upheld the appeal and ruled in MUR’s favour that the sanctions could not have been overcome by reasonable endeavours, because such endeavours do not include accepting an offer of non-contractual performance. MUR was entitled to rely on the force majeure clause and suspend its obligations.

Key takeaways

This judgment provides welcome clarification on a long-standing issue. The Supreme Court’s principled approach will have a far-reaching impact on similar provisions in various commercial contracts and charterparties.

Parties will need to pay increased attention to crafting and interpreting force majeure clauses and contractual obligations.

The key question identified by the Supreme Court is whether reasonable endeavours will restore or preserve performance in accordance with the contractual obligations (particularly where the performance in question amounts to a valuable right). This means that where contracts demand, for example, delivery of a quantity of any commodity at a particular place and time each month, and an offer is made to deliver elsewhere, or later, or to make up a shortfall in a subsequent month, such an offer would not restore contractual performance in the strict sense. It may ultimately have a similar outcome, but it is not performance within the terms of the contract.

Unless a force majeure clause specifically provides for non-contractual reasonable endeavours, an affected party would on the strength of this judgment be entitled to refuse such an offer and rely on force majeure. A force majeure clause can expressly provide that parties are required to accept non-contractual performance to overcome impediments. If parties do incorporate such terms, the extent to which non-contractual performance must be accepted would need to be stipulated in the contract to prevent the resurfacing of uncertainty similar to that in this case.