This week, the Supreme Court issued its decision in the highly anticipated RTI Ltd (Respondent) v MUR Shipping BV (Appellant)[2024] UKSC 18 proceedings.
The Supreme Court unanimously allowed the appealand held that MUR was allowed to reject RTI's offer of non-contractual performance under a force majeure clause (namely to make payments in an alternative currency and compensate MUR for any additional costs) and such an offer could not amount to reasonable endeavours to cure a force majeure event.
Background
The background the matter is well known and has already been well summarised in our previous commentary of the Court of Appeal's decision in 2022 as well as the Supreme Court press release dated 15 May 2024. In short and with thanks to these two documents:
- In 2016, MUR and RTI entered a contract of affreightment. MUR (the shipowner) agreed to make monthly shipments of bauxite from Conakry in Guinea to Dneprobugsky in Ukraine, between 1 July 2016 and 30 June 2018. RTI agreed to make monthly payments to MUR, in US dollars.
- Clause 36 of the contract was a force majeure clause. Clause 36.3(d) of the contract was a reasonable endeavours proviso pursuant to which there is only a force majeure event if the event "cannot be overcome by reasonable endeavours from the Party affected."
- In 2018, RTI's parent company was sanctioned by the US government which, in turn, could not pay in US Dollars. MUR claimed that this constituted a force majeure event and suspended the shipments of bauxite, relying on the force majeure clause.
- RTI disputed this and offered: (i) to make payments to MUR in Euros, which could then be converted into US dollars by MUR's bank on receipt; and (ii) to indemnify MUR for any loss it suffered as a result. MUR rejected RTI's offer.
- The dispute was initially submitted to arbitration in which the tribunal ruled in favour of RTI. MUR had not satisfied the fourth requirement of the force majeure clause pursuant to which the party seeking to rely on the force majeure event had to show the situation "cannot be overcome by reasonable endeavours from the Party affected".
- MUR subsequently challenged this decision in the English Commercial Court under section 69 of the Arbitration Act 1996, in respect of the specified question of law whether, for the purposes of Clause 36.3(d), "reasonable endeavours" could include accepting non-contractual payment denominated in EUR as opposed to USD.
- In the High Court, Jacobs J answered this question in the negative, stating 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" (see [98] of Jacobs J's judgment in MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm)).
- The judgment was appealed, and, by a majority decision (Males and Newey LJJ, Arnold LJ dissenting), the Court of Appeal held that the event could have been "overcome" by accepting RTI's offer as this would have achieved the same result and would have involved no detriment to MUR. It therefore would have constituted reasonable endeavours in this case.
The decision of the Court of Appeal appeared to be one of common sense but at the costs of contractual certainty as the Supreme Court would later rule. RTI would be paying MUR in a different currency but would compensate MUR for any additional costs, thereby putting the latter in the same position it would have been had the contract been performed (MUR would have presumably accepted the sum in Euros, converted it to US Dollars through its bank and RTI would have paid for the costs of doing so).
In a unanimous judgment, the Supreme Court however decided otherwise. It held that MUR's rejection of RTI's offer of non-contractual performance (to make payments in an alternative currency and compensate MUR for it) did not constitute a failure to exercise reasonable endeavours by the affected party, MUR. The reasonable endeavours proviso did not prevent MUR from relying on the force majeure clause.
Reasonable endeavours
The reasoning of the Supreme Court can be summarised as follows:
- An issue of general application: The issue was not one of interpretation turning on the specific terms of clause 36. Reasonable endeavour provisions are commonly found in force majeure clauses and in material similar terms to the clause in this case. Accordingly, even if clause 36 had not contained sub-clause 36.3(d), it would have been interpreted as containing a reasonable endeavours proviso to similar effect. [25] and [29]
- The causal question: The Supreme Court
accepted MUR's position that force majeure clauses in general,
and reasonable endeavours provisos in particular, concern the
causal effect of impediments to contractual performance. To rely on
the force majeure clause, the party affected must show that the
failure to perform the contract (according to its term) could not
have been avoided by the exercise of reasonable endeavours.
Accordingly, the Supreme Court held that the
"causal question is to be addressed by reference
to the parameters of the contract". The Supreme
Court added that the "object of the reasonable
endeavours proviso is to maintain contractual performance, not to
substitute a different performance".
[37]-[38]
It thus concluded that the "offer of non-contractual performance is beyond the scope of "reasonable endeavours"" and held that "there is no reasonable basis for requiring any steps which do not achieve the relevant object; and/or that an offer of non-contractual performance does not "overcome" the impediment, as it does not have the relevant causal impact". [40] - Freedom of contract: The principle of freedom of contract encompasses freedom not to contract. In turn, the freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract. MUR was consequently entitled to refuse RTI's offer of non-contractual performance. [42]
- Clear words needed to forego valuable contractual rights: The need for clear words to be used for there to be any contractually required change to the parties' rights ("required" meaning if the party affected is to be entitled to rely on the force majeure clause) is borne out in clause 36 itself. Clause 36.2 provides that, following the end of a force majeure event, "the Parties shall consult in good faith to make such adjustments as may be appropriate to the shipment schedule". The Supreme Court consequently concluded that the parties recognised the need for clear provision to be made for there to be any contractually required change in contract terms. The same applies to either of the parties being required to accept an offer of non-contractual performance. [46]
- Importance of certainty in commercial contracts: The Supreme Court also noted that MUR's case benefits from being straightforward and, accordingly, provides certainty in commercial contracts. The focus of the reasonable endeavours' inquiry is clear: what steps can reasonably be taken to ensure contractual performance. The limits to that inquiry are also clear; they are provided by the contract. [48]
On the other hand, RTI's position requires a number of difficult questions to be resolved, which the Supreme Court stressed give rise to "considerable legal and factual uncertainty". RTI's position requires "inquiries into whether the acceptance of non-contractual performance would: (i) involve no detriment or other prejudice to the party seeking to invoke force majeure, and (ii) achieve the same result as performance of the contractual obligation in question". [49]
- As to the uncertainty surrounding the concept of "detriment", the Supreme Court held that the term itself is unclear. For instance, to what degree of detriment is should the relevant threshold be at? The Supreme Court held that it is "unclear what exactly is meant by detriment; whether the existence of some detriment, however minor, will be a bar on requiring non-contractual performance to be accepted; and, if not, the nature and extent of detriment required before there is a bar". It also noted that questions "arise as to when the issue of detriment is to be assessed and over what period of time. Any inquiry into consequential detriment is likely to involve a retrospective evidential inquiry. Much will depend on the facts of individual cases. Any such inquiry will be potentially time-consuming and costly, may well involve unpredictable results, and may also lead to the need for resolution by arbitration or adjudication". [50]-[52]
- As to the uncertainty surrounding the concept of "purpose", it concerned the inquiry into the purpose underlying the relevant obligation and whether that purpose would be met by the alternative performance offered. The issues highlighted by the Supreme Court are that there simply may be no clear purpose underlying the obligation. Equally, the obligation may have several purposes which would then presumably have to be hierarchised to find the dominant one. [53]
Comment
Evidently, common sense may not always prevail. Common sense approaches are subject to cognitive biases, prejudiced perceptions and may simply be too subjective. In this regard, the judgment of the Supreme Court is clear and persuasive as to why concepts of contractual certainty and predictability or freedom of contract prevailed.
What does it mean in practice? Lawyers drafting contracts should take great care when drafting force majeure clauses to ensure that they cover every potential eventuality, including in the context of sanctions, and including what "reasonable endeavours" specifically entail in the contemplated eventuality.
In circumstances where a feature of force majeure events is their unpredictability, this will be a challenging task requiring prophet-like skills!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.