UK Supreme Court preserves principles of contractual interpretation in RTI Ltd v MUR Shipping BV

Force majeure clauses operate to relieve a party from its contractual obligations upon the occurrence of specified events, which would prevent the party from being able to fulfil these obligations. These such clauses are commonly accompanied by a reasonable endeavours proviso (either expressly or impliedly) which states that the party seeking to rely on the force majeure clause cannot do so if it has not made ‘reasonable endeavours’ to overcome, avoid or mitigate the force majeure event.  Even where a “reasonable endeavours” clause is not explicitly incorporated, it will be implied as a matter of law.

The central issue in this case was whether or not a party seeking to rely on a force majeure clause is required to accept an offer of non-contractual performance from the other party in order to overcome the effects of the force majeure event.

Facts of the case

On 9 June 2016, MUR and RTI entered into a contract of affreightment, under which MUR (the ship owner) agreed to make monthly shipments of bauxite from Conakry in Guinea to Denprobugsky in Ukraine between 1 July 2016 and 30 June 2018. As consideration for this, RTI (the charterer) agreed to make monthly payments to MUR, which the contract specified must be in US dollars.

Clause 36 of the contract contained a force majeure clause that was qualified by a reasonable endeavours proviso which stated that a force majeure event would not occur if it could be “overcome by reasonable endeavours from the affected party”.

On 6 April 2018, RTI’s parent company was placed on a sanctions list by the US government, which meant that RTI was unable to make timely payments in U.S. dollars, as required under the contract. MUR suspended their shipments and sent RTI a force majeure notice stating that, as a result of the sanctions applied to RTI’s parent company, payment in U.S. dollars was prevented, which they claimed constituted a force majeure event. Seeking to overcome this, RTI offered to make payments to MUR in Euros, which could be converted into U.S. dollars by MUR’s bank, and to indemnify MUR for any additional costs or exchange rate loss suffered as a result, therefore ensuring that MUR would not suffer any detriment.  MUR rejected this offer.

Although the sanctions did not prohibit payment of U.S. dollars, it was highly probable that RTI would have had difficulties in making timely payments in U.S. dollars as required under the contract, due to delays caused by banks needing to verify whether the payments complied with the requirements of the U.S. sanctions regime. 

Arbitration

RTI commenced London Maritime Arbitrators Association arbitration proceedings against MUR for breach of contract, arguing that MUR was not entitled to rely on the force majeure clause because, by rejecting RTI’s offer, they had not satisfied the reasonable endeavour’s proviso. The tribunal found that MUR was not able to rely on the force majeure clause, as it had failed to use reasonable endeavours to overcome the force majeure event in rejecting RTI’s offer. Although RTI’s contractual obligation was to pay in U.S. dollars, the tribunal decided that MUR should have accepted the offer to pay in Euros as there would have been no detriment to MUR. RTI was awarded damages for breach of contract.

First Instance decision

MUR appealed to the High Court. The appeal was allowed on the basis that, as a matter of legal principle, reasonable endeavours did not require a party to accept an offer of non-contractual performance, and the contractual right to payment in U.S. dollars formed part of the parties’ bargain.

Appeal to the Court of Appeal

RTI appealed to the Court of Appeal, which allowed the appeal by a majority, overturning the first instance decision.  Males LJ and Newey LJ applied a “common sense” approach, holding that the main consideration was whether the acceptance of non-contractual performance (i.e. payment in Euros rather than U.S. dollars) would overcome “in a practical sense” the force majeure event (i.e. the impact of the sanctions imposed upon RTI’s parent company). 

The Court of Appeal approached the case as relating to this particular contract, and not reasonable endeavours provisos in force majeure clauses more generally. Their decision turned on the wording of the specific force majeure clause, particularly the word “overcome” in the reasonable endeavours proviso. They considered that the word “overcome” does not necessarily mean that the contact must be performed strictly in accordance with its terms, and the impact of the sanctions would have been “overcome” had MUR accepted RTI’s offer. In addition, MUR would have suffered no loss as a result of payment in Euros.  Had this not been the case, the position would have been different. 

Appeal to the Supreme Court

The Supreme Court unanimously allowed MUR’s appeal, deciding that, absent express wording, reasonable endeavours provisos do not require acceptance of offers of non-contractual performance. 

The general principles of English contract law behind this decision are set out below and at paragraphs 36-59 of the judgment.

1. The object of a reasonable endeavours proviso is to maintain, not alter, contractual performance. A key concept in the operation of this type of proviso centres around causation.  A party is excused from contractual performance where a force majeure event is the cause of the impediment to contractual performance.  It would not be the cause of the impediment if the affected party can reasonably prevent the failure of performance:  in that event the affected parties’ inadequate response is the cause. Reasonable endeavours provisos thus concern “the steps which the affected party should reasonably have taken to enable the contract to continue to be performed”. They are not concerned with steps that could have been taken to secure a substitute, non-contractual performance. In this case, the relevant question was whether MUR could have taken any reasonable steps to enable the payment of U.S. dollars without delay, and not whether it should have accepted the offer of non-contractual performance which did not overcome the impediment to contractual performance.  In other words, “it would be absurd to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance.”
2. Freedom of contract. The fundamental principle of freedom of contract includes the freedom not to contract, and “freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract.”
3. Clear words are required to forego contractual rights. Under the contract, MUR was entitled to insist on payment in U.S. dollars and therefore to refuse payment in any other currency. RTI’s argument was that, under certain circumstances, MUR was required by the reasonable endeavours proviso to forgo that right and accept the offer of non-contractual performance.  The Supreme Court held, as a “general principle of contractual interpretation that parties do not forego valuable rights without it being made clear that that was their intention.” Therefore, a party should not be required to forgo contractual rights unless the contract makes clear by express wording or necessary implication that they have agreed to do so.
4. Certainty and predictability are of particular importance in English commercial contracts and law.  Hence, “absent clear wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance”. The reasonable endeavours inquiry should have been focused solely on the steps that can reasonably be taken to ensure contractual performance. There is no justification for creating needless additional uncertainty by departing from the standard of performance provided by the terms of the contract.

The authorities upon which MUR relied provided strong support for its case.  Firstly, Bulman & Dickson v Fenwick and Company [1894] 1 Q.B. 179, which concerned a reasonable endeavours proviso in an exceptions clause, was found to support MUR’s argument that a reasonable endeavours qualification does not require the affected party to give up its contractual rights, even if it would be reasonable to do so. Secondly, the Vancouver Strikes case [1963] AC 691, in which charterers were able to rely on an exceptions clause to excuse delay in their performance, despite not exercising a contractual option that would have enabled them to avoid this delay.  The charterers were not obliged to use this option, even if it would have been reasonable to do so. The Supreme Court found that the facts in the current case were stronger than the Vancouver Strikes case, as there was no option for MUR to accept payment in Euros, and even if there had been, the Vancouver Strikes case indicates that MUR would still have been entitled not to exercise that option and to insist upon payment in U.S. dollars.

On the other hand, the Supreme Court stated that the various cases relied upon by RTI were distinguishable and did not provide adequate support for its case.

Commentary

As noted above, a “reasonable endeavours” requirement will be implied into a force majeure clause even if it is not expressly provided for in the contract.  The Supreme Court made clear that this case therefore relates to all force majeure provisions generally and this was one reason why the Court of Appeal had been wrong to focus narrowly on interpretation of the language of the particular clause in this contract.

Further, in its wider context, this decision is reflective of a more general approach in the Supreme Court over a number of years, starting with the well-known Arnold v Britton decision [2015] UKSC 36 which has re-emphasised the importance of rigorous textual analysis of the contract, the principles of freedom of contract and commercial certainty. Whilst consideration of the commercial context and the so-called “common sense” approach remains part of the wider consideration, this is not at the expense of a proper textual analysis.  The court is not there to re-write the parties’ contract when things go wrong.

While the approach adopted by the Court of Appeal may have been welcomed by some for its commercial rationale, there is indubitable merit in avoiding the ambiguity, uncertainty and unpredictability that the Court of Appeal decision would have introduced into the interpretation of such clauses, particularly as force majeure clauses with reasonable endeavours provisions are often drafted with material similarities to the clause at the heart of this case.

Next steps

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Authored by Maeve Rowley-O’Donnell, Nigel Sharman, and Philip Parish.