Forcing the point - how far must you go to work around unforeseeable events?

Force majeure remains a hot topic when it comes to contracts.

Following the pandemic, Suez Canal blockage and international sanctions, parties to contracts have been looking at how to possibly recover their losses or minimise the effects of delays.

One question that had arisen was whether contracting parties could be forced to find a way around the issues by being commercially minded, particularly where they had an obligation to use reasonable endeavours to overcome the force majeure event. The Supreme Court has now given us the answer.

Supreme Court case

The case in question is RTI Ltd v MUR Shipping BV [2024] UKSC 18.

RTI had employed MUR to ship circa. 280,000 tonnes of bauxite from Guinea to the Ukraine each month from 1 July 2016 to 30 June 2018, with payment for the carriage being made in USD.

The contract contained a clause stating that either party could suspend performance without liability following a force majeure event, which could not be “...overcome by reasonable endeavours from the Party affected.”

RTI, while a Jersey-based company, was a subsidiary of United Company Rusal plc, a Russian conglomerate, which was subjected to US sanctions on 6 April 2018. As the sanctions applied to majority owned subsidiaries, RTI was affected.

MUR issued a force majeure notice to RTI on 10 April 2018, stating that RTI could no longer make payments in USD and so it considered that MUR was affected by a force majeure event - it was subsequently accepted that this was not correct, but that the sanctions would prevent timely payment in accordance with the contract.

RTI rejected the notice and offered to pay in Euros, while bearing any necessary costs or exchange rate losses incurred by MUR. This was rejected on the basis that the contract required payment in USD. MUR refused to provide vessels until 25 April 2018, when it was confirmed by the US Government that companies were permitted to undertake activities to wind down contracts until 23 October 2023.

Lower Judgments

Prior to reaching the Supreme Court, the case went through three tribunals, starting with arbitration.

At first instance, the arbitrators decided that MUR should have accepted the offer to pay in Euros, as it would not have caused it any detriment. The High Court disagreed.

In his judgment, Jacobs J held that reasonable endeavours must be directed at a situation where the impediment could be overcome to permit performance of the contract in line with its terms. It did not mean that a party had to accept performance different from that which it had contracted for. The contract required payment in USD and MUR was entitled to require timely payment in this currency.

The Court of Appeal reversed the High Court’s decision, but only by a 2 to 1 majority.

Males and Newey LJJ held that the key question was not to do reasonable endeavours, but whether the matter could be overcome even if not in strict compliance with the terms of the contract. Arnold LJ disagreed, stating that you could not overcome a state of affairs by offering something not in accordance with the contract. All of the Lord Justices did agree that this was not a point of general application, but turned on the specific words of the clause in this contract.

Supreme Court

The five Lords (Hodge, Lloyd-Jones, Hamblen, Burrows and Richards), unanimously disagreed with the Court of Appeal in two important ways, the first of which was that the interpretation of this clause was of general importance and not limited to the individual clause.

Secondly, the Supreme Court held that using reasonable endeavours to overcome an impediment would not include accepting non-contractual performance. MUR could not be obliged to accept an offer from RTI to perform its obligations in a manner different to the contract.

Implications

The Supreme Court’s decision sets a clear line in the sand – reasonable endeavours must be directed to performing the contractual obligations, not finding some other way to achieve a similar result.

This aligns with both the fundamental principle of freedom of contract, which must also include the right not to contract; and the requirement for certainty in commercial contracts.  

If the Court of Appeal’s decision had been allowed to remain - leaving aside the Court’s statements that the interpretation that the decision was limited to the specific clause, which was difficult to rationalise - then the next question must be what the limit of reasonable endeavours must be. What if RTI had offered to pay in Russian Roubles or Mongolian Tugriks - could MUR have been forced to accept this, as long as RTI agreed to pay any exchange rate and other fees?

It should, however, be noted that this does not mean that a clause could not be drafted such that a change in performance should be accepted.

For example, in Gravelor Shipping Ltd v GTLK Asia M5 Ltd [2023] EWHC 131 (Comm), a clause which required the parties in that case to cooperate and take all necessary steps for payments to be resumed in the case of sanctions meant that payments into an account which the seller may have significant difficulty accessing would be good consideration.

However, the clause in that case was directed specifically at the payment obligation and was not merely to use reasonable endeavours. It also followed the Court of Appeal decision in the RTI case, so must be treated with caution.