Force majeure clauses (MUR Shipping BV v RTI Ltd)

The recent Court of Appeal case MUR Shipping BV v RTI Ltd [2002] EWCA Civ 1406 examined the circumstances in which a force majeure clause may relieve a party from performance of its contractual obligations where that party has an obligation to use reasonable endeavours to overcome a potential force majeure event.

The case arose out of the imposition of US sanctions on a Russian company (prior to the current war) and provides useful guidance on the drafting and use of force majeure clauses in commercial contracts. It may be particularly relevant where the imposition of sanctions as a result of international conflicts makes contractual performance difficult or indeed impossible.

Factual Background

In 2016, MUR Shipping BV (“MUR”) entered into a freight contract with RTI Ltd (“RTI”) pursuant to which MUR agreed to transfer certain goods to Ukraine. RTI’s payments for this service were to be made in US dollars. The contract contained a force majeure clause which defined “force majeure event” as an “event or state of affairs which cannot be overcome by reasonable endeavours from the party affected”. In 2018, the US government placed RTI’s parent company on its sanctions list. MUR informed RTI that:

1. the US sanctions would unacceptably delay receipt of US dollar payments from RTI (because of the time taken by US banks to scrutinise the transactions and determine whether they breached sanction rules);
2. the US sanctions would further prevent MUR from discharging RTI’s goods onto the freight vehicle.

Accordingly, MUR notified RTI that the imposition of sanctions was a force majeure event pursuant to the contract. RTI unsurprisingly refused to accept this assertion for two reasons. First, they argued that MUR by definition were not a “US Person” for the purposes of the sanctions and, therefore, their obligation to load and discharge the freight goods was unaffected. Secondly, they contended that they had offered to pay for the contract in euros instead, with an indemnity being included in the contract to protect MUR against the cost of converting to US dollars such that MUR would not suffer any detriment.

The parties being unable to agree, RTI brought a claim against MUR for the additional costs of finding another freight shipping company able to handle the goods.

Arbitration and the High Court

The case initially went to an arbitral tribunal which accepted that it was not a breach of sanctions for MUR to load further cargoes under the contract, albeit that this wasn’t clear at the time and that MUR had acted reasonably by taking time to consider the position. The tribunal further found that sanctions did not make it unlawful for payments to be made in US dollars, although it was likely that the US bank would have initially blocked the transactions to allow time to determine this.

The tribunal then considered the definition of force majeure event in the contract (as set out above) and found that MUR could not rely on force majeure as the event itself could have been overcome by reasonable endeavours (i.e. accepting the payment in euros, with the associated indemnity, which would have caused no detriment to MUR).

MUR appealed the tribunal’s decision to the High Court, specifically asking whether an affected party is 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”. The High Court found, allowing MUR’s appeal, that an affected party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance to circumvent force majeure. RTI therefor appealed to the Court of Appeal.

The Court of Appeal

The Court of Appeal was asked to determine whether the force majeure event “could have been overcome by reasonable endeavours from MUR as the party affected” (to be clear, RTI’s position was that accepting payment in euros on the basis set out above would have constituted reasonable endeavours). Males LJ, giving the Court of Appeal’s decision, made clear that each case in this area will ultimately turn on its own facts and that this should not be taken as a determination on reasonable endeavours clauses in general. The decision turned on whether acceptance by MUR of payment in euros (with the associated indemnity given by RTI in MUR’s favour) would have been sufficient to overcome the alleged force majeure event that was the imposition of sanctions on RTI’s parent company. If so, then MUR would be obligated to accept the proposal. If not, any reasonable endeavours on the part of MUR, reasonable or otherwise, would be irrelevant.

Males LJ found that "state of affairs" and "overcome" are broad and non-technical terms, such that the clause was to be interpreted in a common sense way so as to achieve the purpose underlying the parties' obligations (i.e. that MUR should receive the correct quantity of US dollars in their bank account at the correct time). In Males LJ’s opinion, the proposal made by RTI (with the associated indemnity in respect of losses associated with exchange rate conversion) achieved the original purpose with no detriment caused to MUR. Bearing this in mind, Males LJ determined that the state of affairs caused by the imposition of sanctions could have been overcome by MUR accepting payment in euros.

Conclusion

MUR v RTI Ltd makes clear that the interpretation of a force majeure clause will be determined by the specific drafting of the clause. Given that force majeure clauses often include “reasonable endeavours” wording of the type seen here, the decision is likely to have wider implications for parties who enter into, or have already entered into, contracts which will or may be affected by international sanctions, currency restrictions and the like. Businesses should seek appropriate legal advice on the potential implications of force majeure clauses of the type included in the contract between MUR and RTI before entering into contracts.

If you would like any further information or advice on these issues, please contact James Milliken from the Commercial team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.