A force majeure (FM) clause allows a party to stop performing its contractual obligations on the occurrence of a specified event or state of affairs (an FM event), usually defined as events or situations beyond the control of the parties, such as natural disasters or the outbreak of hostilities. FM clauses were put in the spotlight in particular around the time of the pandemic.
FM clauses normally provide that such an event cannot be relied on if it could have been avoided by the exercise of reasonable endeavours by the party affected. In RTI Ltd v MUR Shipping BV [2024] UKSC 18, the Supreme Court had to consider whether such reasonable endeavours meant the party affected had to accept non-contractual performance in order to avoid the FM event, and it decided that it did not.
The interpretation of an FM clause very much depends on the wording of the particular clause, so normally not much can be drawn from judgments on FM clauses. In this case, however, the Supreme Court said that the issue raised was applicable to FM clauses generally. This is because FM clauses are generally interpreted as being only applicable if the party relying on it can show that the event or state of affairs was beyond its reasonable control and could not be avoided by the taking of reasonable steps, and the Supreme Court said that even if the FM clause in this case had not contained this express proviso, it would have been interpreted as containing it in any event.
Facts of case
We looked at the first instance decision here and the Court of Appeal’s decision here, but in summary, RTI Limited (RTI) entered into a two year contract with MUR Shipping BV (MUR) to use MUR’s ships to transport bauxite from Guinea to Ukraine. The contract contained an FM clause which is set out in full in the judgment, but the key point to note is that it contained the following proviso about qualifying FM events: “It cannot be overcome by reasonable endeavours from the Party affected.”
The contract required RTI to pay MUR in US dollars without delay. However US authorities subsequently applied sanctions to RTI’s parent company which meant that for RTI to pay in US dollars would mean unavoidable banking delays. MUR said that this was an FM event under the contract and it sent a notice to RTI relying on the FM clause to suspend its obligations under the contract. RTI rejected the notice, offering to pay MUR in euros instead of US dollars, and it said it would bear any additional costs or exchange rate losses suffered by MUR by this arrangement. MUR rejected this offer. RTI had to charter replacement vessels and it brought arbitration proceedings against MUR for the losses it incurred in doing so. The arbitrators decided that MUR could not rely on the FM clause because the FM event could have been overcome by MUR’s reasonable endeavours by accepting the offer to pay in euros. This was despite the fact that RTI’s contractual obligation was to pay in US dollars.
MUR appealed to the English High Court which upheld its appeal, holding that the obligation to use reasonable endeavours to avoid an FM event did not require MUR to accept non-contractual performance. The Court of Appeal overturned this decision, and MUR appealed again to the Supreme Court.
Supreme Court’s judgment
The Supreme Court upheld MUR’s appeal, holding that, absent express wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. The reasons for this decision were as follows:
- The object of the reasonable endeavours proviso in an FM clause is to maintain contractual performance, not to substitute a different performance
It is for the party affected to show that the FM event caused the failure to perform, and this means showing that the failure to perform could not have been avoided by the exercise of reasonable endeavours. The object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance.
In this case, the relevant contractual performance was payment in US dollars. The impediment to performance was the banking delay resulting from the imposition of sanctions. The exercise of reasonable endeavours by MUR would not have enabled the payment of US dollars to be made without delay, because the banking delay for US dollar payments resulting from the imposition of sanctions would remain in place and would not be overcome by offering non-contractual performance.
- Freedom of contract
A basic principle of contract law is that parties are free to determine for themselves what primary obligations they will accept. The Supreme Court held that this means parties also have freedom not to contract, and that includes freedom not to accept the offer of a non-contractual performance of the contract.
- Clear words needed to forego valuable contractual rights
The Supreme Court held that clear words are needed to forego valuable contractual rights. MUR had a contractual right to be paid in US dollars, and it therefore had a contractual right to refuse to accept payment in any other currency. Clear words would be necessary for MUR to be required to forego that valuable right, including making clear the circumstances in which that would be so required.
- Certainty and predictability are particularly important in English commercial law
Certainty and predictability are of particular importance in the context of English commercial law. The Supreme Court held that allowing parties to argue that the other should accept non-contractual performance to avoid an FM event would be to introduce unwarranted uncertainty and undermine the expectations of reasonable business people.
What does this judgment mean for FM clauses?
Parties can enter into FM clauses with the reassurance that they will not be required to accept non-contractual performance if an FM event arises – unless there are clear words to this effect. The English Supreme Court has held the parties to their bargain providing commercial parties with certainty.
Of course having a FM clause and a FM event isn’t enough – you have to “call it” to be able to rely on the FM event to excuse performance. Taking early advice is key.
Catherine Penny