Introduction
In the recent decision of MUR Shipping BV v RTI Ltd, the Supreme Court has confirmed that undertaking "reasonable endeavours" to overcome a force majeure event does not include requiring the non-defaulting party to accept an offer of non-contractual performance, absent clear wording to that effect. In overturning the Court of Appeal's decision to the contrary, the decision will be welcomed by commercial parties as a helpful confirmation of English law's respect for party autonomy and contractual certainty.
Background
In 2016, the claimant shippers ("MUR") entered into a contract of affreightment ("COA") with the defendant charterers ("RTI") to carry consignments of bauxite from Guinea to Ukraine. Freight was payable in US dollars. The COA provided that neither party would be liable to the other for loss in the event of a force majeure "event" or "state of affairs" which could not be "overcome by reasonable endeavours from the party affected". While such an event or state of affairs was in operation, the obligation of each party to perform the contract was to be suspended.
In April 2018, nearly two years after the COA began, US sanctions were imposed on RTI's parent company. MUR invoked the COA's force majeure clause, contending that the sanctions prevented US dollar payments by RTI. RTI proposed that payment be made in euros and offered to bear the costs of the US dollar conversion. MUR rejected this proposal, as payment in euros was not provided for under the contract, and it would therefore constitute non-contractual performance. RTI was forced to obtain alternative tonnage and brought a claim against MUR for the additional costs of doing so.
The dispute proceeded to arbitration, where it was held that RTI's proposal to pay in euros was a realistic alternative to payment in dollars which, as a matter of reasonable endeavours, MUR should have accepted. Accordingly, MUR were unable to rely on the force majeure clause and were found liable for damages in excess of $2 million.
MUR appealed to the English court under section 69 Arbitration Act 1996, which entitles a party to appeal on a question of law arising out of an award. At first instance, the appeal was allowed: the Commercial Court concluded that an offer of non-contractual performance does not need to be accepted in the exercise of reasonable endeavours. However, the Court of Appeal disagreed, finding instead that the exercise of reasonable endeavours under a force majeure provision could require a non-defaulting party to accept non-contractual performance. MUR appealed to the Supreme Court.
The decision of the Supreme Court
Rejecting the narrow approach taken by the Court of Appeal (which considered it was dealing with an issue of interpretation which turned on the specific terms of the force majeure clause in the COA), the Supreme Court accepted MUR's argument that reasonable endeavours provisos are commonly found in force majeure clauses. The issue, therefore, was one of general application and had to be addressed as a matter of principle.
Going on to overturn the Court of Appeal's decision and find in MUR's favour, the Supreme Court addressed four issues of principle:
1. The object of reasonable endeavours
The Supreme Court held that a reasonable endeavours proviso in a force majeure clause is concerned with the reasonable steps which an affected party should have reasonably taken to enable the contract to continue to be performed. It is not, the Supreme Court held, concerned with steps that could or should have been taken to secure non-contractual performance. Non-contractual performance is beyond the scope of reasonable endeavours, and in the circumstances of this case, requiring MUR to accept payment in euros therefore went beyond the bounds of reasonable endeavours.
2. Freedom of contract
One aspect of the principle of freedom of contract is that parties are generally free to contract on whatever terms they choose. This includes a freedom not to contract. The Supreme Court held that this includes a freedom not to accept an offer of non-contractual performance.
3. Clear words needed to forego valuable contractual rights
It was undisputed that MUR had a contractual right to be paid in US dollars. RTI's argument was that, in certain circumstances, the reasonable endeavours proviso required MUR to forego that right and accept non-contractual performance. However, the Supreme Court held that clear words must be used for there to be any contractually required change to the parties' rights. In circumstances where no such express words were included in the force majeure clause, MUR was not required to accept non-contractual performance.
4. The importance of certainty in commercial contracts
Certainty and predictability are fundamental pillars of English commercial contract law. RTI argued that, provided the non-contractual performance it had proposed (i) did not cause MUR detriment, and (ii) achieved the same result as performance of the contractual obligation in question, MUR was required to accept it. However, the Supreme Court considered that this logic raised numerous questions which give rise to considerable legal and factual uncertainty. Whilst a reasonable endeavours proviso will also bring with it a degree of uncertainty, the Supreme Court held that to go as far as to require non-contractual performance would undermine the expectations of reasonable business people, going against the principles of English contract law.
What does this mean for contracting parties?
MUR and RTI could have included express wording in the force majeure clause requiring the exercise of reasonable endeavours to include acceptance of non-contractual performance. The fact that they did not was sufficient for the Supreme Court to find that MUR was not required to accept RTI's proposal of non-contractual performance.
This decision makes it all the more important for commercial contracting parties to assess from the outset whether to include express provision for non-contractual performance in any reasonable endeavours proviso.
Concluding remarks
This decision by the Supreme Court will be welcomed by many contractual parties seeking predictability in their commercial arrangements. It does, however, place all the more onus on commercial parties to negotiate clear contractual terms from the outset.
Be it the currency of payment or any other aspect of contractual performance, without clear wording requiring a party to accept an offer of non-contractual performance, that party will not be required to accept any such proposal, and the affected party will be left to suffer the consequences. Parties must therefore consider those consequences carefully, and act now to manage the risks of being restricted to contractual performance alone.
The case also illustrates the growing importance of taking the drafting of what is often referred to as the "boilerplate" of the contract, seriously. As we saw in the aftermath of the pandemic, force majeure clauses are ripe for dispute. Parties should not assume that these and other types of clauses that often appear towards the end of the contract do not require careful review and are not open to negotiation. It is particularly important to consider in this context, and also when negotiating termination provisions, the consequences of sanctions being imposed on the performance of a contract.
Ironically, given that the case centres around a clause dealing with the consequence of an unforeseen event, the Supreme Court's decision makes clear that those who draft and negotiate contracts should do more to foresee and account for potential issues upfront at the pre-contractual stage. In line with other similar principles, such as 'contra proferentem', ambiguous drafting is unlikely to assist.