Lead Article: MUR Shipping: Contractual Certainty vs. Commercial Flexibility in English Law
Sign Up for PublicationsIn May 2024, the U.K. Supreme Court’s judgment in RTI Ltd. v. MUR Shipping BV answered the following questions: (1) what does a “reasonable endeavours” obligation require a party to do in the context of a force majeure clause, and (2) is the party who wishes to rely on that clause obliged to accept supposedly pragmatic, non-contractual, work-around solutions? At first glance, the question might seem esoteric. However, the judgment touched upon an enduring debate at the heart of English jurisprudence regarding contractual interpretation: should courts favour principles of commercial flexibility and reasonableness or contractual certainty and predictability?
Force Majeure: The Concept
Force majeure clauses are common in contracts and operate to excuse (and relieve from liability) one or both of the parties from performing the contract (in whole or in part) upon the occurrence of supervening events beyond the parties’ control. As Mr. Justice Knowles put it, force majeure is simply “a label for a list” of supervening events the parties agree should excuse non-performance. See Sucden Middle-East v. Yagci Denizcilik Ve Ticaret Ltd. Sirketi [2018] EWHC 3873 (Comm).
Under English Law, force majeure clauses are entirely a matter of contractual interpretation, with the wording of the clause itself regulating the occurrence of the event. See Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC [2010] EWHC 40 (Comm) at [43]. Because they are not governed by abstract legal principles or case law (as is the case with common law doctrines such as frustration), force majeure clauses provide the parties with both a degree of contractual freedom and commercial certainty.
Force majeure clauses are commonly circumscribed in scope by “reasonable endeavours” carve-outs that state that a party is not relieved from liability for failing to perform unless it uses “reasonable endeavours” to avoid or mitigate the effects of the force majeure event. The rationale is simple: to temper the suspension of a party’s obligations by requiring the party concerned to try and overcome the effect of the force majeure event before relying on the forbearance that the clause provides.
Force Majeure in Recent Years
Force Majeure clauses have provided a wellspring for legal disputes—especially in recent years, in the wake of both Covid-19 and the U.K.’s departure from the European Union. The case of PD Teesport Ltd. v. P&O North Sea Ferries Ltd. [2023] EWHC 857 (Comm) touched upon both issues. There, an agreement between a port operator (P) and a ferry operator (F) required F to make a shortfall payment if F failed to import/export via the port at least 120,000 units each year. The agreement (in broad terms) excused a failure to meet that requirement if doing so would be impossible “solely due to economic factors resulting from the U.K.’s exit from the European Union” and/or Covid-19. When F failed to meet the minimum volume requirement, it relied on a number of events to avoid liability under the force majeure clause. P, on the other hand, sought payment of the shortfall and applied for summary judgment in respect of that claim. Although the Court accepted that Covid-19 and/or Brexit could constitute force majeure events, the Court held that F had failed to establish a specific linkage between either event and the port’s operations. This decision served as a reminder that whether a force majeure clause is triggered depends on a close textual analysis of the clause itself and that, where a clause requires specific conditions to be met, it is insufficient to rely on broad assertions as to the impact of a force majeure event. Instead, a specific linkage must be shown between the event and the non-performance (which could not be proven in this case, at least in any significant sense).
Another case, Travelport Ltd. v. Wex Inc. [2020] EWHC 2670, concerned a contractual provision that conditioned completion of a Share Purchase Agreement (SPA) on satisfaction of pre-conditions, including that, between exchange and completion, there should not be “any Material Adverse Effect” (MAE) or any change or developments “that would reasonably be expected to have” an MAE. Although the MAE clause contained a carve-out for conditions arising from pandemics, the SPA also made clear that pandemics would count as an MAE if it could be shown that there was a “disproportionate” impact on the target companies relative to the “other participants in the industries in which [they] operate.” After exchange, the buyer attempted to withdraw from the transaction, in purported reliance on Covid-19. The Court’s decision turned on the construction of the MAE clause and the definition of “industry participants.” The sellers (who wanted the deal to complete) argued for a narrow interpretation of “industries”, arguing that the appropriate industry comparator was the travel payments industry, and companies operating within it (the rationale being that all industry participants in that industry were likely to have been affected by the Covid-19 pandemic, meaning the target businesses would be no more affected than other businesses in this industry and the carve-out would not apply). The buyer argued for a more broad interpretation of “industries”, claiming that it was a reference to companies operating within the business-to-business (B2B) payments industry (in which it could be said that the target companies were more disproportionately affected relative to their industry co-participants). The Court preferred the buyer’s interpretation (i.e., that the appropriate comparator ‘industry’ was the B2B payments industry in general). As to the seller’s preferred interpretation, the Judge said she was not prepared to imply additional meaning to an undefined term, especially where there was “relative paucity” of evidence to suggest that the “travel payment industries” was a term that of established use. .
Force Majeure in the Context of Sanctions
More recent force majeure cases have touched upon the increasingly relevant issue of sanctions. In 2020, the English Court of Appeal handed down judgment in Lamesa Investments Ltd. v. Cynergy Bank Ltd. [2020] EWCA Civ 821. There, the lender (L) made a loan to a U.K. bank (C). L was then designated under the U.S. sanctions regime as a “blocked person.” C refused to repay the loan on grounds that to do so would expose it to the risk of secondary sanctions, and it invoked a provision in the facility agreement that effectively excused non-payment if sums had not been paid “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.” L argued that C’s reliance on this provision was misplaced because (1) U.S. secondary sanctions legislation contained no express prohibition on payment; (2) C’s non-payment was based on a hypothetical (it was wishing to avoid possible secondary sanctions); and (3) “mandatory” should be interpreted narrowly as referring only to laws applying to U.K. entities making sterling payments. The Court of Appeal disagreed. What mattered was C’s reason for not paying and not whether it was only likely to be sanctioned if it made the payment. The Court commented that if a “mandatory” provision of law only referred to law that specifically forbade C to pay, it would be virtually impossible for that clause to take effect. Instead, the drafters must have intended C to be able to rely on this clause if its reason for non-payment was compliance with a foreign statute. The bottom line: although the U.S. sanctions legislation did not purport (on its face) to prohibit payment by C to L, its effect was tantamount to a prohibition, and L’s argument that there was a difference between noncompliance with U.S. secondary sanctions versus noncompliance with the policy or spirit of the U.S. sanctions regime was semantic.
MUR Shipping
MUR Shipping is the most recent example of a case dealing with the intersection of sanctions and force majeure. There, the Dutch freight company MUR Shipping (MUR) entered into a contract with RTI Limited (RTI), a majority owned subsidiary of Russian aluminium producer, UC Rusal (Rusal). The contract provided for the monthly shipment of bauxite from Guinea to Ukraine in exchange for freight payments in U.S. dollars from RTI to MUR.
The parties’ dispute centered on Rusal’s designation as a sanctioned entity under U.S. sanctions. Although RTI itself was not designated, as a majority-owned subsidiary of Rusal, it became subject to the same restrictions as its parent. Four days after Rusal’s designation, MUR issued a notice to RTI pursuant to clause 36.3 of the contract, noting that the payments to which it was entitled were prevented by U.S. sanctions, and claiming that the sanctions constituted a force majeure, entitling it to suspend the shipments of bauxite. Clause 36.3 of the relevant contract provided that:
A Force Majeure Event is an event or state of affairs which meets all of the following criteria:
- It is outside the immediate control of the Party giving the Force Majeure Notice;
- It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
- It is caused by … any rules or regulations of governments or any interference or acts or directions of governments, the restraint of princes, restrictions on monetary transfers and exchanges;
- It cannot be overcome by reasonable endeavours from the Party affected.
RTI rejected the notice and proposed a work-around solution: it would pay MUR in euros instead of dollars, and bear any additional transaction costs or exchange rate losses incurred in connection with converting the euros received by MUR into dollars. MUR declined, insisted upon its entitlement to suspend performance and refused to nominate any vessels for affreightment.
Around two weeks later, following a further Office of Foreign Assets Control (OFAC) announcement which (in broad terms) allowed the parties to resume shipments for a period of time, MUR resumed nominations of vessels and began to accept euro payments from RTI. However, the short gap of non-performance had nonetheless caused RTI to incur costs of chartering seven replacement vessels.
RTI commenced London Maritime Arbitrator Association arbitration proceedings, arguing that MUR had not been entitled to rely on clause 36.3 as it had failed to use reasonable endeavours to overcome the effects of the force majeure. RTI claimed damages for the cost of chartering the replacement vessels to bridge the gap in which MUR had suspended performance. The Tribunal considered that the terms of the force majeure could have been overcome by reasonable endeavours by MUR, who ought to have accepted RTI’s “completely realistic offer” to pay in euros (which, it said, would have resulted in no detriment). On this basis, the Tribunal granted RTI the relief it sought.
High Court and Court of Appeal
MUR obtained leave from the English High Court to pursue an appeal under section 69 of the U.K. Arbitration Act 1996 on the following question: is a party 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? MUR’s answer to this question was negative and RTI’s answer was affirmative.
Justice Jacobs of the High Court sided with MUR. Citing the 131 year-old case of Bulman v. Fenwick & Co. [1894] 1 QB 179, Mr. Justice Jacobs ruled that the key consideration in determining whether a party is required to exercise reasonable endeavours is not the reasonableness (or otherwise) of the affected party’s conduct, but rather, what the contract says. Any other conclusion would risk the contract being “beset by uncertainty.”
The judgment was appealed by RTI and, seven months later, both parties appeared before the Court of Appeal. By a 2-1 majority (with Arnold LJ dissenting), the Court decided that the force majeure event could have been “overcome” by accepting RTI’s offer (which would have resulted in no detriment to MUR). In the majority’s view, the use of the non-technical word “overcome” implied that non-contractual performance in an event of force majeure was acceptable. The judgment divided opinion. Although some commended its commercial rationale and pragmatism, others argued that it constituted a departure from the traditionally deferential approach taken by English courts to the interpretation of contracts and to generally give effect to parties’ intentions as evinced by the contract’s natural and ordinary meaning.
The U.K. Supreme Court put that debate to rest on May 15, 2024 holding that MUR was able to rely on the force majeure clause and was not obliged to accept non-contractual performance. As such, its rejection of RTI’s offer did not constitute a failure to exercise reasonable endeavours. The Court did not pay close regard to the word “overcome”—their view was that the question of whether reasonable endeavours required the affected party to accept non-contractual performance is one of general application relevant to most contracts, not a question of interpreting a specific provision in a specific contract. It should therefore be addressed as a matter of principle, in accordance with ordinary contractual principles.
Principles at Play in the Judgment
The Court’s judgment contained a number of important clarifications regarding reasonable endeavours provisos including that, for a party to rely on such a clause, the affected party must be able to show that the force majeure event caused its failure to perform, and that “failure to perform” means failing to perform in accordance with the contract’s terms. In short, its purpose is to maintain contractual performance, not to substitute a different performance. 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 Court to find that MUR was not required to accept RTI’s offer of non-contractual performance.
The judgment also underscored the importance of three more general principles that have formed the cornerstone of numerous debates in English jurisprudence. First, that parties are generally free to contract on whatever terms they choose (and that those terms should be given effect). Second, that clear wording is required to forgo contractual rights. And third, that effectively forcing a party to accept non-contractual performance of obligations (in the name of putative “reasonableness”) would be tantamount to an unwelcome departure from certainty and predictability (both seen as hallmarks of English commercial law, and the English common law more generally). All three principles were at play when the Court described RTI’s case as “not anchored to the contract” and giving rise to “considerable legal and factual uncertainty,” as well as its comment that “there is no justification for creating needless additional uncertainty by departing from the standard provided by the terms of the contract and hence by what constitutes contractual performance.”
Comment
At the heart of MUR Shipping was a dichotomy between competing visions of how a contract ought to be interpreted with those favouring flexibility and reasonableness on one side, and those favouring contractual freedom, certainty, and predictability on the other.
In siding with the latter, the Court’s judgment was reflective of an approach taken by the Court to questions of contractual interpretation in recent years, following its judgment in Arnold v Britton [2015] UKSC 36. That judgment re-emphasised the sanctity of freedom of contract and commercial certainty at the heart of English law, and the importance of a rigorous textual analysis of contractual terms. Although the commercial context and “business common sense” were to be taken into account, these factors were not to be at the expense of a proper textual analysis: the court does not exist to re-write the parties’ contract when things go awry.
For parties who wish to retain a degree of flexibility in a world characterized increasingly by instability, protectionism and shock events, it is important that—at the outset of a contract negotiation—the parties consider whether to include express provisions for non-contractual performance in any reasonable endeavours proviso. Equally, those subject to existing contracts may wish to revisit the drafting of their force majeure clauses to clarify more expressly that affected parties should accept non-contractual performance (where such performance would result in no prejudice to the affected party). Either way, the decision shows that, regardless of the contractual obligation concerned (and however seemingly immaterial e.g., the currency of payment), absent clear wording requiring a party to accept an offer of non-contractual performance, that party will not be required to do so, and the other party will be forced to put up with the consequences.