Contractual interpretation of force majeure clause containing “reasonable endeavours” obligation

MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406

The question

As a matter of contract interpretation, could the acceptance of a proposal to make payment in euros have overcome the force majeure event/state of affairs caused by the difficulty of them making timely payments in US dollars which resulted from sanctions imposed.

The key takeaway

Those relying on force majeure clauses to avoid performing their contractual obligations should consider that a court may, in the absence of express words, take a practical approach, focussing on achieving the underlying purpose of the parties’ obligations rather than requiring that the contract be performed in strict accordance with its terms.

The background

The charterers of a ship, RTI, entered into a contract of affreightment with ship owner, MUR, for the shipping of large quantities of bauxite from Guinea to Ukraine. The contract contained a force majeure clause providing, among other things, that one of the requirements for invoking the force majeure clause was that the alleged event must be one that could not be overcome by “reasonable endeavours” by the affected party.

The US imposed sanctions on the majority owner of RTI that led to difficulties and delays for them in paying freight in US dollars, which they were required to do under the contract. RTI proposed as an alternative that they should make payment in euros which could be converted into dollars as soon as they were received by the owner’s bank and agreed to bear any additional costs or exchange rate losses in converting the euros into dollars. MUR rejected this proposal, insisting on its right to receive payment in dollars. MUR sent a force majeure notice to RTI seeking to rely on force majeure to suspend its obligations under the contract; this was rejected by RTI.

The key question before the Court of Appeal in relation to whether MUR was entitled to rely on the force majeure clause boiled down to whether the force majeure event or state of affairs concerning the international sanctions which prohibited MUR from accepting payment in US dollars (as required by the contract), could have been overcome by affected party MUR’s “reasonable endeavours”. 

The decision

The Court of Appeal decided that acceptance of RTI’s proposal to pay freight in euros and to bear the cost of converting those euros into dollars would have overcome the state of affairs caused by the imposition of sanctions. Also, it would have been very straightforward for MUR to accept that proposal, requiring no exertion on its part, and resulting in no detriment to MUR.

In coming to its decision that acceptance of RTI’s proposal would have overcome the force majeure event, the Court of Appeal first considered whether, in order to overcome the state of affairs in question, it was essential for the contract to be performed strictly in accordance with its terms (ie only if RTI found a way to make timely payments of freight in US dollars). 

The court decided that that was too narrow an approach to the construction of the clause. Terms such as “state of affairs” and “overcome” are broad and non-technical terms which meant the relevant clause should be applied in a common-sense way to achieve the underlying purpose of the parties’ obligations—in this case, concerning payment obligations, that MUR should receive the right quantity of US dollars in its bank account at the right time. There was no reason why a solution which achieved this purpose should not be regarded as “overcoming the state of affairs” resulting from the imposition of sanctions. It was an ordinary and acceptable use of language to say that a problem or state of affairs is “overcome” if its adverse consequences are completely avoided.

Why is this important?

Whether a force majeure clause can be invoked will depend on the clause’s wording and specific circumstances facing the parties. In this case, in interpreting the force majeure clause, the Court of Appeal took a common-sense approach, focussing on achieving the underlying purpose of the parties’ obligations rather than requiring that the contract be performed in strict accordance with its terms. This approach may be of interest to those seeking to rely on force majeure clauses as a result of sanctions imposed on Russian entities. 

Any practical tips?

Ensure that when drafting force majeure clauses consideration is given to the possibility that, if a dispute arises, the courts may take a common sense approach to how the parties achieve their underlying obligations, including accepting non-contractual performance. When drafting such provisions, consider how a force majeure event is defined in the contract and whether to include reasonable endeavours obligations. 

Winter 2022