RTI Ltd (Respondent) v MUR Shipping BV (Appellant) [2024] UKSC 18

The Supreme Court judgment was handed down on 15 May 2024.

Background:

In June 2016, MUR Shipping BV (MUR), a shipowner, and RTI Ltd (RTI), a charterer, entered into a contract of affreightment pursuant to which MUR would ship cargoes of Bauxite from Guinea to Ukraine monthly. For this service, the contract stipulated that RTI would make freight payments to MUR in US dollars. The contract between the two parties included a force majeure clause which released the parties from their obligations upon the occurrence of an event which among other criteria, could not, “[…] be overcome by reasonable endeavours from the Party affected”.

In early April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) implemented sanctions against RTI’s parent company. MUR sent a force majeure notice on the basis that payment by RTI in the contractual currency of US dollars was prevented by the OFAC sanctions and was a force majeure event. RTI rejected the force majeure notice and offered to make payments in Euros and to indemnify MUR for any additional costs suffered by MUR. MUR rejected this offer insisting on its contractual right to payment in US dollars. MUR then suspended performance due to a force majeure event and RTI was forced to charter other vessels to ship the bauxite that was originally intended to be shipped by MUR.

RTI invoked an arbitration clause that existed in the contract and claimed that they were owed damages for the cost of chartering-in vessels to ship the cargo in the period during which MUR had suspended their performance of the contract.

Relevant Law:

A force majeure clause releases a party from its obligation to perform under a contract on the occurrence of a specified event or state of affairs. As opposed to the common law principle of frustration, force majeure is defined by the clause within the relevant contract. There is no general rule for force majeure in English law and the limits of what can be considered to be a force majeure event will be demarcated by the drafting of the contract and how the court interprets the contract. A typical force majeure clause will often stipulate those events that can be considered to be force majeure, the impact of these events upon the performance of the contract and what will occur in relation to services or payments that are made before the event. Often, such clauses state that it cannot be relied upon if the effects of the adverse event or circumstances could be evaded by the ‘reasonable endeavours’ of the affected party.

As the Supreme Court recognised at [60], there was no previous authority that, “[…] decided whether or not reasonable endeavours in a force majeure clause requires the affected party to accept an offer of non-contractual performance from the other party”. ‘Chitty on Contracts’ ((2023) 35^th edition, volume 1, para 27-066) provides the following explanation of force majeure clauses –

“ [I]t is possible to deduce from the authorities some general propositions in relation to the type of event that is likely to fall within the scope of the words ‘force majeure’ where they are used without further amplification in the contract itself. In such a case a court is likely to conclude that the type of event that will fall within the scope of the clause is an event that was: (i) beyond the reasonable control of the parties (and so would not include an event caused by the negligence, omission or default of one of the contracting parties); (ii) causative of the non-performance; and (iii) could not have been overcome or avoided by the taking of reasonable steps”.

Proceedings:

At each stage of the proceedings, the primary issue to be decided was whether a party who sought to rely on a force majeure clause was required to accept an offer of non-contractual performance to overcome the effects of the force majeure event.

Arbitration Proceedings:

At the first stage, RTI began arbitral proceedings against MUR for breach of contract and RTI claimed they were owed the cost of chartering vessels as a substitute for the period that MUR had suspended performance. In brief, arbitration is a method of dispute resolution where an impartial third party, known as an arbitrator, is appointed to review the evidence and arguments presented by the parties involved and make a binding decision. The tribunal decided in favour of RTI by holding that MUR was in breach of contract. This decision was reached on the basis that MUR had been unable to rely on the force majeure clause because the event could have been overcome by the offer of payment in Euros which would have been “reasonable endeavours” under clause 36.3(d) of the contract.

High Court:

MUR appealed to the High Court under section 69 of the Arbitration Act 1996 on the basis that the tribunal had erred on a point of law. The appeal concerned whether ‘reasonable endeavours’ extended to accepting non-contractual performance. The High Court allowed the appeal and concluded that MUR was not required to relinquish their contractual right to payment in US dollars.

Court of Appeal:

RTI appealed to the Court of Appeal who held that MUR had not been entitled to rely on the force majeure clause. Males LJ in the leading judgment analysed the issue as concerning the construction of the force majeure clause. The majority held that the clause should be approached in a ‘common sense way’ and that therefore the offer to pay in Euros did overcome the force majeure event if the right amount of US dollars were paid and at the right time. This would have the same effect as payment under the terms of the contract. Proceedings ultimately were taken to the Supreme Court.

Judgment:

Unanimously, the Supreme Court overturned the Court of Appeal’s decision and held that where a contract states that reasonable endeavours may be exercised to solve a force majeure event, the extent of these reasonable endeavours is governed by the contract itself. Thus, MUR were free to refuse the offer of a non-contractual solution to the issues posed by the force majeure event. In reaching this decision, the Supreme Court agreed with the counsel for MUR, Mr Nigel Eaton KC, that proving causation of the force majeure event is a critical element for any party seeking to rely on a force majeure clause. The offer by RTI to pay in Euros did not resolve the issue imposed by the sanctions, even if the offer had the potential to have the same ultimate result as the original contractual performance. The entitlement of MUR to their contractual right of payment in US dollars could have been removed only if the contract provided for it expressly.

Commentary:

Underlying the judgment of the Supreme Court, there exists the oft-stated principles of English contract law: the freedom of contract and contractual certainty. The Supreme Court declared that, “the principle of freedom of contract is fundamental to the English law of contract” ([41]), and ensures that this continues to be the case by deciding that the freedom to contract also necessitates that a party has the freedom to not accept the offer of a non-contractual performance of the contract.

The decision reaffirms the centrality of certainty and predictability to English commercial law. This is demonstrated clearly by the quotation of Lord Hamblen who stated in JTI Polska sp z oo v Jakubowski [2023] UKSC 19 that, “certainty and predictability are of particular importance in the context of English commercial law, all the more so given the frequent choice of English law as the governing law in international commercial transactions”. By favouring the arguments put forward by MUR, the Supreme Court confirmed that it was the contract itself which governed the obligations and rights of the parties. The Supreme Court’s adherence to certainty and predictability defeated RTI’s argument that MUR was utilising the force majeure event to back out of a contract that it no longer desired to be a party to. To RTI, this was commercially unreasonable and unjust. However, the Supreme Court restated its commitment to certainty by explaining that “it is not unmeritorious or unjust to insist on contractual performance, all the more so if being precluded from doing so would introduce uncertainty contrary to the expectations of reasonable business people”. [58].

Those sympathetic to RTI’s perspective are likely to criticise the decision as commercially impractical and unreasonable. However, the Supreme Court justified their decision by stating that they considered “the dichotomy in this context between reasonableness and certainty to be misplaced”, [58]. To the Supreme Court, the commitment to certainty and the sanctity of the contract is itself commercially practical. It allows all parties to be sure of their respective positions in relation to force majeure clauses and ensures that they can act accordingly.

This decision clarifies the approach that will be taken by the courts towards force majeure clauses. The Court has made a clear statement that it will not enforce a remedy which was not included in the contract. The effect of any force majeure clause will be determined by the express wording of the provision itself. Recent geopolitical tensions such as the Russian invasion of Ukraine, the attacks on commercial ships by the Houthis in the recent Red Sea Crisis, or global disruption caused by events such as COVID-19 have shown that commercial dealings are not immune from adverse effects. Consequently, it is likely and prudent for force majeure clauses to continue to be commonplace in commercial contracts. It is therefore imperative for both draftsmen and litigators to reflect upon this decision when considering any force majeure clause.

Written by Nicholas Gillyon