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12 May 2022

Reliance on force majeure in the face of sanctions: MUR Shipping v RTI

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In MUR Shipping BV v RTI Ltd1, the Commercial Court affirmed a contracting party's right to invoke force majeure where the parent company of its counterparty is subject to sanctions.

While this decision related to the US sanctions on Russian entities imposed in 2018, it is likely to have relevance for many parties currently considering the scope of their contractual obligations following the recent sanctions imposed as a result of the war in Ukraine. In this update, we examine the decision in MUR and the law on force majeure and reasonable endeavours generally.

Force majeure

The term force majeure has no universally recognised meaning in English law. As such, the concept of force majeure operates only to the extent contractually agreed.

In light of this, contracts will often include sweep-up language to ensure that any force majeure events expressly included in a contract are not treated as exhaustive. In addition, drafters will look to include language to ensure that any party wishing to rely on a force majeure event makes efforts to avoid or mitigate the impact of the event. The recent case of MUR Shipping BV v RTI Ltd highlights that one of the most common of these provisions (that requiring the use of 'reasonable endeavours' to overcome the force majeure event) will not extend to obliging a party to accept anything other than contractual performance.

MUR Shipping BV v RTI Ltd

In MUR, the Commercial Court provided some helpful clarity on the scope of the ubiquitous 'reasonable endeavours' requirement in force majeure clauses.

Background

In June 2016, MUR Shipping BV (the "Owners") entered into a contract of affreightment ("COA") with RTI Ltd (the "Charterers") for the shipment of approximately 280,000 metric tons per month of bauxite from Guinea to Ukraine. In April 2018, the US Department of the Treasury's Office of Foreign Assets Control ("OFAC") applied sanctions to the Charterers' parent company, adding them to the Specially Designated Nationals and Blocked Persons List. Payment of freight under the COA was specified to be in US dollars and it was agreed amongst the parties that, as any transfers in US dollars would be cleared by a US intermediary bank, US dollar payments would be delayed (or possibly rejected) as a result of the sanctions. This led to the Owners invoking a force majeure clause in the COA by sending a force majeure notice (the "FM Notice") on 10 April 2018.

The term 'Force Majeure Event' was defined in the COA as an event which, among other conditions, "[could] not be overcome by reasonable endeavours from the Party affected". In sending the FM Notice, the Owners contended that: (i) the ongoing performance of the contract would constitute a breach of the sanctions placed upon RTI's parent company by OFAC; and (ii) that the sanctions would prevent the US dollar payments required by the COA.

By response, the Charterers stated that sanctions would not interfere with cargo operations and noted that contractual payment under the COA could be made in Euros, with any resulting costs to be met by the Charterer. In reply, the Owners submitted that, pursuant to the COA, freight was to be paid in US dollars and that the likely delay in such payments would obstruct the load and discharge of cargo.

Due to the occurrence of the purported force majeure event, the Owners refused to nominate vessels under the COA and the Charterers were required to obtain alternative tonnage at additional cost. On this basis, the Charterers brought arbitral proceedings against the Owners for the additional costs incurred in this process.

Arbitration

The arbitral tribunal held that the Owners' case on force majeure would have been successful, but for the fact that the force majeure could have been "overcome by reasonable endeavours" as per the terms of the COA. The tribunal considered that the Charterers' proposal to make payments falling due under the COA in Euros was a "completely realistic alternative" to the US dollar payment envisaged in the COA and, accordingly, found in favour of the Charterers.

The Owners appealed the tribunal's decision under section 69 of the Arbitration Act 1996 on a question of law, namely whether a duty to take reasonable endeavours to overcome a force majeure event obliged a party to accept non-contractual performance.

Commercial Court decision

On appeal to the Commercial Court, Mr Justice Jacobs found in favour of the Owners' appeal, overturning the tribunal's award. Mr Justice Jacobs held that, as a matter of established case law2, the scope of reasonable endeavours provisions is limited to the performance of the contract entered into by the parties; the currency of payment was an express and important term of the COA and a requirement of 'reasonable endeavours' did not oblige the Owners to accept payment in Euros in order to circumvent the effect of a force majeure. As Mr Justice Jacobs noted, "an exercise which involves assessing the relative importance of contractual terms would lead to considerable uncertainty in the operation of force majeure clauses. Such clauses have been introduced very widely into contracts and one purpose of such clauses is to mitigate the inherent uncertainties in the application of frustration".

Mr Justice Jacobs also rejected the Charterers' arguments in the alternative in respect of causation. In particular, the Charterers contended that there was an insufficient causal connection between the implementation of OFAC sanctions as against its parent company, the resulting difficulty in making US dollar denominated freight payments under the COA and the Owners' purported delay or prevention of loading and discharge. In rejecting this argument, Mr Justice Jacobs held that, "it [was not] possible to discern any error of law in the tribunal's conclusion that (reasonable endeavours apart) the Owners' case on force majeure succeeded in all other respects."

Practical consequences

The Commercial Court's decision raises a number of practical consequences in respect of the drafting and invocation of force majeure clauses. In particular:
 

  • Whilst a party obliged to make 'reasonable endeavours' to overcome the effect of a force majeure clause will have to prove that it used its reasonable endeavours to prevent, or at least mitigate, the effects of the force majeure event, that is only required to the extent that those endeavours are aligned with contractual performance; there is no requirement for a party to accept anything other than contractual performance.
  • Consider carefully the wording used when drafting a force majeure clause. Whether the clause is triggered will depend on its proper interpretation which requires reference to the words the parties have actually used, not their general intention3.Here, the Court deemed the wording included in the force majeure clause under the COA, "any rules or regulations of governments or any interference or acts or directions of governments" and "restrictions on monetary transfers and exchanges" sufficiently covered the issue of sanctions.
  • While the Court has helpfully clarified that 'reasonable endeavours' does not include accepting non-contractual performance (however easy that might be), there remains considerable uncertainty about the scope of the term generally. For more analysis on how the Courts interpret the term see our article: "Best endeavours" vs "reasonable endeavours": not two sides of the same coin.
  


1 [2022] EWHC 467 (Comm)

2 Bulman v Fenwick [1894] 1 QB 179

3 Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star) [1996] 2 Lloyd's Rep 383

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