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

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

The question

Where a contractual force majeure clause contains a proviso requiring the party which is affected by force majeure to exercise “reasonable endeavours” to overcome it, can the proviso require the affected party to agree to accept a non-contractual performance?

The key takeaway

In construing a force majeure clause, the UK Supreme Court has steered away from focusing on “achieving the underlying purpose of the parties’ obligations”, preferring the approach of requiring that the contract be performed in accordance with its terms. In particular, the court would not interpret the “reasonable endeavours” proviso, which required the party which was affected by force majeure to exercise reasonable endeavours to overcome it, as requiring the affected party to accept non-contractual performance unless the parties expressly agree.

The background

As set out in our previous Snapshot on the High Court decision 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:

36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

(a)...

(c) It is caused by one or more of acts of …, any rules or regulations of governments or any interference or acts or directions of governments, the restraint of prices, restrictions on monetary transfers and exchanges;

(d) It cannot be overcome by reasonable endeavors from the Party affected.

The US Department of the Treasury’s Office of Foreign Asset Control imposed sanctions on the parent company of RTI. This would have led to difficulties and delays for RTI in paying in US dollars, as stipulated in the contract. Therefore, MUR sent a force majeure notice to RTI.

RTI rejected the force majeure notice and offered to make payment in Euros rather than US dollars, and further agreed to bear any additional costs or exchange rate losses in the conversion. MUR rejected this proposal and suspended operations under the contract, insisting on its right to receive payment in US dollars.

The key question before the Supreme Court was whether MUR was entitled to maintain its position (a position with which the High Court agreed) that “reasonable endeavours” from the party affected within clause 36.3(d) of the contract could not include accepting payment in Euros rather than US dollars.

The decision

Dismissing the Court of Appeal’s approach (see here), the Supreme Court unanimously allowed MUR’s appeal, meaning that rejecting RTI’s offer of payment in Euros payment was not a failure by MUR to exercise “reasonable endeavours”.

In reaching its judgment, the Supreme Court considered four principles which supported MUR’s appeal.

First, it considered the object of reasonable endeavours provisos within force majeure clauses. The relevant question is whether reasonable endeavours could have secured the continuation or resumption of contractual performance, ie the object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance. In this case, the relevant contractual performance was payment in US dollars. The only way in which the impediment to contractual performance could have been “overcome” was if the exercise of reasonable endeavours by MUR would have enabled the payment of US dollars to be made without delay.

However, the banking delay for US dollar payments resulting from the imposition of sanctions remained in place and was not “overcome” by offering non-contractual performance. It would be absurd to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance.

Secondly, the Supreme Court considered the principle of freedom of contract. It found that the freedom of contract also entitles freedom not to contract. As a result, MUR was within its rights to reject the offer of payment in Euros which was an offer of non-contractual performance of the contract.

Thirdly, the court stated that clear words within the contract are required before valuable contractual rights are foregone. Therefore, without express wording or by necessary implication (including making clear the circumstances in which it would be required), MUR was not obliged to give up the valuable contractual right to receive payment in US dollars. In fact, the court determined that clause 36 itself required clear words to be used for there to be any contractually required change to the parties’ rights. Clause 36.2 provided that, following the end of a force majeure event, “the Parties shall consult in good faith to make such adjustments as may be appropriate to the shipment schedule.” The same applied to either of the parties being required to accept an offer of non-contractual performance.

Finally, MUR’s position was correct as certainty in commercial contracts is a cornerstone of English commercial law. A determination in favour of RTI on this issue, on other hand, gave rise to considerable legal and factual uncertainty requiring inquiries into whether the acceptance of non-contractual performance would (i) involve no detriment to the party seeking to invoke force majeure, and (ii) achieve the same result as performance of the contractual obligation in question. The parties were entitled to know with reasonable confidence whether or not a force majeure clause can be relied upon at the relevant time, not after some retrospective inquiry. In addition, by clear wording, the parties could have themselves provided for reasonable endeavours to include accepting an offer of non contractual performance from the other party.

Why is this important?

This is an important decision because it is common for a force majeure clause to make specific reference to a party using reasonable endeavours. In its interpretation of the force majeure clause, the Supreme Court restated the importance of certainty in commercial contracts and determined that absent express wording, “reasonable endeavours” in this context does not require a party to accept non-contractual performance.

Any practical tips?

Consider whether the force majeure clause should contain an obligation that one or all of the parties must use their reasonable endeavours to minimise the effects of the force majeure event. If there are to be any provisos to the operation of the force majeure clause, consider whether any particular steps should be specified, in addition to or in the alternative to an (unspecified) reasonable endeavours proviso.

If the parties would be prepared to accept an alternative to (certain aspects of) the particular contractual performance specified, eg as to the currency of payments, to maintain the overall transaction, consider including such alternative options.

If, at the time of drafting, there is a known concern (eg supply chain disruptions or significant price inflation) that may impact the performance of the contract, consider tailored clauses to deal with the anticipated consequences of those particular event (and ensure such provisions are consistent with the force majeure provisions).

Summer 2024