UK Supreme Court Blog

EDITORS: Dan Tench, Emma Cross, Zainab Hodgson, Francesca Knight, James Warshaw and Natalie Haefner (CMS)
Hugh Tomlinson KC, Matthew Ryder KC, Nandini Bulchandani and Daniel Rudd (Matrix)

In this post, Stephanie Woods, Senior Associate at CMS, and Holly Ranfield, Associate at CMS, preview the decision awaited from the Supreme Court in RTI Ltd v MUR Shipping BV.

Factual Background

MUR Shipping BV (“MUR”), the shipowners, and RTI Ltd (“RTI”), the charterers, entered into a contract of affreightment in June 2016. Under the contract, RTI agreed to ship and MUR agreed to carry bauxite from Guinea to Ukraine.  It was a term of the contract that RTI would pay freight in the sum of US $12 per metric ton.

The contract provided that “neither Owners nor Charterers shall be liable to the other for loss, damage, delay or failure in performance caused by a Force Majeure Event…while such force Majeure Event is in operation the obligation of each Party to perform this Charter Party … shall be suspended”. A Force Majeure Event was defined as an event (i) outside the immediate control of the party giving notice, (ii) which prevented or delayed the loading or discharge of the cargo, (iii) was caused by one or more of a number of specified reasons, and (iv) which could not be overcome by the reasonable endeavours of the affected party.

On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control imposed sanctions on RTI’s parent company such that the parent company was added to the Specially Designated Nationals and Blocked Persons List (the “Sanctions”). As a consequence, on 10 April 2016 MUR sent a Force Majeure Notice to RTI, stating that the continuance of the contract would be a breach of Sanctions and that Sanctions would prevent the payments in US dollars, which was required under the contract. The notice further stated that RTI itself should be treated as included on the Specially Designated Nationals and Blocked Persons List.

RTI rejected the Force Majeure Notice stating that Sanctions would not affect the performance of the contract and that RTI, being a Dutch company, was not a US person caught by the Sanctions. It proposed settling the freight payment in Euros instead and undertook to bear any currency exchange loss resulting from the different currency. MUR did not accept RTI’s proposal, stating that the contract required payment in US dollars, that there had been a force majeure event and consequently suspended vessel nomination under the contract on the basis of the force majeure clause. RTI obtained alternative tonnage and brought a claim by way of arbitration against MUR seeking the additional costs incurred.

The Arbitral Tribunal held that the exercise of reasonable endeavours required MUR to accept RTI’s proposal to make payment in Euros and that adopting this alternative would have resulted in no detriment for MUR. In the circumstances, MUR was not entitled to rely on the force majeure clause as the force majeure event could have been overcome by the exercise of reasonable endeavours.

MUR brought an appeal under the Arbitration Act 1996, s 69 as to whether reasonable endeavours extended to accepting payment in a non-contractual currency instead of the currency stipulated in the contract.

High Court

The High Court found that the exercise of reasonable endeavours under the force majeure clause did not require MUR to sacrifice its contractual right to payment in US Dollars under the contract.

The court remarked that the exercise of reasonable endeavours required endeavours towards the performance of the parties’ bargain and did not extend to requiring the affected party to accept non-contractual performance (being the payment of freight in a different currency) which did not form part of their agreement.

Court of Appeal

The Court of Appeal reversed the High Court’s judgment by a 2:1 majority. The court considered that the question was whether, in order to overcome the state of affairs caused by the Sanctions, it was essential for the contract to be performed in strict accordance with its terms.

The judgment provided that terms such as “overcome” and “state of affairs” were broad and non-technical, and that the force majeure clause should be applied in a common sense way to achieve the purpose underlying the parties’ obligations.

The court held that RTI’s proposal to pay in Euros and to cover the conversion costs would have achieved the parties’ obligations without detriment to either party.

The judgment set out that that it was apparent from the arbitral award that the reason MUR had refused to accept payment in Euros was that the contract had become disadvantageous to it.

However, the judge stressed that the case was not concerned with reasonable endeavours or force majeure clauses in general and that each clause should be considered on its own terms.

MUR appealed the decision and a hearing took place before the Supreme Court on 6 and 7 March 2024 for which the judgment is awaited.

Comments

Standard form force majeure and reasonable endeavours clauses are frequently included in contracts. Whilst a party may hope not to need to rely on such provisions, sanctions and the changing geopolitical landscape have resulted in these clauses being of increased interest.

Against that background, and given the differing approach taken by the High Court and Court of Appeal, the Supreme Court’s decision is keenly awaited.  Whilst it is unlikely that the Supreme Court’s decision will provide universal guidance to interpreting these clauses (given the emphasis from the Court of Appeal that each clause should be considered on its own terms), the decision will hopefully provide useful guidance as to how parties can ensure clarity in drafting reasonable endeavours clauses. In the meantime, parties drafting these clauses will want to ensure they are as specific as possible as to what equates to reasonable endeavours in order to reduce ambiguity.