The Court of Appeal's decision in MUR Shipping v. RTI could cause difficulty for businesses seeking to rely on force majeure (FM) clauses in contracts affected by sanctions or supply chain disruption. The court allowed RTI’s appeal from the High Court, which had earlier this year set aside an arbitral award under s.69 of the Arbitration Act 1996 on the basis of an error of law. 

What was the dispute about?

The dispute between the parties arose out of a shipping contract to carry bauxite from Guinea to Ukraine. Under the contract, MUR (the shipowner) agreed to carry consignments of bauxite in exchange for RTI (the charterer) making payments on specific dates in US dollars.

In April 2018, the US imposed sanctions on RTI’s parent company. MUR invoked the contractual FM clause, the trigger events for which included “restrictions on monetary transfers and exchanges”. MUR argued that it would be a breach of sanctions were MUR to continue performing under the contract, as the sanctions would prevent RTI’s US dollar payments as required under the contract.

In rejecting MUR’s claim that the FM clause was engaged, RTI argued that:

• the sanctions did not impact the cargo operations;
• MUR was not caught by the US sanctions as a Dutch company; and
• any issues could be overcome by RTI making payments in Euros (which were unaffected by the sanctions) which would then be converted to US dollars for payment to MUR (with RTI bearing any associated costs).

Reasonable endeavours

The dispute was referred to arbitration and the tribunal found in favour of RTI, although it noted that, but for one condition of the FM clause, MUR’s reliance on the FM clause would have been successful. That condition defined an FM event as one that “[could not] be overcome by reasonable endeavours from the Party affected”, with the “Party affected” for these purposes being MUR. Specifically, the tribunal determined that MUR could have accepted payment in Euros (and then converted to US dollars) without any detriment to it.

MUR appealed to the English Commercial Court on a point of law under s.69 of the Arbitration Act 1996. It asked the court to determine whether, as a matter of interpretation of the contract under English law, “reasonable endeavours” extended to accepting payment in non-contractual Euros instead of the contractually agreed US dollars.

Jacobs J allowed MUR’s appeal, holding that the contract required payment by RTI in US dollars and that MUR was not required to sacrifice its contractual right for payment to be made in that currency. He added that, if the loss of a contractual right turns purely on what is reasonable, then that could give rise to uncertainty. RTI appealed the decision to the Court of Appeal under s.69, for which Jacobs J granted permission as a question of general importance.

Common sense prevails

The Court of Appeal (Arnold LJ dissenting) allowed RTI’s appeal, finding that MUR should have accepted payment in Euros. Males LJ (with whom Newey LJ agreed) considered that the essential question was whether the FM event could only have been “overcome” if that meant the contract being performed in strict accordance with its terms. This was too narrow an approach. Rather, the FM clause should be applied in a common-sense way which achieves the purpose underlying the parties’ obligations. In this case, the purpose was that MUR received the right amount of US dollars at the right time. He held that MUR’s acceptance of RTI’s Euros proposal would achieve that without any detriment to MUR (particularly since RTI was willing to indemnify MUR for any losses and costs associated with the conversions).

Can you rely on your FM clause?

This decision will be of concern to businesses that have relied upon FM clauses following the sanctions imposed on various Russian entities earlier this year by the US, the UK and the European Union. The Court of Appeal’s decision suggests that, if FM clauses are qualified with reasonable endeavour obligations or similar, they may need to accept performance not strictly in accordance with the terms of the contract, if that would achieve the same essential aim. If you want to avoid that, be sure to take great care in how you define an FM event and whether it is subject to any qualifications, particularly in relation to sanctions where the scope may be unclear and it may still be possible for the parties to perform under their agreement.