ARTICLE
9 January 2025

Sanctions, Force Majeure And Reasonable Endeavours In The Supreme Court

QC
Quadrant Chambers

Contributor

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In RTI Ltd v MUR Shipping BV [2024], the UK Supreme Court ruled that a force majeure clause requiring "reasonable endeavors" did not oblige a party to accept non-contractual performance, emphasizing contractual rights, commercial certainty, and strict clause interpretation.
United Kingdom International Law

RTI Ltd v MUR Shipping BV [2024] UKSC 18

Introduction

RTI Ltd v MUR Shipping BV [2024] UKSC 18 concerned the construction of a force majeure (“FM”) clause in a contract of affreightment (“COA”). The central issue was whether it was a requirement of declaring FM that the putative FM event had to be incapable of being overcome by reasonable endeavours by the party declaring FM.

As governments worldwide increasingly deploy economic sanctions and trade controls as instruments of state policy, the importance of FM clauses in contracts for international trade and transport is increasing.

The FM Clause

The FM clause in question stated that an event or state of affairs only qualified as a force majeure event if it met several criteria, including that it prevented or delayed the loading or discharge of the cargo (Clause 36.3(b)) and could not “be overcome by reasonable endeavors [sic] from the Party affected” (Clause 36.3(d) (“the RE provision”). The question of law on appeal was whether, in the absence of express stipulation, the RE provision could require a party to accept performance that was non-contractual in some way.

The contract operated smoothly until April 2018, when the US government imposed sanctions affecting RTI's parent company. MUR contended that RTI would no longer be able to make US$ payments and declared FM on the basis that the sanctions constituted a FM event, sending a notice of suspension of performance on 10 April 2018.

RTI denied that the sanctions would interfere with cargo operations, and proposed to make payments in €, covering any currency conversion costs themselves. However, MUR refused the offer and maintained their suspension of performance. The impasse lasted two weeks, after which MUR agreed to accept RTI's payments in €, but during the suspension period, RTI had to charter alternative vessels at additional cost. RTI claimed damages in arbitration.

Underlying Decisions

RTI succeeded in its claim before the arbitrators, but its victory turned on the tribunal's finding that the RE provision was not satisfied: MUR could have accepted RTI's proposal to pay the freight in € and bear any additional costs, which the tribunal described as a “completely realistic alternative”.

MUR appealed to the High Court (Jacobs J) under s. 69 of the Arbitration Act 1996, and succeeded in reversing the tribunal's decision. But the judge recognised that the point was novel and granted RTI permission to appeal to the Court of Appeal.

RTI succeeded in the Court of Appeal, by a majority. Even the dissenting judge (Arnold LJ) observed that “[o]n the facts of this case MUR's position has no merit” (at §66).

Appellate Courts

The Court of Appeal refused permission to appeal, but the Supreme Court granted it and reversed the decision of the Court of Appeal.

It is instructive to compare the contrasting approaches between the two courts.

Males LJ took a broad, purposive approach to interpreting clause 36, and held that terms such as “state of affairs” and “overcome” are broad and non-technical terms. He suggested that clause 36 should be applied in a common-sense manner that achieves the underlying purpose of the contract. In this case, that purpose concerned the payment obligations: that MUR should receive the correct amount of US$ in its account at the right time. Males LJ found no reason why RTI's offer to pay in €, which would ensure that MUR received the required amount of US$ after conversion, should not be considered as overcoming the state of affairs resulting from the sanctions . Newey LJ, agreeing with Males LJ in the Court of Appeal, summarised this argument effectively: if all the adverse consequences of the FM event have been completely eliminated, how can it be said that the problem has not been overcome?

The Supreme Court disagreed with the Court of Appeal's interpretation of the FM clause. Hamblen and Burrows JJSC emphasised that MUR had a clear contractual right to be paid in US$, and that it would have required clear and express wording in the contract to remove it. The focus of the enquiry in relation to the RE provision was on steps that would ensure contractual performance, not a substitute performance. It was not reasonable to expect MUR to accept non-contractual performance, nor would that have overcome the FM event.

Comment

There are three key aspects of the Supreme Court's decision that warrant closer scrutiny

First, there is a striking difference in how the Court of Appeal and the Supreme Court approached the construction of the FM clause. The Supreme Court treated their decision as one that would apply to most FM clauses (on the basis that even if an RE provision is not express, it will normally be implied). By contrast, the Court of Appeal unanimously considered that it was concerned with this particular FM clause, not reasonable endeavours or FM clauses in general. They also accorded more importance to the fact that the reasonableness of endeavours required of MUR had already been determined by the tribunal.

It is arguably a defect in the Supreme Court's general approach that it is insufficiently sensitive to the wording of the FM clause, which must on any view be of central importance. Nothing in the language of clause 36 expressly excluded non-contractual options, and even after the Supreme Court's decision the source of that limitation remains obscure. Construing the word “overcome” practically and in context, it was surely focused on the smooth continuation of cargo operations rather than strict compliance with every last letter of the contract.

But even on the Supreme Court's high level approach, an impediment to contractual performance is surely ‘overcome' if the obligation in question is waived, in which case the case turned on whether waiving the right to payment in US$ amounted to more than “reasonable endeavours”, as to which nothing was expressly said in the FM clause, and which looks very much like the sort of essentially factual question that is best left to the tribunal of fact.

Second, the Supreme Court gave a far higher billing to commercial certainty than the Court of Appeal, arguably according commercial certainty an importance that could not be justified by reference to the parties' intention. It is a natural response to RTI's position to ask where the line would be drawn in future cases: when would acceptance of a non-contractual solution have required more than reasonable endeavours, or have been regarded as failing to overcome an impediment to performance. But RTI's particular case was one in which there was no detriment to their counterparty whatsoever, so it could be questioned why RTI should have been concerned about the potential line-drawing issues in other cases. After all, it is possible to agree a term that provides flexibility at the expense of some certainty, and that is perhaps what the parties had done in this case.

Third, the Supreme Court did not think that the RE provision should lightly be regarded as amounting to an agreement by MUR to give up its right to payment in US$, and cited the Gilbert-Ash principle, which holds that “parties do not normally give up valuable rights without making it clear that they intend to do so”. But this principle traditionally applies to statutory or common law rights rather than other contractual rights, and in any case there are equally well-established principles which the Supreme Court did not give such prominence, that say that contracts should be construed as a whole (meaning that the right to payment in US$ was from its inception to be construed subject to the RE provision) and that force majeure clauses should be construed narrowly because they generally permit the suspension or cessation of contractual performance. RTI argued that there was an inherent contradiction in the argument that MUR's right to be paid in US$ should not be removed without clear language, meaning that RTI's right to be supplied with vessels could be easily suspended or ended, even in circumstances where an ideal solution to the sanctions issue had been found.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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