THE UK SUPREME COURT EMPHASISES THE IMPORTANCE OF CERTAINTY AND FREEDOM OF CONTRACT IN ENGLISH LAW
In the UK Supreme Court's judgment in RTI Ltd v MUR Shipping BV [2024] UKSC 18, which was handed down last week, it considered what obligations the words “reasonable endeavours” placed on a party, in the context of a force majeure clause.
The Supreme Court unanimously decided that a party that was entitled to receive payments in US dollars which could not be made due to sanctions issues was justified in rejecting an offer of payment of an equivalent amount in Euros and relying on force majeure, notwithstanding a contractual proviso that an event would only be a force majeure if “it cannot be overcome by reasonable endeavours from the Party affected”.
The Supreme Court's reasoning emphasises that certainty and predictability are of crucial importance in English law and that the principle of freedom of contract includes the freedom not to accept non-contractual performance. In this context the object of such a reasonable endeavours proviso is seeking to maintain, not alter, the performance of the contract in accordance with its terms in light of particular impediments to contractual performance.
This decision will be of interest and application in a wide range of circumstances where a party is involved in a dispute regarding the scope of reasonable endeavours or force majeure provisions.
FACTUAL BACKGROUND
We set out the background to the dispute between MUR Shipping BV ("MUR") and RTI Ltd ("RTI") in detail in our previous alert. The relevant facts are summarised again below:
- MUR and RTI entered into a contract pursuant to which MUR agreed to ship and supply bauxite to RTI (the "Contract").
- The Contract contained a force majeure clause, which included in its definition of "Force Majeure Event" a requirement that the relevant event "…cannot be overcome by reasonable endeavours from the Party affected". This wording was central to the parties' dispute.
- US sanctions were subsequently imposed against RTI's majority shareholder, but not RTI.
- MUR issued a force majeure notice suspending its obligations under the Contract. MUR noted that while RTI itself was not subject to the sanctions, there was a risk that by accepting US dollar payments from RTI, MUR would breach US sanctions.
- RTI rejected the force majeure notice, proposing that it could make equivalent payments to MUR in Euros, which MUR could convert to US dollars. However, MUR did not accept this proposal.
- This resulted in RTI having to obtain alternative supply at additional cost. RTI brought arbitral proceedings against MUR to recover those costs.
PROCEDURAL HISTORY
At first instance the arbitral tribunal found in RTI's favour on the basis that its proposal to pay in Euros and bear any cost of the conversion to US dollars was, the tribunal said, a "completely realistic alternative". The award was, however, overturned by the High Court on appeal. In that judgment, Mr Justice Jacobs found that the scope of reasonable endeavours provisions was limited to the performance of the contract entered into by the parties. This provision did not oblige MUR to accept RTI's proposed non-contractual performance to overcome the force majeure event. This decision was subsequently overturned by the Court of Appeal. MUR then appealed to the Supreme Court.
SUPREME COURT'S DECISION
THE PARTIES' ARGUMENTS
MUR argued that the fundamental question for the Supreme Court to decide was whether a party can be debarred from invoking a force majeure clause on the grounds that it should instead have agreed to vary the terms of the contract or to accept a non-contractual performance. MUR reiterated the argument it made before the Court of Appeal, that existing case law 1 established a principle that absent some contrary indication in the clause, reasonable endeavours did not require a party to accept anything less than contractual performance.
RTI reiterated the contractual interpretation arguments that had been accepted by the Court of Appeal (which we discussed in our previous alert).
THE JUDGMENT
In a judgment given jointly by Lord Hamblen and Lord Burrows, the Supreme Court unanimously allowed the appeal and overturned the Court of Appeal's decision.
In doing so, the Supreme Court found that the question before the Court was one of general application which should be addressed as a matter of principle, contrary to the approach taken by the Court of Appeal. On this basis the Supreme Court found that MUR's obligation to use reasonable endeavours to overcome the force majeure event was confined to its obligations under the Contract. A refusal to accept a method of performance that was not provided for or contemplated in the Contract would not breach the obligation to use reasonable endeavours to overcome the force majeure event.
The Supreme Court's decision was primarily based on the application of four principles:
- The object of reasonable endeavours provisos: force majeure and reasonable endeavours clauses are concerned with the causal effect of impediments to contractual performance (being performance of the contract in accordance with its terms).Therefore the obligation to use reasonable endeavours is limited to removing the impediment sufficiently to enable contractual performance (and not to enabling or justifying a failure to perform in accordance with the relevant terms).
- Freedom of contact: this fundamental principle of English law includes the freedom not to contract, part of this is the right not to accept non-contractual performance.
- Clear words are needed to forego valuable contractual rights: a party is not generally required to forego valuable rights unless the contractual requirement is clear.
- The importance of certainty and predictability in English law: parties need to know with reasonable confidence whether or not a clause can be relied upon at the relevant time by reference to the express rights/obligations under the contract, not after retrospective enquiry as to whether non-contractual performance leads to the same result.
KEY TAKEAWAYS
The Supreme Court's judgment demonstrates a preference for contractual certainty over perceived pragmatism based on subjective factors. Had the Court of Appeal's reasoning been adopted, it is easy to envision contexts where seeking to follow or predict the outcome of that approach might lead to considerable uncertainty and debate.
This judgment provides helpful certainty in the context of force majeure that a party is not required to look outside of the four corners of the contract when using its reasonable endeavours to overcome the force majeure event. Beyond force majeure, we expect that the Supreme Court's interpretation of the contractual principles will be relied on, by analogy, in other contexts where a party seeks to assert that its counterparty is required expressly or implicitly to accept non-contractual performance.
As the Supreme Court noted, parties are free to contract as they see fit. This includes the ability to expressly stipulate alternative methods of performance or to state that the use of reasonable endeavours includes having to accept non-contractual performance where that will lead to an equivalent outcome and/or where the impacted party will suffer no detriment. If this is the desired outcome it is now clear that it must be addressed in the contract.
The decision is a further reminder that a party that is considering accepting non-contractual performance and potentially foregoing its express legal rights should consider the potential implications carefully and seek legal advice before taking any action which may constitute a waiver.
Footnote
1 Bulman v Fenwick & Co [1894] 1 QB 179; and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food [1963] AC 691 (known as “Vancouver Strikes”).
Originally published 21 May 2024
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