Reasonable endeavours and force majeure: double excitement!

doubleHow would you feel if you learnt that the English Court of Appeal had heard a case about the interpretation of a contract, where both force majeure and reasonable endeavours obligations were analysed? Thrilled? IP Draughts was.

The case was recently published as MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406. The contract was one of those shipping transactions that have odd names; in this case, a contract of affreightment. The contract required a shipowner to load seven cargoes of bauxite for a charterer, and deliver them from Guinea to Ukraine. The problem was:

  • the contract stated that payment was to be made in US dollars
  • the US government had imposed sanctions on various companies associated with a Mr Oleg Deripaska
  • the chartering company was not sanctioned, but was part-owned by a sanctioned company which had provided a guarantee
  • payments in US dollars were likely to be processed through a US bank
  • a US bank would likely be cautious and delay payment while they took advice about complying with the sanctions

The shipowner declined to load the cargoes, invoking the force majeure clause. The charterer offered payment in Euros, and to indemnify the shipowner against any costs associated with conversion of the payment into US dollars in the shipowner’s bank account. The shipowner refused this practical solution.

Clause 36.3 of the contract defined force majeure event as follows:

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

a) It is outside the immediate control of the Party giving the Force Majeure Notice;

b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;

c) It is caused by one or more of acts of God, extreme weather conditions, war, lockout, strikes or other labour disturbances, explosions, fire, invasion, insurrection, blockade, embargo, riot, flood, earthquake, including all accidents to piers, shiploaders, and/or mills, factories, barges, or machinery, railway and canal stoppage by ice or frost, any rules or regulations of governments or any interference or acts or directions of governments, the restraint of princes, restrictions on monetary transfers and exchanges;

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

The question before the court was whether the offer of payment in Euros came within the exception in paragraph d), so that there was no Force Majeure Event.

The dispute was originally referred to arbitration. Under English arbitration law, there is a limited right of appeal to the English High Court from an arbitrator’s decision on a point of law.

Arbitrators: no force majeure. The arbitrators decided that, prima facie, a Force Majeure Event had occurred, but that it was overcome by the offer of payment in Euros, which amounted to reasonable endeavo[u]rs on the part of the charterer.

High Court: yes force majeure. The shipowner appealed to the High Court. Mr Justice Jacobs found in the shipowner’s favour. As summarised by Males LJ in the Court of Appeal, “[Jacobs J’s] essential reason …was that the contract required payment in US dollars and that “a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure or similar clause”.

Court of Appeal majority: no force majeure. The charterer appealed to a three-man Court of Appeal against the decision of Jacobs J. Males LJ and Newey LJ decided by majority decision that there was no force majeure event because payment was offered in Euros on terms that resulted in no disadvantage to the shipowner. They seem to have regarded the point about offering non-contractual performance as a red herring.

Court of Appeal minority: yes force majeure. In the Court of Appeal, Arnold LJ sided with the High Court judge, and disagreed with Males LJ and Newey LJ. In summary, he decided:

  • this case wasn’t really about the meaning of reasonable endeavours
  • it was about whether, to quote clause 36.3,  the “state of affairs” could be “overcome” by payment in Euros
  • for practical purposes, payment in Euros solved the shipowner’s problem
  • but in the absence of clear words in the contract requiring it to do so, a party was not required to accept different performance [payment in Euros] to that specified in the contract [payment in US dollars]

So, two senior judges said yes, two said no. But the two that counted were the majority in the Court of Appeal. IP Draughts is left feeling that Arnold LJ’s fierce logic has met the pragmatism of his fellow judges, and pragmatism has won.

Are there any general lessons from this case for contract drafters? Perhaps not. It seems that many more issues were fought in the arbitration, and only one issue was appealed to the court. On that one issue, perhaps contract drafters might consider including in their force majeure clauses:

  1. An exception where the party affected can take reasonable steps to overcome the force majeure event or situation. On reflection, “reasonable steps” might be better drafting on the facts of this case than “reasonable endeavours”.
  2. Wording to clarify that those reasonable steps might include offering performance that is different to that specified in the contract, but which results in no disadvantage to the party receiving the performance. In this case, such wording was unnecessary, but who knows whether a future case might be heard where Arnold LJ and a promoted Jacobs LJ (or others who share their views) are in the majority.

Of course, wording of this kind might be rejected by the other party in negotiations. It might sound risky to accept a term that allows different performance to that agreed. Maybe we should chalk this case up as a very unusual set of facts that doesn’t merit special drafting in template agreements.

2 Comments

Filed under Uncategorized

2 responses to “Reasonable endeavours and force majeure: double excitement!

  1. vrkoven

    Erm…why was the case not decided under criterion (b)? Remember, the “state of affairs” had to meet all four criteria, and nothing in the state of affairs concerning payment, or delay in processing it, would have prevented or delayed the loading of the cargo (or subsequent unloading) at the times and places required. Catastrophe at the mine, sure; delay in overland shipping to the port, sure. Financial difficulty, not so much.

    • Good question, Vance. I’m guessing the shipowner was “prevented” from performing because the spondulicks had not reached his bank account. Of course, the case report doesn’t mention this point!

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.