Oil, gas and commodities: Supreme Court overturns Court of Appeal on force majeure

On 15 May 2024, the Supreme Court unanimously overturned the Court of Appeal’s decision that a ‘reasonable endeavours’ obligation in a force majeure clause could require a party to accept alternative, or non-contractual, performance.

The Supreme Court clarified the law on force majeure clauses by relying on well-established English law principles and found that an obligation to use reasonable endeavours in the context of a force majeure clause would not require a party who wishes to rely on the clause to accept the other party’s offer of non-contractual performance.

Facts

CMS has published an article on the Commercial Court’s judgment in its Annual Review of Developments in English Oil and Gas Law 2022 (available here) which sets out the facts of the underlying dispute in greater detail. An abridged summary of the facts is reproduced here as well as in the CMS article about the Court of Appeal judgment (available here).

The dispute concerned a contract of affreightment (the ‘COA’) between MUR Shipping BV (‘MUR’) (as the ‘Owner’) and RTI Ltd (‘RTI’) (as the ‘Charterer’), for the shipment of bauxite from Guinea to Ukraine.

The force majeure was defined in the COA as follows:

“36.3. 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 endeavours from the Party affected.”

In April 2018, RTI’s Russian parent company was sanctioned by the US Department of the Treasury’s Office of Foreign Assets Control. This led MUR to state that it would be a breach of the sanctions to continue with the performance of the COA, noting that the “sanctions will prevent dollar payments, which are required under the COA”. MUR therefore invoked the force majeure clause in the COA.

RTI argued that there was no force majeure event and that the sanctions were not relevant as: (i) MUR would not be caught by US sanctions as it was not a US entity; and (ii) payments could be made in Euros instead (with RTI covering any associated currency charges).

RTI commenced arbitral proceedings against MUR.

The arbitral tribunal considered that making payment in Euros was a “completely realistic alternative”, and so MUR should have accepted this proposal rather than claiming force majeure.

MUR appealed the decision to the Commercial Court, on a question of law as to whether ‘reasonable endeavours’ would require a party claiming force majeure to accept non-contractual performance (i.e., payment in Euros rather than US Dollars).

Commercial Court Decision

Following detailed consideration of submissions on contractual interpretation put forward by the parties and relevant case-law in the area of ‘reasonable endeavours’, the Commercial Court decided that MUR was not required to sacrifice its contractual right to payment in US Dollars.

As such, the Commercial Court confirmed that ‘reasonable endeavours’ on a party to overcome a force majeure event does not extend to a party being required to tender non-contractual performance, even where there may be an alternative course of action which may avoid the effect of the event said to give rise to force majeure.

Court of Appeal Decision

CMS has published an article on the Court of Appeal’s judgment, appealed in this case, in late 2022 (available here). Males LJ considered that the appeal concerned the specific terms of clause 36 and that the ‘real question’ was whether acceptance of the proposal to pay freight in Euros and to bear the cost of converting those Euros into US Dollars would “overcome” the state of affairs caused by the imposition of sanctions. Newey LJ, agreeing with Males LJ, held that it was sufficient that the force majeure event could be “overcome” in a “practical sense, such that all its adverse consequences would be avoided”.

As such, the Court of Appeal held, by a majority, that MUR’s acceptance of RTI’s proposal for payment in Euros, in addition to MUR covering the costs of conversion to US Dollars, would have overcome the force majeure event and did not constitute non-contractual performance as it met the purpose of MUR receiving the correct amount of US Dollars. Consequently, the Court of Appeal allowed the appeal and restored the award of the arbitrators.

Arnold LJ, in his dissenting decision, appreciated that MUR’s position on the facts had no ‘merit’, but that it is entitled to insist upon strict contractual performance, under the ‘Gilbert-Ash’ principle, this being payment in US Dollars and not Euros. 

Supreme Court Decision

The Supreme Court unanimously overturned the Court of Appeal judgment.

The judgment presented by Lord Hamblen and Lord Burrows disagreed with the Court of Appeal’s analysis that the case was dealing with a narrow issue of interpretation of the specific terms of clause 36. Since force majeure clauses are generally interpreted as applicable only if the party invoking it can show that the state of affairs was beyond its reasonable control and could not be avoided by taking reasonable steps, they were dealing with a very common feature of force majeure clauses and any decision an appellate court takes would be applicable to force majeure clauses generally.

After reviewing a large number of authorities, the Supreme Court explained why it disagreed with the Court of Appeal’s decision under several well-established principles of English law:

• Object of reasonable endeavours provisos: The Supreme Court noted that force majeure clauses are generally interpretated as implicitly including reasonable endeavours provisos because of causation (i.e. if the party could have prevented the state of affairs by taking reasonable steps, then the force majeure event could not have caused the failure to perform). Lord Hamblen and Lord Burrows reiterated that contractual performance under a force majeure clause means performance of the contract according to its terms (which, in this case, meant payment in US Dollars) and failure to perform means failing to perform according to those terms. The Supreme Court strongly disagreed with the Court of Appeal’s analysis of this issue and stated:
  
  “This means that the relevant question is whether reasonable endeavours could have secured the continuation or resumption of contractual performance. (…) It is not concerned with the steps that could or should have been taken to secure some different, non-contractual, performance. The object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance. (…) Put another way, it would be absurd to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance.”
   
• Freedom of contract: The Supreme Court reiterated that the principle of freedom of contract is fundamental to English law and stated that freedom of contract includes “the freedom not to accept the offer of a non-contractual performance of the contract”.
   
• Clear words are needed to forego contractual rights: A party should not be required to forego valuable rights unless the contract makes it clear. On the facts, MUR had the contractual right to refuse payment in any other currency than US Dollars and did not expressly forego this right.
   
• Importance of certainty in commercial contracts: Counsel for RTI had suggested that non-contractual performance may be accepted if: (i) it involves no detriment to the party seeking to invoke force majeure; and (ii) it achieves the same result as performance of the contractual obligation in question. Lord Hamblen and Lord Burrows examined RTI’s arguments in the context of legal and commercial certainty and RTI’s claim that this approach would be favoured by reasonable business people. The Supreme Court rejected this argument, stating that RTI’s proposed approach gives rise to considerable uncertainty, especially in the context of a clause which requires immediate judgments to be made, which would be contrary to the expectations of reasonable business people.

Comment

As the Supreme Court itself noted, this is the first case that has decided whether or not reasonable endeavours in a force majeure clause requires the affected party to accept an offer of non-contractual performance from the other party.

The closest cases were: Bulman & Dickson v Fenwick & Co [1894] 1 QB 179 and the Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691 (“the Vancouver Strikes case”), which provided strong implicit support for MUR’s case. In contrast any support in the authorities for RTI’s case was weak.

The view expressed in our previous article (available here) was that the potential problem with the Court of Appeal’s analysis is that it was not what the contract required. The contract required payment in US Dollars. If payment could not be made in US Dollars the contract could not be performed on its terms. The approach taken by the Court of Appeal had the potential to create confusion in the operation of force majeure clauses and was (perhaps) an example of hard facts creating bad law.

The Supreme Court’s decision accepted that at first sight, RTI’s submissions appear to favour reasonableness (and justice) over certainty, but this should not “be allowed to ride rough-shod over the required contractual performance”, holding that reasonable endeavours provisos in force majeure clauses should not be extended to offers of non-contractual performance unless the parties expressly agreed.

The Supreme Court has confirmed that “it is not unmeritorious or unjust to insist on contractual performance”. 

Accordingly, the decision brings welcome clarity to any uncertainty the Court of Appeal judgment may have created and bases its judgment on fundamental principles of English commercial law, especially certainty and predictability.

For lawyers drafting force majeure clauses the key ‘take away’ points are:

1. In English law, force majeure clauses will be construed on their own terms such that the drafter is in control of the category of events that may constitute force majeure and their contractual consequences.
    
2. Even where a force majeure provision does not contain an express obligation to use reasonable endeavours to mitigate the effect of the event that might cause force majeure, the law will usually imply that a party invoking force majeure must show that the event or state of affairs was beyond its reasonable control and could not have been avoided by taking reasonable steps.
    
3. The requirement to take reasonable steps (or reasonable endeavours) will not generally be construed as compelling non-contractual performance. That said, the Supreme Court made clear that it is open to the parties to agree otherwise in their contract.