What reasonable steps does a party have to take to overcome a force majeure clause?

In a rare appeal of an arbitration award under section 69 of the Arbitration Act 1996 on a point of law, the Court of Appeal has recently handed down judgment in MUR Shipping BV v RTI Ltd (2022) overturning a first instance decision which had overturned an London Maritime Arbitrators Association (LMAA) tribunal’s Award. The issue in the case was whether a party seeking to rely on a force majeure clause had to use reasonable endeavours to overcome the detriment of a force majeure clause. The Court of Appeal found that they did.

The facts of the case

This case concerned a contract of affreightment (a contract between a ship-owner and charterer) between MUR Shipping BV (MUR) as the shipowner and RTI Ltd (RTI) as the charterer. The contract provided that RTI had to pay MUR in US dollars.

In 2018, RTI’s parent company was placed on a sanctions list by the US Department of the Treasury’s Office of Foreign Assets. MUR sent a force majeure notice to RTI stating that because of RTI’s parent company being placed on a US sanctions list, it could no longer accept payment in US dollars and, therefore, a force majeure event had occurred.

The contract contained a typical force majeure provision but provided that a force majeure event would not occur if “d) It cannot be overcome by reasonable endeavors from the Party affected.”

In response to MUR’s force majeure notice, RTI offered to make payment in euros making clear that they would bear any additional cost or exchange rate loss in converting euros to US dollars. RTI explained that MUR would therefore not suffer any detriment. MUR refused to accept euros and refused to nominate vessels for loading under the contract.

Arbitration Tribunal

RTI commenced LMAA arbitration proceedings against MUR for demurrage (ie a charge payable to the owner of a chartered ship on failure to load or discharge the ship within the time agreed). The tribunal determined that MUR was not entitled to rely on the force majeure clause in the contract because its failure to accept payment in euros was a failure to use ‘reasonable endeavours’ to overcome the force majeure event.  

First Instance Decision

MUR appealed the tribunal’s Award under section 69 of the Arbitration Act 1996 on the point of law of whether the meaning of the ‘reasonable endeavours’ clause meant that it, as the affected party, was required to accept payment in another currency other than that provided for in the contract.   

Mr Justice Jacobs granted MUR’s appeal and determined that because the contract required payment in US dollars, MUR did not have to, by exercise of reasonable endeavours, accept non-contractual performance in order to overcome the force majeure event.

Court of Appeal

RTI appealed the decision to the Court of Appeal. In a decision of 2 to 1, The Court of Appeal overturned Mr Justice Jacobs’ first instance decision and upheld the tribunal’s award. In the leading judgment, Lord Justice Males made clear that this case and the clause involved would be considered on their own terms and the court was not concerned with making general proclamations about reasonable endeavours or force majeure clauses. Unlike certain civil law systems, parties can only rely on force majeure provisions in England & Wales if they have provided for them in their contracts. Each force majeure clause will be interpreted by a court on the wording used in the clause. 

The Court of Appeal noted that that the main considerations in this case were whether acceptance of the proposal to pay for the freight in euros would overcome the force majeure event, the impact of the imposition of sanctions on the parent company, and whether it was essential for the contract to be performed in strict accordance with its terms (i.e. payment in US dollars). If it was essential for the contract to be performed in strict accordance with its terms, RTI would have had to find some way to make the payment in US dollars. LJ Males held that this was a narrow construction of the clause and that, applying the force majeure clause in a common sense way, if MUR received the right quantity of US dollars at the right time (even after being converted from euros) then that that achieves the purpose of the parties’ underlying obligations.

Lord Justice Males held that acceptance of the proposal by RTI to pay MUR in euros (which could be converted to US dollars, with RTI fronting any additional cost) would have resulted in no detriment to MUR and overcame the state of affairs caused by the imposition of sanctions on MUR’s parent company. Had the payment in euros resulted in detriment to MUR, then the situation would have been different. “Overcome” did not mean that the contract had to be performed in strict accordance with its terms.

What this decision means going forward

Drafters of force majeure clauses do commonly provide that parties use reasonable endeavours to mitigate the impact of a force majeure provision. Whilst the court made clear that force majeure and reasonable endeavours clauses will be considered on their own terms, anyone drafting a force majeure clause which provides that it can be overcome by a party using reasonable endeavours should think carefully about what that may mean when a force majeure issue arises. The court in this case found that a party seeking to rely on a force majeure provision may have to accept alternative performance of a contractual clause if that overcomes the state of affairs in question and the detriment caused by a party seeking to rely on a force majeure clause.

The case also acts as a useful reminder for parties adopting arbitration clauses to think carefully about parties’ rights to challenge awards on points of law. Under the LMAA rules, parties can challenge arbitration awards to the English courts on points of law unless they provide for otherwise in their contracts. The default position under other institutional rules such as the LCIA and ICC is that the parties waive their rights to challenge awards on points of law to the English courts.