Party entitled to rely on force majeure clause where counterparty's parent company became subject to US sanctions

The Commercial Court has held that a shipowner was entitled to rely on a force majeure clause in a shipping contract where its charterer's parent company became subject to US sanctions - allowing an appeal from an arbitration award on a point of law under section 69 of the Arbitration Act 1996: MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm).

The decision is of particular interest as the court allowed reliance on force majeure despite the fact that the sanctions did not directly bite on the shipowners, but rather would be likely to delay US dollar payments which in turn meant that shipowners were not prepared to go ahead with performance of the contract. The two key points arising from the court's decision are as follows:

1. In exercising reasonable endeavours to overcome the impact of a force majeure event, a party is not obliged to accept anything other than contractual performance. In this case, for example, the shipowners were not required to accept payment in Euros rather than the contractual currency of US dollars.
2. There is no requirement that a force majeure event directly prevents or delays performance, without any intervening decision-making process on the part of the party relying on the clause. A party's decision, taken in reaction to a force majeure event, will not necessarily break the chain of causation between the force majeure event and the non-performance, at least where the decision is reasonable.

Background

In June 2016 the appellant ship owners (the "Owners") contracted with the respondent charterers (the "Charterers") to carry monthly shipments of bauxite from Guinea to Ukraine. The contract contained a force majeure clause which provided that neither the Owners nor the Charterers would be liable to the other for loss, damage, delay or failure in performance caused by a "Force Majeure Event", which was defined as an event or state of affairs which met 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,..., 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."

On 6 April 2018, the Charterer's parent company became subject to US sanctions. On 10 April, the Owners sent a force majeure notice stating that it would be a breach of sanctions for the Owners to continue with the performance of the contract, and that the "sanctions will prevent dollar payments, which are required" under the contract. The Charterers responded that sanctions would not interfere with cargo operations, that payment could be made in Euros, and that the Owners (a Dutch company) were not a "US person" caught by sanctions.

In response, the Owners stated that the freight was to be paid in US dollars under the contract, and that if monetary transfers from Charterers to Owners were restricted, the Owners could not be expected to load and discharge the cargo without receiving payment. Accordingly, there had been a Force Majeure Event which might prevent loading and discharging. The Owners declined to nominate ships under the contract, relying upon force majeure. The Charterers obtained alternative tonnage and brought a claim in arbitration for the additional costs incurred.

The arbitration tribunal gave an Award in favour of the Charterers. It held that, but for one point, the Owners would have been able to rely on force majeure. Although the Owners were a Dutch company and so not directly caught by US sanctions legislation, and there was minimal risk of secondary sanctions penalties being applied, the tribunal was satisfied that, given the drastic effect of sanctions legislation, the Owners were entitled to take time to review the position and opt for caution in continuing to trade with the Charterers. It was also satisfied that the practical effect of the imposition of sanctions would be to delay US dollar payments.

However, the point on which the Owners failed was that, applying the terms of the force majeure clause, the event could have been "overcome by reasonable endeavours from the Party affected" - i.e. if the Owners had accepted the Charterers' proposal to make payment in Euros, with the Charterers bearing any additional costs or exchange rate losses in converting the currencies. The tribunal described this as a "completely realistic alternative" to the contractual payment obligation, which was to pay in US dollars.

The Owners appealed the Award on a question of law under section 69 of the Arbitration Act 1996 - namely whether reasonable endeavours extended to accepting payment in (non-contractual) Euros instead of (contractual) US dollars.

By a respondent's notice, the Charterers argued that, if necessary, the Award should be upheld for other reasons, including that restrictions on payments, in consequence of sanctions, did not cause loading or discharging to be prevented or delayed.

Decision

The High Court (Jacobs J) allowed the appeal, finding that the Owners' obligation to use reasonable endeavours to overcome the Force Majeure Event did not mean they were obliged to accept payment in Euros and the Award should not be upheld for different reasons.

Reasonable endeavours and non-contractual performance

At its broadest, the Charterers' submission was that when a question arose as to the exercise of reasonable endeavours, in the force majeure context, the nature of the parties' contractual obligations was simply one factor to be weighed in the balance. Jacobs J rejected that submission, saying there was no authority to support it and it was contrary to the principles of law apparent from Bulman v Fenwick [1894] 1 QB 179 (and other similar authority).

In Bulman, the question was whether the charterers of a vessel were entitled to rely on a strike clause (equivalent to force majeure) where they had allowed the vessel to continue to Regent's Canal, knowing it would be affected by strike, rather than nominating a different discharge port (out of five contractual options). The Court of Appeal upheld the judge's finding that they were entitled to rely on the clause, and the charterers' obligation to act reasonably did not require them to select a different contractual port.

Bulman shows, Jacobs J found, that a requirement of reasonable endeavours does not mean a party must accept non-contractual performance in order to circumvent the effect of a force majeure or similar clause. A relevant contractual obligation is not simply a factor to be weighed in the balance when coming to an overall assessment of reasonableness.

The Charterers in the present case submitted that, even if a party might not be required to accept non-contractual performance of obligations relating and critical to loading or discharge, the payment obligation in the present case did not fall into that category. Payment in Euros was in practice as good as payment in US dollars, because funds could be readily converted.

Jacobs J rejected this argument, finding that the agreed contractual currency was an important contractual obligation. Although the payment obligation was not directly germane to loading and discharging, this did not mean that reasonable endeavours required a party to accept a change in contractual performance in relation to the payment obligations. Further, an exercise which involves assessing the relative importance of contractual terms would lead to considerable uncertainty in the operation of force majeure clauses.

Jacobs J also rejected the Charterers' attempts to draw an analogy with cases relating to mitigation of loss following a breach of contract or cases relating to frustration.

Causation

The Charterers put forward various arguments in the alternative, including that neither US sanctions nor any resulting difficulty in making US dollars payments had prevented or delayed the loading or discharge of the cargo - despite the tribunal's finding that US dollar payments that passed through US intermediary banks would initially be stopped pending investigation. The Charterers referred to a clause in the contract which provided for payment of freight within five days after completion of loading, and contended that it was extremely difficult to see how a difficulty paying freight could even theoretically prevent or delay loading.

In essence, the argument was that the Owners' failure to load was self-induced. They had chosen not to receive payment following the imposition of sanctions, and had then chosen not to load cargoes. They therefore could not rely force majeure clause. Alternatively, the Charterers argued, even if monetary restrictions were a cause of prevention or delay in loading, they were not the sole cause (as the Owners' reaction to the restrictions was a competing cause) and therefore were not sufficient to allow reliance on force majeure.

Jacobs J dismissed all of these arguments, finding that it was not possible to discern any error of law in the tribunal's conclusion that (reasonable endeavours apart) the Owners' case on force majeure succeeded in all other respects. The Charterers' real complaint, he said, was that the tribunal should not have found that there was a sufficient causal connection between non-payment of freight and prevention or delay in loading or discharging. This was a finding of mixed fact and law, and was within the range of conclusions open to the tribunal.

Jacobs J specifically rejected the Charterers' argument that a party cannot rely on force majeure if the circumstances involved, as one aspect of causation, a decision by the party relying upon the clause. The Charterers sought to rely on Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640, in which the charterer of a rig sought to rely on force majeure where the relevant event had prevented drilling in one part of the contractual area, but its inability to drill in another part of the contractual area was caused by matters which had nothing to do with the force majeure event. Although Teare J said, in that context, that a force majeure event must be the sole cause of the failure to perform an obligation, he made it clear that questions of causation were always sensitive to the legal context in which the question arises.

Seadrill did not mean, Jacobs J held, that a party's decision reacting to a force majeure event would always prevent the force majeure event being the "sole" cause. He pointed to a line of authority which shows that if a force majeure event means a party is left with a limited supply, and cannot fulfil all of its contracts, there is still force majeure so long as it allocates available supplies reasonably. This shows that a reasonable decision, as a reaction to a force majeure event, does not prevent reliance on force majeure.

As Jacobs J put it, the relevant question is whether the decision taken in response to the force majeure event is such as to break the chain of causation, which will usually require unreasonable conduct. The Charterers' attempt to rely on an unreasonable refusal to accept payment in Euros did not assist. In light of the finding that the exercise of reasonable endeavours did not require the Owners to accept a non-contractual payment, it would be "a very surprising conclusion" if insistence on contractual payment was unreasonable so as to break the chain of causation.