Force majeure: Supreme Court finds no obligation on party seeking to rely on force majeure clause to accept counterparty's offer of non-contractual performance

In a judgment out today, the Supreme Court has unanimously overturned the Court of Appeal's decision that a shipowner was not entitled to rely on a force majeure clause in a shipping contract when its charterer's parent company became subject to US sanctions. It found that, contrary to the Court of Appeal's decision, the shipowner did not fail to use reasonable endeavours to overcome the force majeure event as required by the clause: RTI Ltd v MUR Shipping BV [2024] UKSC 18.

The decision establishes that an obligation in a force majeure clause to use reasonable endeavours to overcome or avoid the effects of the force majeure event (a "reasonable endeavours proviso") will not require a party who wishes to rely on the clause to accept a counterparty's offer of non-contractual performance: that party can insist on strict contractual performance by the counterparty and, if that is prevented by the relevant event, the party can assert force majeure to suspend its own obligations under the contract.

While the Court of Appeal's decision in this case (considered here) was based on the specific wording of the force majeure clause, the Supreme Court addressed the issue as a matter of principle, noting that reasonable endeavours provisos are a common feature of force majeure clauses. Even if there is no express proviso, a force majeure clause will generally only apply (either as a matter of interpretation or by way of implied term) where the force majeure event was beyond the parties' reasonable control and could not be avoided by taking reasonable steps. Accordingly, the Supreme Court's decision is of general application to force majeure clauses.

The decision emphasises the importance English law places on certainty and predictability in commercial transactions. The Court of Appeal had found that a reasonable endeavours proviso would require acceptance of non-contractual performance, where that would achieve the same result as contractual performance and would not involve any detriment to the party seeking to invoke force majeure. In the Supreme Court's view, however, this would introduce an unacceptable degree of uncertainty in circumstances where parties may need to make immediate judgements, and therefore need to know with reasonable certainty whether or not they can rely on a force majeure clause. As the court commented:

"It is not unmeritorious or unjust to insist on contractual performance, all the more so if being precluded from doing so would introduce uncertainty contrary to the expectations of reasonable business people."

The Supreme Court noted that parties can expressly provide in a force majeure clause for reasonable endeavours to include acceptance of an offer of non-contractual performance - which presumably they would wish to limit to circumstances where that would achieve the same result as contractual performance and would not cause any detriment. If parties are considering such a course, however, they should think carefully about how this may apply and whether additional limits should be specified, such as excluding particular obligations from scope.

Background

As explained in our post on the Court of Appeal decision, linked above, the dispute related to a 2016 contract between a shipowner and charterer to carry monthly shipments of bauxite from Guinea to Ukraine, with payment to be made in US dollars.

The contract provided that neither party would be liable for loss, damage, delay or failure in performance caused by a “Force Majeure Event”, defined as an event or state of affairs which met various criteria including: “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, which gave rise to prospective difficulties and delays for payments in US dollars. The shipowner relied on this as a Force Majeure Event. The charterer offered to make payment in euros, which could be immediately converted to dollars by the shipowner's bank, and to bear any additional costs or exchange rate losses. The shipowner, however, rejected the offer and insisted on their right to payment in dollars.

The charterer brought a claim in arbitration for the additional costs incurred in making alternative shipping arrangements. The arbitration tribunal found in favour of the charterer that the event could have been “overcome by reasonable endeavors” from the shipowner, ie by accepting payment in euros, so they were not entitled to rely on the clause.

The shipowner appealed this point to the High Court as a question of law, under section 69 of the Arbitration Act 1996. Jacobs J allowed the appeal, finding that the obligation to use reasonable endeavours to overcome the Force Majeure Event did not mean the shipowner was obliged to accept the non-contractual performance of payment in euros. The Court of Appeal overturned that decision, by a majority, on the basis that payment in euros would have achieved precisely the same result and caused no detriment to the shipowner; its refusal to accept payment in euros was therefore a failure to use reasonable endeavours as required by the clause. Lord Justice Arnold dissented on the basis that the shipowner was entitled to insist on its strict contractual right to receive payment in US dollars

Decision

The Supreme Court has unanimously allowed the shipowner's appeal. Lord Hamblen and Lord Burrows gave the lead judgment, with which Lord Hodge, Lloyd-Jones and Richard agreed.

The court noted that force majeure clauses commonly provide, expressly or impliedly, that the clause cannot be relied upon if the effects of what would otherwise be a force majeure event could be avoided by the exercise of reasonable endeavours. It held that, even if the force majeure clause in the present case had not included an express requirement that the relevant event could not be overcome by reasonable endeavours, it would have been interpreted as containing a reasonable endeavours proviso to that effect. Accordingly, no particular significance could be attached to the use of the word "overcome" in the clause, and the Court of Appeal was wrong to approach the question as simply a matter of interpretation of the particular clause.

The question was whether, absent express wording, a reasonable endeavours proviso required a party seeking to rely on the force majeure clause to accept non-contractual performance in some circumstances, as the Court of Appeal had held.

The Supreme Court held that it did not, for reasons of both principle and authority. As for considerations of principle, the court referred to the following:

1. The object of reasonable endeavours provisos

The reason a force majeure clause is generally interpreted as being subject to a reasonable endeavours proviso comes down to a question of causation. A party is excused from performance by a force majeure event where the event caused the failure to perform. If the party could reasonably have prevented the failure of performance, then there is no causal connection.

But failure to perform means failure to perform in accordance with the terms of the contract. The causal question must therefore be addressed by reference to the parameters of the contract, and the reasonable endeavours proviso is concerned with whether reasonable endeavours could have secured performance in accordance with the terms of the contract - in this case, payment in US dollars. It is not concerned with whether steps could have been taken to secure some different, non-contractual performance, such as (in this case) payment in euros.

2. Freedom of contract

The principle of freedom of contract is fundamental to the English law of contract, so that parties are generally free to contract on whatever terms they choose. The principle of freedom of contract includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract.

3. Clear words needed to forego valuable contractual rights

The contract in this case gave the shipowner a clear right to insist on payment in US dollars and refuse payment in any other currency - subject to the possible effect of the reasonable endeavours proviso. That right was valuable to the shipowner. The charterer's argument that the shipowner should have accepted payment in euros would mean that, in certain circumstances, the reasonable endeavours proviso required the shipowner to forego that valuable right by accepting an offer of non-contractual performance.

The court found that, in principle, a party should not be required to give up a valuable right unless that is made clear in the contract (whether expressly or by necessary implication). This could be regarded as a general principle of contractual interpretation - whether based on the so-called Gilbert-Ash principle (as per Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689) that a party is not to be taken to give up its legal rights in the absence of clear words to that effect, if that principle extends to contractual rights as well as common law or statutory rights, or under an analogous principle.

4. The importance of certainty in commercial contracts

There have been many authoritative statements as to the importance English commercial law places on certainty and predictability in commercial transactions. On the shipowner's case, the focus of the inquiry needed under a reasonable endeavours proviso was clear: what steps can reasonably be taken to ensure contractual performance.

In contrast, the charterer's case would give rise to considerable legal and factual uncertainty, as it would require inquiries into whether or not the acceptance of non-contractual performance would achieve the same result as contractual performance and/or involve detriment to the party seeking to rely on the clause. Questions might arise, for example, as to the nature and extent of detriment required for this purpose, and the purpose underlying the relevant obligation and whether it would be met by the alternative performance offered.

The court noted in particular that this was in the context of a clause which requires immediate judgements to be made. Parties need to know with reasonable confidence whether or not a force majeure clause can be relied upon at the relevant time, not after some retrospective inquiry. Although the concept of "reasonable endeavours" itself imports some degree of uncertainty, it would create needless additional uncertainty to depart from the standard provided by the contract's requirements as to performance.

While there were no authorities directly on point, the Supreme Court found that the cases of Bulman & Dickson v Fenwick & Co [1894] 1 QB 179 and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691 provided strong implicit support for the shipowner's position. In contrast, any support in the authorities for the charterer's position was weak.