MUR Shipping BV -v- RTI Ltd

On 9 June 2016, MUR (the shipowner) and RTI entered into a contract of affreightment whereby MUR agreed to make monthly shipments of bauxite from Guinea to Ukraine, between 1 July 2016 and 30 June 2018. In return, RTI agreed to make monthly payments to MUR in US dollars. The contract contained a force majeure clause which (amongst other things) provided that the specified event would only be a force majeure event if it could not be overcome by reasonable endeavours from the party affected.

On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed sanctions on Mr Oleg Deripaska and various companies that he controlled. One such company was United Company Rusal Plc, the majority owner of RTI. Consequently, on 10 April 2018 MUR sent a force majeure notice to RTI as the newly imposed sanctions would prevent dollar payments which were required under the contract. In an attempt to remedy this, RTI offered to make payment to MUR in Euros, which could be converted to dollars by MUR’s bank, and to indemnify them for any exchange shortfalls or charges. However, MUR refused this offer. A short while later, after an updated general license was issued by OFAC, MUR did in fact resume nominating vessels under the contract and accepted payment of Euros. The dispute arose out of the period in which MUR refused to nominate vessels under the contract as a result of the force majeure notice.

The dispute was resolved by arbitration, with the arbitrators finding that while MUR’s case on force majeure succeeded in all other respects, it failed because it could have been ‘overcome by reasonable endeavours from the party effected.’ That is to say, in other words, the sanctions would have been a force majeure event, but MUR had the option of accepting payment in Euros and accepting that would have caused them no detriment.

MUR appealed this decision to the Commercial Court under s.69 of the Arbitration Act 1996 where Mr Justice Jacobs allowed the appeal and granted permission to further appeal to the Court of Appeal. The reasoning given by Jacobs J can be boiled down to one specific point – “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.”

The Court of Appeal overturned Jacobs J by a majority of two to one, with Males and Newey LJJ agreeing, and Arnold LJ dissenting. The Court of Appeal held that, because “the purpose of the payment obligation [in the contract] was to provide MUR as the shipowner with the right quantity of dollars in its account at the right time. RTI’s proposal achieved that objective with no detriment to MUR and therefore overcame the state of affairs caused by the imposition of sanctions on Rusal,” it would have been reasonable to accept the payment in Euros and, therefore,  MUR did not exercise reasonable endeavours to overcome the state of affairs giving rise to the force majeure event.

MUR appealed to the Supreme Court which unanimously allowed the appeal, holding that, absent express wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance for four key reasons.

Firstly, force majeure clauses, and their associated reasonable endeavours provisos, concern the causal effect of impediments to contractual performance. The affected party must be able to show the relevant event caused the failure to perform, and that means establishing that the failure to perform could not have been avoided by the exercise of reasonable endeavours. Contractual performance means performance of the contract according to its terms and therefore, a failure to perform means failing to perform in accordance with those same terms. The Court described it as “absurd” to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance.

Secondly, the principle of freedom of contract applies which includes freedom to not contract. This extends to include the freedom to not accept the offer of non-contractual performance, with the Court referring to Lord Toulson’s comments in Prime Sight Ltd v Lavarello – “Parties are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce them.”

Thirdly, clear words are needed to forego valuable contractual rights. The contract provided that MUR had an undoubted right to insist on payment in US dollars, and also to refuse payment in any other currency. Unless clear words are used to require MUR to forgo that valuable right, including making clear the circumstances in which it would be required – neither of which were included in the reasonable endeavours proviso in the clause – then there is nothing within the contract, as it stood, which would have required MUR to accept non-contractual performance.

Fourthly, and finally, there is the importance of certainty and predictability in commercial contracts, particularly where English law is the frequent choice to govern international commercial transactions. On the facts (and the law) MUR’s case is straightforward, absent clear wording, a reasonable endeavours proviso does not require acceptance of an offer of non-contractual performance. The focus of the reasonable endeavours questions is clear – what steps can reasonably be taken to ensure contractual performance. MUR anchored their case in the contract.

In contrast to this, RTI did not anchor their argument in the contract. The approach submitted by RTI would have introduced both factual and legal uncertainty. The RTI approach added a need to consider whether accepting an offer of non-contractual performance would involve no detriment or prejudice to the party seeking to invoke force majeure, and whether that non-contractual performance would achieve the same result as performance of the contractual obligation in question.

Drawing the line between the two parties positions the Court found that there is no justification for creating needless additional uncertainty by departing from the standard of performance provided by the terms of the contract. While the case put forward by RTI appeared to favour reasonableness, specifically a position that ‘reasonable businesspeople would favour’ over certainty, adopting that approach would “ride rough-shod” over the required contractual performance and undermine the expectations of those same reasonable business people all over the world who require certainty in their dealings.

Certainty, which can only be provided by reliance on the contract, its terms, and performance of the contract in line with those terms.