UNSANCTIONED PAYMENTS: OVERCOMING FORCE MAJEURE THROUGH NON-CONTRACTUAL PERFORMANCE

In what some may regard as a surprising outcome, the English Court of Appeal has held that a force majeure clause was not triggered because the affected party could have accepted performance that was not in accordance with the terms of the contract. US sanctions rendered it impossible to make timely payment under a contract for affreightment (the “Contract”) in U.S. dollars. However, it was open to the ship owner (“MUR”) to accept an offer of payment in Euros (and of the cost of converting them to U.S. dollars) from the charterer (“RTI”). Therefore, one of the conditions of the force majeure clause–that the force majeure event was not capable of being overcome by “reasonable endeavours” by the party affected–was not satisfied, notwithstanding that the Contract required payment in US dollars.

The result in MUR Shipping BV v RTI Ltd ^[1] turns (as do all force majeure cases) on the precise wording of the force majeure clause in question. However, the fact that RTI’s offer of ‘non-contractual’ performance was found to be an acceptable basis for resisting the invocation of force majeure by MUR will be of particular interest, given the prevalence of express and implied ‘reasonable endeavours’ provisos in force majeure clauses. The case is also an important reminder of the careful analysis of the relevant clause and surrounding facts that is required before invoking force majeure–as a general rule, such clauses are not easily engaged, including in cases involving sanctions.

Background

The Contract contained a force majeure clause which provided that neither party would be liable for loss, damage, delay or failure in performance caused by a Force Majeure Event (the “Force Majeure Clause”). It further provided that:

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 … 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; and
d) It cannot be overcome by reasonable endeavors from the Party affected.

After the U.S. Office of Foreign Assets Control (OFAC) imposed sanctions on the majority owner of RTI, MUR invoked the Force Majeure Clause claiming that continued performance of the Contract by MUR (i.e. loading and carrying RTI’s bauxite cargoes) would breach U.S. sanctions legislation and that, in any case, the sanctions meant that RTI was unable to make payments in U.S. dollars, as the Contract required.

RTI did not accept that the sanctions interfered with MUR’s performance, but offered to make payments under the Contract in Euros instead to avoid difficulties paying in U.S. dollars. The Euros would be exchanged into U.S. dollars by MUR’s bank before being deposited into MUR’s account and RTI would bear any foreign exchange costs incurred.

MUR rejected the offer and refused to load RTI’s bauxite cargoes. RTI brought a claim for breach of contract, which MUR sought to resist on the basis of the Force Majeure Clause.

Arbitral Award and Commercial Court Appeal

The arbitral tribunal found that the U.S. sanctions did not prevent MUR from loading RTI’s cargoes, but accepted that any payment made by RTI in U.S. dollars through a U.S. bank would have been subject to delay. However, it considered that RTI’s proposal to make the payments in Euros presented “no disadvantages” to MUR since RTI had offered to bear the associated costs, and it therefore constituted a “completely realistic alternative.” On that basis, the Force Majeure Event could have been overcome by reasonable endeavours and, as such, MUR was not entitled to rely on the provision.

The Commercial Court reversed the tribunal’s decision, on the basis that “reasonable endeavours” did not include having to accept ‘non-contractual’ performance (in this case, payment in Euros rather than U.S. Dollars) to overcome the Force Majeure Event. MUR was therefore entitled to rely on the Force Majeure Clause.

Court of Appeal Decision

A majority of the Court of Appeal allowed the appeal. Males LJ (giving the leading judgment) emphasised that the Court was concerned with the specific provisions of the Force Majeure Clause and not reasonable endeavours or force majeure clauses more generally.
The “party affected” for the purposes of the Force Majeure Clause was the party invoking the clause, and MUR was therefore required to show that it could not, with reasonable endeavours, have overcome the relevant Force Majeure Event.

As it would have been straightforward for MUR to accept payment in Euros, requiring no exertion on its part, Males LJ considered that there was no question of reasonableness. The real issue was simply whether doing so would “overcome” the “state of affairs” caused by the imposition of sanctions on RTI. Males LJ held that it would be too narrow an approach to conclude that the “state of affairs” in question could only be overcome if RTI found a way of making timely payments in U.S. dollars, in strict adherence with the terms of the Contract.

Instead, Males LJ considered that the use of broad and non-technical terms such as “state of affairs” and “overcome” suggested the clause should be applied in a common-sense manner to achieve the parties’ underlying purpose–i.e. that MUR should receive the right quantity of U.S. dollars in its bank account at the right time. The word “overcome” was broad enough to include any circumstances where the adverse consequences of a state of affairs had or would have been completely avoided, as in this case.

Males LJ emphasised, however, that the position would have been different if the proposal resulted in any detriment to MUR or in MUR ultimately receiving something different from what was required by the contract.

Arnold LJ, in dissent, referred to the general common law presumption that parties do not give up their legal rights without using clear words to that effect, and found that the presumption is an important part of the context in which the Force Majeure Clause had to be interpreted. On that basis, an “event or state of affairs,” could not be “overcome” within the meaning of the Force Majeure Clause by accepting an offer of non-contractual performance. If the parties had intended this to be the case, clear express words would have been used accordingly. Absent such language, acceptance of payment in Euros did not overcome the force majeure.

Comment

The Court emphasised, rightly, that force majeure clauses must be considered on their own terms. Care should be taken, therefore, before applying the Court’s decision in other contexts. For instance, given the significance the majority gave to the breadth of the phrase “event or state of affairs,” it remains to be seen whether narrower language, e.g. simply an “event” which needs to be “overcome,” would have led the Court to the same conclusion.

That being said, force majeure clauses similar to the one in this case will be familiar to many commercial parties and, particularly because this was a finely balanced outcome, the court’s reasoning will nonetheless be of interest.

It is notable that only two of the four judges who considered the clause decided that it was permissible, on the wording of this force majeure clause at least, for an offer of non-contractual performance to be used to successfully resist the invocation of force majeure. While it arguably achieved the ‘fairer result’ as between the parties, the majority’s rationale for taking the approach that it did–that the non-affected party would suffer no detriment and, in substance, would still ‘get what it bargained for’–arguably involves a re-writing of the parties’ bargain. This is because it elevates, without apparent justification, the importance of one right (the reasonable endeavours proviso as part of the force majeure clause) over the importance of another (the requirement for RTI to pay in U.S. dollars). As Arnold LJ indicated, in the absence of clear wording to the contrary, the English Court should be very hesitant before making such an assumption.

There were, however, unusual features of this case which may have led to the approach the majority took:

• First, as an appeal under section 69 of the Arbitration Act 1996, the court had to assume as correct all findings of fact and law by the tribunal which were not the subject of permission to appeal. The tribunal had found that, other than the issue on appeal, all other limbs of the Force Majeure Clause were engaged. As Males LJ observed, this was based, in part, on the somewhat questionable argument from MUR that the difficulties RTI might (subsequently) encounter making payments in U.S. dollars reasonably caused MUR’s refusal to load cargoes–a seemingly artificial characterisation of the Force Majeure Event and its impact on the “affected party” (i.e. MUR). The Court’s reasoning may therefore have differed had it not been constrained by the tribunal’s findings on the other limbs of the Force Majeure Clause–a point worth bearing in mind more generally by those contemplating challenges on points of law under section 69.
• Secondly, and related to the above, the reasonable endeavours that had to be capable of overcoming the relevant state of affairs were the reasonable endeavours of the affected party, i.e. MUR. Arguably, it was, again, artificial to view MUR as being in a position to use any “reasonable endeavours” at all, in circumstances where it could do nothing, other than accept non-contractual payment in Euros to resolve a problem that, in truth, affected RTI’s ability to perform its obligation to pay in U.S. dollars. On its face, the purpose of the reasonable endeavours proviso is to ensure that the party relying on the force majeure clause is genuinely prevented by the relevant state of affairs from performing their obligation, which in this case, would (or should) relevantly have been MUR’s obligation to load RTI’s cargoes. However, by characterising the Force Majeure Event as difficulties making U.S. dollar payments (when, in fact, the Force Majeure Clause related specifically (and only) to the non-loading of or delays in loading cargoes), the majority’s reasoning puts the reasonable endeavours proviso to work resolving a situation which it appears the Force Majeure Clause was not intended to cover. The insistence of Arnold LJ (and the judge below) on the ‘clear words’ approach avoids that difficulty.

It has yet to be seen if MUR will apply for permission to appeal to the Supreme Court, but given the unusual features above and that the question on appeal was decided differently by two of the four judges to consider it, this may not be the last word on the issue.