Force Majeure: The Implications of Non-Contractual Performance

10th July 2024

By Laura Crowe, Associate

The Supreme Court have recently handed down a judgment in the case of RTI Ltd v MUR Shipping BV which has garnered significant attention due to its implications for the application of force majeure clauses in contracts. The court considered whether in a contract that contains a force majeure clause stating that the party impacted by the force majeure event must exercise “reasonable endeavours” to “overcome” it, the scope of “reasonable endeavours” is limited by the contract and the affected party can refuse to accept non-contractual solutions offered to overcome the event. What, on the face of it, appeared to be a simple issue, was a case that went back and forth between the courts at each appeal stage, divided the Court of Appeal and ended in the Supreme Court.

What is a force majeure clause?

A force majeure clause permits one or more of the parties to cancel the contract, or be excused from performing their contractual duties, upon the occurrence of unforeseeable circumstances or events that are beyond the control of the parties involved in a contract that make it impossible or impracticable to fulfil their contractual obligations. Force Majeure Events should be defined within a contact and are often thought of as “acts of God and war” which can include natural disasters, war, terrorism, strikes, government actions, or other events that are not within the reasonable control of the parties. Force Majeure clauses also typically include specific provisions regarding notice requirements of the occurrence of a relevant force majeure event and may also include rights to terminate if the force majeure event is not resolved within a specific period of time.

The Facts

The dispute arose between a shipowner, MUR Shipping BVI (MUR) and charterer, RTI Ltd (RTI) who entered a contract of affreightment. Following the impact on RTI of the imposition of EU sanctions on Russia in response to geopolitical events, RTI was unable to make payments under the contract in U.S. dollars. MUR invoked the force majeure clause and gave notice to RTI who instead offered to make payment in euros and to cover the cost of converting the payment from euros to U.S. dollars. This alterative payment solution was not accepted by MUR, and it suspended operations under the contract in reliance on the force majeure clause.

The Decision

The Supreme Court’s decision focused on the following key principles:

  1. The object of reasonable endeavours proviso

The question here was whether MUR could have taken any reasonable steps to enable the payment of U.S. dollars without delay, not whether it should have accepted the offer of non-contractual performance (payment in euros). There is a presumption that only contractual performance of the contract would invoke the obligation on the affected party to exercise reasonable endeavours to avoid the effects of a force majeure event; the offer to pay in euros did not overcome the specific obstacle to contractual performance (i.e. the contractual obligation was to pay in U.S dollars).

  1. Freedom of contract

Freedom of contract is a contract law principle that allows parties to negotiate and agree on the terms and conditions of their agreement without undue interference. The Supreme Court, in its determination held that this principle also extends to freedom not to contract, and parties are free not to accept an offer of non-contractual performance. This reflected a respect for the parties’ autonomy to define their contractual obligations and the conditions under which they can be excused.

  1. Clear words needed to forgo valuable contractual rights

The court identified that RTI’s argument that MUR should have accepted the alternative payment would have resulted in MUR forgoing its contractual rights regarding payment. They reiterated that force majeure clauses must be interpreted strictly according to the precise language used in the contract and if MUR was required to forgo its contractual rights, the contract should and could have dealt with this expressly, but it did not.

  1. The importance of certainty in commercial contracts

Contracting parties need to know with a degree of confidence whether a clause can be relied upon when required. The Supreme Court was clear in its determination that MUR had not been unreasonable in their refusal to accept payment in euros, stating that: “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.”

Implications of the Decision

The Supreme Court’s decision in the case has significant implications:

  1. Drafting Considerations

Recent global events, such as COVID-19, have already highlighted the importance of force majeure clauses but there was not much case law. This case emphasises the considerations that businesses should make when reviewing its contracts and ensuring that force majeure clauses are clear and specific. Force majeure clauses must be precise about the definition of a force majeure event and businesses should consider whether they wish to avoid or alternatively strengthen the imposition of a reasonable endeavours requirement.

  1. Commercial certainty

Those seeking to rely on a force majeure provision should consider if a proposal for alternative performance falls within the terms of the contract or will be deemed non-contractual performance, even where the alternative performance would cause no detriment to the other party and would ultimately achieve the same outcome as contractual performance. This does not however prevent the parties from choosing to accept non-contractual performance and to adopt a pragmatic approach, such as, acceptance where contractual goals can be achieved without causing undue detriment to one another.

If you would like our Commercial and IP Team to assist in reviewing your contracts, please contact a member of our commercial team on 0161 832 3434.

 

Contributors: Holly Wragg, Trainee Solicitor

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