Oil, gas and commodities: Force majeure

England and Wales

In MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406 the Court of Appeal overturned the Commercial Court’s judgment and found that a ‘reasonable endeavours’ obligation in a force majeure clause could require a party to overcome a state of affairs which would otherwise constitute a force majeure event by accepting alternative, or non-contractual, performance.

Facts

CMS have published an article on the Commercial Court’s judgment, appealed in this case, in its Annual Review of Developments in English Oil and Gas Law 2022 (available here) which sets out the facts of the underlying dispute in greater detail. An abridged summary of the facts is reproduced here.

The dispute concerned a contract of affreightment (the ‘COA’) between MUR Shipping BV (‘MUR’) (as the ‘Owner’) and RTI Ltd (‘RTI’) (as the ‘Charterer’), for the shipment of around 280,000 metric tons of bauxite from Guinea to Ukraine per month.

In April 2018, RTI’s Russian parent company was sanctioned by the US Department of the Treasury’s

Office of Foreign Assets Control. This led MUR to state that it would be a breach of the sanctions to continue with the performance of the COA, noting that the ‘sanctions will prevent dollar payments, which are required under the COA’. MUR therefore invoked the force majeure clause in the COA.

RTI argued that there was no force majeure event and that the sanctions were not relevant as: (i) MUR was a Dutch company and so it would not be caught by US sanctions as it was not a US entity, and (ii) payments could be made in Euros instead (with RTI covering any associated currency charges).

MUR would not nominate ships under the COA, arguing that it was an express term of the COA that payments were to be made in US Dollars and so the COA could not be performed.

RTI commenced arbitral proceedings against MUR and was successful in its submissions concerning the reasonable endeavours sub-clause 36.3(d) of the COA’s force majeure clause as follows:

  • 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 one or more of acts of God, extreme weather conditions, war, lockout, strikes or other labour disturbances, explosions, fire, invasion, insurrection, blockade, embargo, riot, flood, earthquake, including all accidents to piers, shiploaders, and/or mills, factories, barges, or machinery, railway and canal stoppage by ice or frost, 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.

The arbitral tribunal considered that making payment in Euros was a ‘completely realistic alternative’, particularly as RTI had offered to bear any additional costs incurred by exchange rate charges, and so MUR should have accepted this proposal rather than claiming force majeure.

MUR obtained permission to appeal the decision to the Commercial Court, on a question of law as to whether ‘reasonable endeavours’ would require a party claiming force majeure to accept non-contractual performance (i.e., payment in Euros rather than US Dollars).

Commercial Court Decision

Following detailed consideration of submissions on contractual interpretation put forward by the parties and relevant case-law in the area of ‘reasonable endeavours’, the Commercial Court decided that MUR were not required to sacrifice their contractual right to payment in US Dollars.

As such, the Commercial Court confirmed that ‘reasonable endeavours’ on a party to overcome a force majeure event do not extend to a party being required to tender non-contractual performance, even where there may be an alternative course of action which may avoid the effect of the event said to give rise to force majeure. A more detailed analysis of the Commercial Court’s judgment is available in CMS’ Annual Review of Developments in English Oil and Gas Law 2022 (available here).

Court of Appeal Decision

Whilst recognising the range of elements considered by the arbitrators and relatively limited scope of the appeal which the Court could consider as a result of s.69 Arbitration Act 1969, Males LJ identified the only issue for the Court of Appeal to consider at paragraph 40:

…whether the force majeure event or state of affairs could have been overcome by reasonable endeavours from MUR as the party affected. It arises on the basis that RTI’s contractual obligation was to pay freight in US dollars.”

Males LJ, in the majority judgment, found that there was no need to discuss the principles of mitigation of damages and frustration which had been covered by the parties and were subject to consideration by the Commercial Court. The judgment focuses instead directly on the wording of the force majeure clause and the purpose of the payment obligations under the COA. Concerning the payment obligation, Males LJ accepted at paragraph 60:

“[…] that the contract required payment in US dollars, but the purpose of that payment obligation 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 [RTI’s parent company]

As such, the Court of Appeal held, by a majority, that MUR’s acceptance of RTI’s proposal for payment in Euros, in addition to MUR covering the costs of conversion to US Dollars, would have overcome the force majeure event and did not constitute non-contractual performance as it met the purpose of MUR receiving the correct amount of US Dollars. Consequently the Court of Appeal allowed the appeal and restored the award of the arbitrators.

Arnold LJ, in his dissenting decision, appreciated that MUR’s position on the facts had no ‘merit’ but that it is entitled to insist upon strict contractual performance, under the ‘Gilbert-Ash’ principle, this being payment in US Dollars and not Euros. In particular at paragraph 74, Arnold LJ states that “’an event or state of affairs’ is not ‘overcome’ within the meaning of clause 36.3(d) by an offer of non-contractual performance”.

Comment

It is not entirely apparent from the decision of Males LJ whether:

  1. The Court of Appeal decided that non-contractual performance may be required by a ‘reasonable endeavours’ obligation in a force majeure clause provided that it does not conflict with the ‘purpose underlying the parties’ obligations’; or

  2. whether in finding that the ‘purpose underlying the parties’ obligations’ was that the seller ‘receive the right quantity of US dollars in its bank account at the right time’ the Court of Appeal was deciding that there was not, in fact, an obligation to pay in US Dollars.

Either way, the potential problem with the Court of Appeal’s analysis is that it is not what the contract requires. The contract requires payment in US Dollars. The approach taken by the Court of Appeal may have ‘merit’ in this decision (on the facts), but it has the potential to create confusion in the operation of force majeure clauses.  Perhaps an example of hard facts creating bad law. 

If it is the Court of Appeal’s decision that it is necessary to look to the ‘purpose underlying the parties’ obligations’ in establishing whether a force majeure clause may require non-contractual performance, the exercise of establishing the purpose (beyond the words of the contract) has the potential to create significant divergence of views in the operating of clauses. In turn, this may result in more disputes. 

In light of the 2:1 majority judgment, there is a possibility of an appeal to the Supreme Court and the judgment may well be overturned.

In the interim, it may be necessary to revisit the wording of force majeure clauses to ensure that non-contractual performance is not required (if that is the parties’ intention).