Certainty in the unforeseen: Supreme Court confirms the scope of ‘reasonable endeavours’ in a force majeure clause

In a case which will apply to the interpretation of all ‘reasonable endeavours’ provisions within force majeure clauses, the UK Supreme Court [“UKSC”] has held that a party is not obligated to accept an offer of non-contractual performance by their counterparty, even if the party can overcome the effects of the specified force majeure event by doing so. The decision in RTI Ltd v MUR Shipping BV [2024] UKSC 18 reinforces a number of established English contract law principles including parties freedom to contract, that clear words are needed to forego valuable contractual rights and that contractual certainty and predictability of outcomes are important doctrines. 

We have set out the procedural history of the action in brief below. However if you would like to know more about the High Court and Court of Appeal judgments, please refer to our previous articles. 

Facts

Mur Shipping BV (“MUR”), the shipowner, and RTI Limited (“RTI”), the charterer, entered into a contract of affreightment (“COA”) for the transporting of bauxite from Guinea to Ukraine over a two-year period. The COA provided for freight payments to be made in US dollars (“USD”). 

Clause 36 of the COA contained the force majeure provisions. Notably, clause 36.3 defined what constitutes a ‘Force Majeure Event’, and read 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, ship loaders, 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 [sic] from the Party affected.”

In April 2018, the US Government imposed sanctions on RTI’s parent company. As a result, RTI was also caught by the sanctions as a majority-owned subsidiary of a listed entity. MUR considered that the sanctions would adversely affect RTI’s contractual obligation to pay in USD, so it sent a force majeure notice pursuant to clause 36.3(a) and insisted on its right to suspend its performance of the contract.

RTI rejected the notice, claiming it could instead pay in euros (“EUR”) and that it would bear any exchange rate losses or further costs stemming from a subsequent conversion to USD. MUR continued to assert its contractual right to receive payment in USD. RTI commenced arbitration seeking compensation for the cost of finding replacement vessels in light of MUR’s suspended performance. 

The Legal Story So Far…

The arbitral tribunal decided that MUR could not rely on the force majeure clause because the circumstances could have been overcome by exercising reasonable endeavours (applying clause 36.3(d)) to take a pragmatically sensible option and accept payment in EUR, which could then be converted to USD). Accordingly, RTI was entitled to damages flowing from MUR’s breach of contract by way of suspended performance. MUR appealed the decision to the Commercial Court, relying on section 69 of the Arbitration Act 1996 (appeal on a point of law). 
In the High Court, Jacobs J overturned the tribunal’s decision and ruled in favour of MUR. The judge held that the reasonableness or otherwise of a party’s conduct is not the key consideration but rather what the contract entitled that party to do – any other conclusion would lead to the contractual right becoming “tenuous” and the contract itself being “beset by uncertainty”. He stressed the importance of upholding contractual rights and avoiding uncertainty in commercial transactions. RTI appealed the decision. 
The majority in the Court of Appeal found in RTI’s favour, reinforcing the arbitral tribunal’s findings. Males and Newey LJJ held that as MUR would not have suffered damage as a result of RTI’s offer to pay in EUR, RTI could accordingly rely on non-contractual performance and MUR ought to be amenable to this alternative performance of payment. Arnold LJ dissented, arguing that a force majeure event cannot be overcome by an offer of non-contractual performance. If the parties wanted this possibility, he argued, they should have expressly provided as such in the COA. MUR appealed the decision to the UKSC. 

Decision of the Supreme Court

In its unanimous judgment, the UKSC restored the position established in the High Court, namely that RTI was not entitled to rely on non-contractual performance and that MUR possessed a contractual right to claim force majeure. The Court’s decision was supported by four deeply entrenched principles of UK contract law. 

First, the relevant question was whether the reasonable endeavours proviso was able to secure the “continuation or resumption of contractual performance”? The court held that the object of a reasonable endeavours proviso concerns the causal effect of impediments to contractual performance. In other words, to rely on a force majeure clause, the affected party must show that the force majeure event caused the failure to perform. The element of causation was therefore confined to the parameters of the COA. Here, the impediment to contractual performance was banking delays caused by the imposition of sanctions. Non-contractual alternatives, such as offering to pay in EUR, did not engage with the question of adopting reasonable endeavours as this meant non-contractual continuation of the contract. Bluntly put, “it would be absurd to say that MUR caused the non-performance of the contract by failing to accept an offer of non-contractual performance”. 

Second, the Court upheld the principle of freedom of contract and the idea that parties are unencumbered when contracting on agreed-upon terms. The freedom to contract extends to the freedom to not contract. In this case, MUR had every right to reject an offer of non-contractual performance.

The third principle echoed Arnold LJ’s dissenting judgment in the Court of Appeal. In order to forego a valuable contractual right, the parties needed to agree an express provision in the force majeure clause to allow for an alternative and/or non-contractual performance. In the present construction of the contract, clause 36.3(d) did not represent a foregoing of this right. 
Lastly, the principle of certainty in commercial contracts is enshrined in English commercial law. RTI’s offer to pay in EUR was deemed to give rise to both factual and legal uncertainty. By accepting non-contractual performance, the parties would be forced to consider additional questions such as whether this would give rise to any detriment to the party seeking to invoke the force majeure clause and would it achieve the same result as performance of the contractual obligation? Allowing such uncertainty to fester would inevitably “undermine the expectations of reasonable business people”. What was certain from the provisions of the contract is that payment could only be accepted in USD, and the Court made sure to protect this right. 

The Court discussed that the concept of ‘reasonable endeavours’ did involve an evaluative judgment, which could lead to uncertainty, but it held that here the evaluation is geared towards achieving contractual performance, in contrast to accepting non-contractual performance which would create additional uncertainty as to the eventual outcome. 

Contractual Performance is key 

In this decision the UKSC has kept to traditional English law principles upholding parties’ freedom to contract. If parties wish for greater flexibility in their contractual arrangements, they need to include an express provision to that effect. 

No matter how reasonable and practical it may have seemed for MUR to simply have accepted payment in EUR with no detriment resulting from the acceptance, MUR was entitled to insist on a literal interpretation of the contract in this context. The UKSC upheld the principle of contractual certainty. Parties now know that relying on a notice of a force majeure event means that they will not need to accept the uncertainty of non-contractual performance even if doing so might mitigate or overturn the force majeure event. 

The takeaway for parties entering into contracts is to, as always, draft clearly and unambiguously. When considering force majeure clauses, make sure that the scope of the clause is clearly defined so that each party knows what it can and cannot rely upon in these situations. This is especially important when force majeure clauses are increasingly being invoked as world events cause multiple supply chain issues and the imposition of sanctions. Specifying that payment is allowed in an alternative currency or that performance may be affected in a different way can be drafted into a reasonable endeavours proviso, although parties will need to consider whether these alternatives still achieve the same result in terms of performance of the contract, and therefore any additional drafting should be carefully scrutinised. 

With thanks to Naim Kalaji for his help in drafting this article.