Comment
The Court of Appeal’s judgment in MUR Shipping BV v RTI Ltd was handed down at the end of 2022. The judgment is of significant interest to financial institutions and other parties who have contractual relationships with entities which are now subject to a sanctions’ regime. The judgment also serves as a useful reminder to all commercial parties to review and consider what specific contractual obligations should be included when contracting with entities who are at risk of being sanctioned.
In MUR Shipping BV, the Court of Appeal considered whether a force majeure clause could release a party from performance of its obligations under a contract, in circumstances where the party has a contractual obligation to use reasonable endeavours to overcome any potential force majeure event.
At first instance, the High Court held that, in exercising “reasonable endeavours” to overcome the impact of sanctions, a party is not required to accept anything other than what has been agreed in the contract.
The Court of Appeal (by a majority of two to one) overturned the High Court’s decision. The Court of Appeal’s judgment confirms that:
- the imposition of sanctions on a party to a contract is an event capable of triggering a force majeure clause;
- the interpretation of a force majeure clause will have to be analysed and determined by the specific wording of the clause and the specific circumstances which apply;
- a party may have an obligation to accept payment in an alternative currency to the one specified in the contract to overcome the effect of a force majeure event; and
- more generally, that the exercise of any reasonable endeavours to overcome an event of force majeure might involve performance which is inconsistent with the express terms of the contractual terms.
The judgment therefore highlights that parties should carefully consider the drafting of any force majeure provisions in contracts into which they enter. Parties will be well served in ensuring that the drafting adequately considers and addresses the wider circumstances of the agreement and the counterparties with whom they contract.
I. Facts
The case involved a long-term freight contract entered into in 2016 between MUR Shipping BV (“M”), the owners of the vessel, and RTI (“R”), the charterers.
Pursuant to the contract, M agreed to transfer certain goods to Ukraine for and on behalf of R. Under the contract, payment for these services was to be made in U.S. dollars. However, the contract contained a force majeure clause which included wording defining an event of force majeure as an event or state of affairs which “cannot be overcome by reasonable endeavours from the party affected.”
In 2018, R’s parent company was placed on to the U.S. sanctions list by the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC“) due to its direct or indirect association with Mr Oleg Deripaska.
As a result of the OFAC sanctions, M argued that this was a force majeure event and that the sanctions prevented M from receiving payment in U.S. dollars as provided for under the agreement. As a consequence, M refused to load goods to the vessel for transport. M further declined to nominate alternative or further vessels, in maintenance of its position that the OFAC sanctions constituted a force majeure event.
R refused to accept that the OFAC sanctions constituted a force majeure event which allowed refusal of M’s performance under the contract.
R argued, that:
- M was not impacted by the OFAC sanctions as they were not a “U.S. Person” for the purposes of the sanction legislation and regime; and/or
- that payment could be made in an alternative currency to US dollars so as to avoid any potential sanctions issues. In respect of the latter, R offered to bear the additional costs of any exchange rate fluctuations or additional costs in payment in a different currency and specifically proposed that payment be made in Euros.
In summary, R’s position was that any event of force majeure that might have arisen as a result of the sanctioning of its parent company could be overcome by the use of reasonable endeavours in M accepting payment in a different currency to that provided for under the contract.
M maintained its position and refused to load the freight goods.
II. The Tribunal’s Decision
R brought an arbitration claim for M’s refusal to nominate a further vessel and for the additional costs of finding another shipping company.
The Tribunal found in R’s favour. In its finding, the Tribunal concluded that M could have overcome the issues of payment by using its reasonable endeavours to accept payment in an alternative currency – as proposed by R.
In reaching this conclusion, the Tribunal found that M would have been in no worse position, or at any disadvantage, if it had accepted payment in Euros, and that this was a realistic alternative for M to have accepted which would have caused them no detriment.
III. The High Court Appeal
M sought and obtained permission to appeal to the Commercial Court under s.69 Arbitration Act 1996. Permission was given by Jacobs J on the narrow issue of:
Having heard argument and submissions, Jacobs J allowed the appeal and concluded that the essential reason for doing so was that:
The judge relied on the decision in Bulman v Fenwick & Co [1894] 1 QB 179 in so holding.
IV. Findings by the Court of Appeal
In a majority of two to one, the Court of Appeal overturned the Jacobs J judgment and reinstated the decision of the Tribunal.
Males LJ, giving the leading judgment, concluded that M’s acceptance of R’s proposal to pay in Euros would have overcome the problems which would have resulted from sanctions having been imposed on R.
In particular, Males LJ made the following observations:
- The Court of Appeal was not concerned with reasonable endeavours or force majeure clauses in general. The appeal related to the specific terms of clause 36 of the contract in particular. Males LJ noted that “[e]ach such clause must be considered on its own terms”.
- That clause 36.3(d) was not concerned “with the exercise of reasonable endeavours in the abstract, let alone with whether the party affected has acted reasonably. The question is whether the relevant event or state of affairs can be overcome by reasonable endeavours from the party affected.”
- That there was an express contractual right for M to receive payment in U.S. dollars and there was no dispute as to M being required to abandon or vary that right. Rather, the question for the Court of Appeal was whether, if M accepted payment in Euros, it would overcome the problems resulting from the imposition of sanctions which impacted on R.
Considering these factors, the Court of Appeal concluded that a common-sense interpretation of clause 36 needed to be applied to achieve the purpose of the parties’ underlying intentions. In particular, Males LJ saw no reason why an alternative payment in Euros, which would result in M receiving the exact equivalent of U.S. dollars as it had contracted to receive, would not “overcome” any strict problems that had arisen from the OFAC sanctions. The acceptance of this approach, in the majority of the Court of Appeal’s view, was that this would have been a use of reasonable endeavours pursuant to the requirement under the force majeure clause contained withing the contract between M and R.
Arnold LJ dissented from the majority. He relied on the presumption established in the earlier case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC689, being that a party does not give up their legal rights absent clear express words to the same.
On the facts of the case, Arnold LJ’s view was that M was entitled to insist on its strict contractual right to receive payment in US dollars.