Force majeure and alternative performance

Does a non-defaulting party have to accept an offer for alternative contractual performance where a force majeure clause is engaged?

In a rare appeal of an arbitration award under section 69 of the Arbitration Act 1996 on a point of law, the UK Supreme Court has recently handed down judgment in RTI Ltd v MUR Shipping BV (2024) overturning a Court of Appeal decision regarding a London Maritime Arbitrators Association (LMAA) tribunal’s Award.

The issue in the case was whether a party seeking to rely on a force majeure clause could effectively compel the other party to accept alternative performance which was not provided for in the contract. The Supreme Court overturned the Court of Appeal’s decision and found that it could not.

The facts of the case

This case concerned a contract of affreightment (a contract between a ship-owner and charterer) between MUR Shipping BV (MUR) as the shipowner and RTI Ltd (RTI) as the charterer. The contract provided that RTI had to pay MUR in US dollars.

In 2018, RTI’s parent company was placed on a sanctions list by the US Department of the Treasury’s Office of Foreign Assets. MUR sent a force majeure notice to RTI stating that because of RTI’s parent company being placed on a US sanctions list, it could no longer accept payment in US dollars and, therefore, a force majeure event had occurred.

The contract contained a typical force majeure provision but provided that a force majeure event would not occur if “d) It cannot be overcome by reasonable endeavours from the Party affected”.

In response to MUR’s force majeure notice, RTI offered to make payment in euros making clear that they would bear any additional cost or exchange rate loss in converting euros to US dollars. RTI explained that MUR would therefore not suffer any detriment. MUR refused to accept euros and refused to nominate vessels for loading under the contract.

Arbitration tribunal

RTI commenced LMAA arbitration proceedings against MUR for demurrage (ie a charge payable to the owner of a chartered ship on failure to load or discharge the ship within the time agreed). The tribunal determined that MUR was not entitled to rely on the force majeure clause in the contract because its failure to accept payment in euros was a failure to use "reasonable endeavours" to overcome the force majeure event.  

First instance decision

MUR appealed the tribunal’s Award under section 69 of the Arbitration Act 1996 on the point of law of whether the meaning of the "reasonable endeavours" clause meant that it, as the affected party, was required to accept payment in another currency other than that provided for in the contract.  

Mr Justice Jacobs granted MUR’s appeal and determined that because the contract required payment in US dollars, MUR did not have to, by exercise of reasonable endeavours, accept non-contractual performance in order to overcome the force majeure event.

Court of Appeal

RTI appealed the decision to the Court of Appeal. In a decision of 2 to 1, the Court of Appeal overturned Mr Justice Jacobs’ first instance decision and upheld the tribunal’s award. In the leading judgment, Males LJ made clear that this case and the clause involved would be considered on their own terms and the court was not concerned with making general proclamations about reasonable endeavours or force majeure clauses. Unlike certain civil law systems, parties can only rely on force majeure provisions in England & Wales if they have provided for them in their contracts. Each force majeure clause will be interpreted by a court on the wording used in the clause.

The Court of Appeal noted that that the main considerations in this case were whether acceptance of the proposal to pay for the freight in euros would overcome the force majeure event, the impact of the imposition of sanctions on the parent company, and whether it was essential for the contract to be performed in strict accordance with its terms (ie payment in US dollars). If it was essential for the contract to be performed in strict accordance with its terms, RTI would have had to find some way to make the payment in US dollars. Males LJ held that this was a narrow construction of the clause and that, applying the force majeure clause in a common sense way, if MUR received the right quantity of US dollars at the right time (even after being converted from euros) then that that achieves the purpose of the parties’ underlying obligations.

Males LJ held that acceptance of the proposal by RTI to pay MUR in Euros (which could be converted to US dollars, with RTI fronting any additional cost) would have resulted in no detriment to MUR and overcame the state of affairs caused by the imposition of sanctions on MUR’s parent company. Had the payment in euros resulted in detriment to MUR, then the situation would have been different. “Overcome” did not mean that the contract had to be performed in strict accordance with its terms.

UK Supreme Court

The UK Supreme Court overturned the Court of Appeal’s decision. It found that the leading authorities made clear that a counterparty did not have “to accept an offer of non-contractual performance” where a party was impacted by a force majeure event.  

While force majeure clauses often contain an express requirement to use reasonable endeavours to overcome a force majeure event, it determined that even without that, it's trite law that force majeure provisions contain implied terms that the party seeking to rely on a force majeure clause has to use reasonable endeavours to overcome the event. However, MUR’s right to accept payment in US dollars rather than an alternative currency was a fundamental right under the contract. Accordingly, and absent any wording in the contract which would require MUR to accept an alternative currency payment, there was no requirement on MUR (who was not the party subject to the force majeure event) to accept “different, non-contractual, performance.

The object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance.”  

While there may have been an argument as to whether MUR mitigated its losses by failing to accept payment in an alternative currency, the Supreme Court found that was not in issue in this case as it was RTI suing MUR for breach of contract rather than the other way round.

What this means going forward

Drafters of force majeure clauses do commonly provide that parties use reasonable endeavours to mitigate the impact of a force majeure provision. While the court made clear that force majeure and reasonable endeavours clauses will be considered on their own terms, anyone drafting a force majeure clause which provides that it can be overcome by a party using reasonable endeavours should think carefully about what that may mean when a force majeure issue arises. 

Drafters should think carefully about whether other provisions in the contract need to be provided for which would mean that a counterparty has to accept alternative performance if that overcomes the state of affairs in question and the detriment caused by a party impacted by a force majeure event specified in the force majeure clause.

The case also acts as a useful reminder for parties adopting arbitration clauses to think carefully about parties’ rights to challenge awards on points of law. Under the LMAA rules, parties can challenge arbitration awards to the English courts on points of law unless they provide for otherwise in their contracts. The default position under other institutional rules such as the LCIA and ICC is that the parties waive their rights to challenge awards on points of law to the English courts.

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