The unprecedented sanctions imposed on Russia by the international community in the wake of the invasion of Ukraine have had a significant impact on international commercial relationships. Where the performance of contractual obligations may be affected by sanctions, contracting parties are having to look carefully at the force majeure (FM) provisions in their contracts, just as they did as the global impact of the pandemic developed.
The protection provided by a FM clause will depend on the precise wording of the contract and its application to the circumstances. However, the courts continue to provide helpful guidance to parties who need to assess whether they or their counterparties can rely on FM to avoid liability if they fail to comply with their contractual obligations.
The recent Commercial Court decision in MUR Shipping BV v RTI Ltd, which dealt with a situation arising from US sanctions imposed in 2018, is of particular interest. (The Court of Appeal subsequently overturned the Commercial Court’s decision and we have covered the Court of Appeal’s decision in this blog post.)
It establishes that:
- If a party is required to exercise reasonable endeavours to overcome the impact of a FM event, it will not be obliged to accept something other than the contractual performance required of the other party, such as accepting payment in Euros rather than US dollars.
- A party may be able to rely on a FM even if the event does not directly prevent or delay that party’s performance of its contractual obligations. In MUR Shipping, the sanctions related to the parent company of the counterparty.
Background
In 2016, ship owners MUR Shipping (the Owners) contracted with charterers RTI (the Charterers) to carry monthly shipments of bauxite from Guinea to Ukraine. The contract included a FM clause. The definition of a FM event included rules or regulations of governments. Importantly, the clause also stated that an event would not be a FM unless “[i]t cannot be overcome by reasonable endeavours from the Party affected”.
Subsequently, the US sanctioned Charterer’s parent company. The Owners issued a FM notice stating that the sanctions prevented them from performing their contractual obligations and that the sanctions would prevent the Charterers from making payment in US dollars as contractually required. The Charterers rejected the FM notice, saying that the sanctions would have no impact on the Owners’ ability to load and discharge cargo and Charterers could make payment in Euros. The Owners rejected this position and refused to nominate ships under the contract. Arbitration proceedings followed under which the Charterers sought to recover the additional costs incurred.
The Charterers’ claim succeeded at arbitration. The tribunal accepted that the sanctions on the Charterers’ parent company were capable of amounting to a FM under the contractual definition. However, the tribunal found that the FM event could have been overcome by the reasonable endeavours of the Owners in accepting the Charterers’ proposal to pay in Euros. The tribunal concluded that this was a “completely realistic alternative” to the contractual requirement to pay in US dollars.
The Owners appealed on the question of whether an obligation to make reasonable endeavours to overcome the FM required them to accept payment in a non-contractual currency. The appeal succeeded for the reasons set out below.
1. Reasonable endeavours versus contractual obligations
The Charterers argued that when considering whether the Owners had made reasonable endeavours to avoid the impact of the FM, the court should weigh in the balance the importance of other contractual provisions, such as the contractual requirement for the Charterers to make payment in US dollars. They submitted that this requirement was not critical since payment in Euros was in practice the same as payment in US dollars because following receipt, the funds could easily be converted.
The court rejected the invitation to consider a contractual obligation as no more than a factor to be weighed in the balance in an overall assessment of reasonableness. There was no authority to support the Charterers’ suggestion and if the court was required to determine the relative importance of different contractual obligations that would lead to undesirable uncertainty in the application of FM provisions.
In any event, the court found that the obligation to pay in US dollars was an important contractual obligation. Although the payment obligation did not directly impact the Owner’s ability to load and discharge cargo, a requirement to use reasonable endeavours did not require it to accept payment in another currency. The Owners were therefore entitled to insist on payment in US dollars.
2. Causation
The Charterers also argued that the FM event, in this case the relevant US sanctions, had not prevented or delayed the Owners from loading or discharging the cargo. They should therefore not be excused from performing those obligations. In effect, they submitted that it was the Owners’ own decision not to receive payment in Euros, or at least their decision not to perform based on a concern about whether sanctions would delay US dollar payments that was the cause of their non-performance, not the sanctions themselves.
Often FM clauses can operate harshly against the paying party because, even if a FM event prevents the provision of goods or services under a contract, those events are unlikely to make it impossible for the paying party to effect the payment required by the contract. The facts in MUR Shipping were the mirror image. The performance of the loading and discharging services by the Owners were not prevented by the FM event but the ability of the Charterers to make payment was likely to be affected.
In that context, it is interesting that the court rejected the Charterers’ arguments on causation. It specifically rejected the submission that a party cannot rely on FM if the circumstances included, as one aspect of causation, a decision taken by that party in reaction to the FM. In those circumstances unreasonable conduct by that party would usually be required to break the chain. A reasonable decision taken in response to a FM event will therefore not prevent that party relying on FM.
Practical points
There are a number of practical points to take from MUR Shipping:
- The starting point for any party considering whether it can rely on a FM to avoid liability for non-performance of contractual obligations, or assessing whether a counterparty can avoid performing its obligations, is the precise wording of the FM clause in the contract.
- A party obliged to make “reasonable endeavours” to overcome the impact of a FM event cannot simply stand by and do nothing. However, such an obligation will not require that party to accept a non-contractual performance.
- The court will generally endeavour to give effect to the terms agreed by the parties, in this case the obligation on the Charterer to pay in US dollars. If the court instead simply looked at what was reasonable in the circumstances, then this would undermine the certainty of the contract
- Sanctions may amount to a FM event even if they are not imposed on a contracting party.
- The court will have some sympathy for the predicament of a contracting party when their counterparty is affected by sanctions. In MUR Shipping, the court accepted that it was reasonable for the Owner to have paused and considered the potential implications of sanctions before proceeding to perform its contractual obligations.
