Interpreting a Force Majeure clause in the face of international sanctions – the case of Mur Shipping BV v RTI Ltd provides guidance

In the recent judgment of MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm), the English Commercial Court allowed an appeal from the appellant shipowners on the proper construction of the Force Majeure clause in the context of Russian sanctions. The dispute related to the shipowners’ reliance on the Force Majeure clause in a Contract of Affreightment in response to the charterers’ difficulties in payment of freight in US dollars as a result of the US Sanctions on Russia.  Amongst other things, the clause stated that the relevant event would only be considered force majeure if it could not be overcome by the reasonable endeavours of the party affected.  The Court consequently held that the obligation to exercise “reasonable endeavour” to overcome a force majeure event did not require the shipowners to accept non-contractual performance by the charterers.

While this decision related to the 2018 US Sanctions on Russian entities, it is no doubt relevant given the renewed and ongoing US Sanctions on Russia following on from events in Ukraine.

Background facts

In June 2016, Mur Shipping BV (“MUR”), as shipowners, and RTI Ltd (“RTI”), as charterers, concluded a contract of affreightment (“COA”) for MUR to carry various consignments of bauxite from Conakry, Guinea to Dneprobugsky, Ukraine.

In April 2018, the US Treasury’s Office of Foreign Asset Control (“OFAC”) imposed sanctions on RTI’s parent company, adding it to the Special Designated Nationals and Blocked Persons List.  In light of the US Sanctions imposed on RTI’s parent company, MUR invoked the Force Majeure clause under the COA by sending a force majeure notice to RTI shortly after the US Sanctions were imposed.

It must be mentioned that the Force Majeure clause, in this case, defined a force majeure event as one which, amongst other things, prevented or delayed the loading and / or discharge of cargo and fell within various categories such as extreme weather conditions, war, embargo, any rules or regulations of governments or any interference or acts or directions of governments, restrictions on monetary transfers and exchanges and so on.  In addition, the event in question would only be considered a force majeure one if it cannot be overcome by reasonable endeavours of the party affected.  

In the force majeure notice, MUR informed RTI that it would be in breach of the US Sanctions should it continue with the performance of the COA and that the US Sanctions would prevent payment in US Dollar (the contractual currency of the COA).  In response, RTI proposed settling the freight payment in Euros and bear all additional costs arising from the change in currency.

MUR did not agree to RTI’s proposal of payment in Euros and temporarily suspended vessel nomination, arguing that it could not be expected to continue with loading operations, knowing that it may not receive payment under the terms of the COA. In the event, RTI then obtained alternative tonnage for the cargo and commenced arbitration proceedings against MUR to recover the additional costs incurred. 

The arbitration proceedings

The Force Majeure clause in the COA contained a “reasonable endeavour” provision which provides that a force majeure event must be one that “cannot be overcome by reasonable endeavours from the Party affected”.  In that regard, a key issue in dispute was whether this meant that MUR was obliged to accept payment in a non-contractual currency from RTI.

The Tribunal accepted the drastic effects of the US Sanctions (both primary and secondary) on commercial transactions and that commercial counter-parties would be discouraged from trading with a sanctioned party.  However, MUR’s case on force majeure fell on the basis that it did not meet the criteria mentioned in the preceding paragraph – that the event must be one which “cannot be overcome by reasonable endeavours from the Party affected”.  The Tribunal took the view that the issue of non-payment arising from the US Sanctions could have realistically been overcame had MUR accepted RTI’s proposal for settlement in Euros, bearing in mind that RTI had already undertaken to bear any currency exchange loss due to payment in a different currency.  Consequently, the Tribunal held in favour of RTI and concluded that MUR’s obligation to exercise reasonable endeavours would require them to accept payment in a non-contractual currency.

Appeal to the English Commercial Court

MUR were granted leave to appeal the Tribunal’s decision under Section 69 of the Arbitration Act 1996 on a question of law, namely, whether MUR’s obligation to exercise reasonable endeavours under the Force Majeure clause extended to requiring it to accept non-contractual performance by RTI, i.e. accepting freight payment in another currency (Euros).

MUR’s position

In the appeal before the English Commercial Court, MUR put forward the argument that reasonable endeavours could not extend to requiring the affected party to agree to vary the terms of the contract or to agree to a non-contractual performance.

MUR submitted that it could not be expected to load and discharge cargo without being paid and that RTI’s inability to make contractual payments would clearly delay performance, not least because MUR would be entitled to exercise a lien on the cargo for unpaid freight.

Further, MUR also argued that where a contracting party found itself in a doubtful position (as with the US Sanctions), it was entitled to take reasonable time to review the position.

Finally, MUR submitted that there would be uncertainty to the parties’ contractual rights if these rights are subject to what is or is not reasonable on the facts of a particular case.

RTI’s position

RTI advanced several arguments before the English Commercial Court and they were, among others, as follows.

1. That on a broad level, in the exercise of reasonable endeavours in a Force Majeure clause, the nature of the parties’ contractual obligations was only one factor to be considered and weighed in the circumstances.

2. Even if a party may not be required to accept non-contractual performance of obligations relating to the loading and / or discharge of cargo, the payment obligation in the current case did not fall into this scenario.  On the facts, there was no commercial difference the payment in Euros or US Dollar and that payment in Euros was, in practice, as good as payment in US Dollar because the funds could be readily converted.

3. There was no sufficient causal link between the non-payment of freight and the prevention of or delay in the loading or discharge of cargo. 

4. The Tribunal had erred in holding that subject to reasonable endeavours, the Force Majeure clause gave MUR a legal entitlement to take time to review its position and then opt to take a position.

The English Commercial Court’s decision

The English Commercial Court consequently allowed the appeal from MUR.  In doing so, it held, amongst others, as follows.

1. The exercise of reasonable endeavours under the Force Majeure clause did not require MUR to sacrifice its contractual right to payment in US Dollar.  Payment in Euros was not a contractual right and the exercise of reasonable endeavours did not extend to requiring the affected party to accept such non-contractual performance.

2. The parties’ contractual obligation was not simply a factor to be weighted in the balance when coming to an overall assessment of reasonableness.  The critical question related not to the reasonableness of the affected party’s conduct, but rather what the contract entitled the affected party to do.

3. The commercial venture must be considered in whole and the shipowner is not bound to load (even if possible) if a peril would affect the later performance of such a commercial venture.

4. The Court took the view that MUR was entitled to take reasonable time to consider its next course of action, as decided by the Tribunal (although it was acknowledged that this issue was not appealed on by MUR).

Comments

This case offers insight on how parties should interpret “reasonable endeavours” in a Force Majeure clause and the Court appears to take the view that parties are not required to accept performance which has not been contractually provided for. 

On a broader level, and while this case involved US Sanctions imposed on Russia in 2018, it may be relevant in the context of the interplay between FM clauses and international sanctions, particularly given the recent US Sanctions (and others) imposed on Russia as a consequence of the Russian-Ukraine conflict.