Insights ‘Reasonable Endeavours’ provisions in force majeure clauses: Supreme Court delivers judgment

The Supreme Court has delivered a judgment that provides clarity on the scope of ‘reasonable endeavours’ provisions within force majeure clauses. The unanimous judgment confirms that, absent clear wording, a party will not be forced to accept a non-contractual solution offered by the other party to overcome a force majeure event.

The case concerned a freight contract between MUR Shipping BV (“MUR”) and RTI Ltd (“RTI”) under which MUR agreed to carry bauxite for RTI from Guinea to Ukraine between June 2016 and June 2018. The contract required RTI to pay MUR in US Dollars.

On 6 April 2018, US authorities imposed sanctions on RTI’s parent company, meaning that it would have been difficult for RTI to make timely payment in US Dollars. As a result, MUR invoked the force majeure provisions of the contract and sent notice to RTI. In turn, RTI rejected the force majeure notice on the basis that it was prepared to pay in Euros instead and to bear any additional costs or exchange rate losses suffered by MUR in converting US Dollars to Euros. MUR insisted that it was entitled to payment in US Dollars and suspended performance.

RTI commenced arbitration, claiming damages from MUR for the cost of chartering replacement vessels during the period that MUR suspended performance. Meanwhile, MUR maintained its position that it was entitled to suspend its performance under the force majeure clause in the contract.

The force majeure clause was relatively standard. It provided that neither party would be “liable to loss, damage, delay, or failure in performance caused by a Force Majeure Event”, which was defined as an event or state of affairs meeting all of the following criteria:

  • It is outside the immediate control of the Party giving the Force Majeure Notice;
  • It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
  • 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, shiploaders, 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;
  • It cannot be overcome by reasonable endeavours from the Party affected.

The principal focus of the dispute between the parties was on the requirement at (d). On RTI’s case, MUR could not rely on the force majeure clause as the state of affairs or event could be overcome by paying in Euros and meeting any costs of conversion. The arbitration tribunal agreed.

MUR successfully appealed to the High Court on this matter of law under section 69 of the Arbitration Act 1996. Jacobs J held that MUR was entitled to expect payment in US Dollars: it was part of the parties’ bargain. The exercise of reasonable endeavours required endeavours towards the performance of that bargain, not towards performance that achieved a different result to that which was agreed. He also cautioned against the reasoning advanced by RTI: if the loss of a contractual right turns purely on what is reasonable in a case, then the contract is beset by uncertainty.

RTI successfully appealed to the Court of Appeal. Much of the Court’s judgment focused on the construction of the wording of the reasonable endeavours provision within the force majeure clause. In Males LJ’s view, the clause should be applied in a “common sense way which achieves the purpose underlying the parties’ obligations”. As a result, he concluded that “I see no reason why a solution which ensured the achievement of this purpose should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided”. He added that MUR suffered no damage as a result of RTI’s contractual breach of paying in Euros, and that the word “overcome” does not mean that the contract must be performed in strict accordance with its terms. Arnold LJ dissented, arguing that an event or state of affairs is not “overcome” by an offer of non-contractual performance. In his view, if the parties to a contract intended a force majeure clause to extend to a requirement to accept non-contractual performance, clear express wording to that effect was required.

In its appeal to the Supreme Court, MUR argued that the Court of Appeal was wrong to consider this case to be one of a narrow matter of construction of the relevant clause and an enquiry into whether, on the facts of the individual case, the purpose of the underlying contractual obligations had been achieved. Instead, MUR argued, it was a fundamental point of principle: absent clear words to that effect, reasonable endeavours to overcome a force majeure event should not include accepting an offer of non-contractual performance.

The Supreme Court agreed with MUR. It held that there are “several principles which provide good reasons for accepting MUR’s case”. First, reasonable endeavours provisions in force majeure clauses are concerned with whether reasonable endeavours “could have secured the continuation or resumption of contractual performance…the object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance”.

Second, the Court was concerned not to undermine the principle of freedom of contract: “The principle of freedom of contract includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract”. Third, if either party was required to accept an offer of non-contractual performance, thereby forgoing valuable contractual rights, clear words would be required in the contract.

Finally, the Court was concerned about the importance of certainty in commercial contracts. As it put it, RTI’s case was not “anchored to the contract” and instead required “inquiries into whether the acceptance of non-contractual performance would: (i) involve no detriment or other prejudice to the party seeking to invoke force majeure, and (ii) achieve the same result as performance of the contractual obligation in question.” As the court noted, all of these questions arise “in the context of a clause which requires immediate judgments to be made. Parties need to know with reasonable confidence whether or not a force majeure clause can be relied upon at the relevant time, not after some retrospective inquiry”, and they therefore undermine the certainty of any contract which is a bedrock of the law in England and Wales.

To read the Supreme Court’s judgment in full, click here