Force majeure, reasonable endeavours and Government sanctions

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Just as we thought, or dared hope, we had seen the last of force majeure (for a while at least), the High Court ruled last month that there was no positive obligation on a party to a contract to make payments to the other in a different currency than that provided for under the contract (known as non-contractual performance) due to a force majeure event occurring.

Facts

Mur Shipping BV (“MUR”) signed a Contract of Affreightment (“COA”) with RTI Ltd (“RTI”), who were the charterers, in June 2016. Under the COA, RTI agreed to ship, and MUR agreed to carry, approximately 280,000 metric tons per month of bauxite (aluminium rock), in consignments of 30,000 – 40,000 metric tons, from Conakry in Guinea to the Ukraine.

On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) applied sanctions on RTI’s parent company, and subsequently added them to the Specially Designated Nationals and Blocked Persons List.

This led to MUR triggering a force majeure clause in the COA by sending a properly sufficient force majeure notice (“FM Notice”) to RTI on 10 April 2018.

The critical clause stated:

“A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

  1. a)  It is outside the immediate control of the Party giving the Force Majeure Notice;
  2. b)  It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
  3. c)  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;
  4. d)  It cannot be overcome by reasonable endeavors [sic] from the Party affected.”

The grounds relied on by MUR was that due to restrictions imposed by the US Government, RTI could not make payment in US Dollars since the US banks would attempt to block the payments – a cautious measure so as to not infringe sanctions legislation. The response from RTI was that no matter what restrictions were likely to be, they could make payments in Euros instead. The question for the High Court was ‘could non-contractual performance circumvent a force majeure clause?’

The High Court decided that a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure clause (no matter how reasonable the alternative might be). The Judge concluded that a reasonable endeavours obligation did not require a change in contractual performance.

One might contend that pragmatism has been lost here. Arguably, however, the decision has to be right because the idea that a party is required to do something that neither party expected or anticipates at the outset goes against the principle of contract certainty and that if a party or parties intended that, they should have included an express right to amend contractual obligations within the clause itself. Paying in US dollars was an “important contractual obligation” on RTI.

Whilst sanctions are not new, it appears that businesses are now looking at ways in which sanctions could impact the performance of a contract. Would those particular sanctions themselves prevented the contract from being performed? The Court ruled that MUR could rely on the force majeure clause due to the sanctions being imposed on RTI’s parent company.

If you are concerned by any of your commercial agreements, please get in touch with the Team.