Force Majeure Clauses in Commercial Contracts

It is generally understood that a contract will expressly state what each party should do during their contractual relationship with the other party. In other words, what each party’s obligations are and what performance is expected of them. Though, contracts come in all shapes and sizes.

In commercial contracts it is common to include several clauses that seek to protect a party from certain events. Such clauses generate a great deal of attention by legal and commercial teams across the globe. In the event of delay, for example, a liquidated damages clause may be incorporated to protect the party subject to the delay.

One clause that commonly appears in commercial contracts is that of force majeure. Force majeure clauses allow a party to be excused from their obligations under a contract if they are unable to perform those obligations for reasons outside of their control. Force majeure clauses are staple clause that often refer to floods, hurricanes and other natural disasters and are sometimes referred to as “Act of God” clauses (although that description is misguided – as this article will set out, force majeure clauses can and do cover much wider events than natural disasters).

The implications of a force majeure clause can be drastic. Despite this, force majeure clauses are so often overlooked when companies (or their lawyers) are drafting commercial contracts.

RTI LTD V MUR SHIPPING BV

The recent case of RTI Ltd v MUR Shipping BV¹ brought firmly into the spotlight the dangers of not having sufficiently clear force majeure clauses. The force majeure clause in this particular contract was one of the more detailed ones that can be found. On the face of it, the clause appears to be clear, concise and tick all the standard boxes, detailing what a force majeure event is and when notice needs to be issued. Most importantly, it stated:

• “It [force majeure event] cannot be overcome by reasonable endeavours from the party affected.” [emphasis added]

Problems arose between the parties when RTI’s parent company was sanctioned by the US Treasury (for unrelated matters) which prevented the parent company, along with its subsidiaries, from trading in USD. The contract stated that MUR were to be paid in USD. MUR claimed that the sanctioning of its parent company was a force majeure event, the sanctions being outside MUR’s control and reasonable contemplation and they were therefore excused from performance. RTI, in response, offered to pay MUR the amount due under the contract as well as any exchange fees in EUR i.e. exercising “reasonable endeavours” to overcome the force majeure event as required by the force majeure clause. MUR refused this offer and RTI arbitrated the matter.

The Claim went through a number of appeals. The arbitral tribunal concluded that RTI were fair and reasonable and operated to remove the force majeure event, stating that MUR were unreasonable in rejecting the payment in EUR with exchange fees paid, particularly as it created no detriment to MUR.

Upon appeal to the High Court², Jacobs J overturned the arbitral award and found in favour of MUR because:

• “…the contractual right to payment in US Dollars formed part of the parties’ ‘bargain’. The exercise of reasonable endeavours required endeavours towards the performance of that bargain; not towards a performance directed at achieving a different result which formed no part of the parties’ agreement.”

The Court of Appeal³ overturned the High Court’s judgment with Males LJ stating:

• “…the word overcome does not necessarily mean that the contract must be performed in strict accordance with its terms; and that a finding that the force majeure state of affairs could have been overcome by the exercise of reasonable endeavours was one with which the court should not interfere.”⁴

Newey LJ agreed and further held:

• “…it was sufficient that the force majeure event could be “overcome” in a “practical sense, such that all its adverse consequences would be avoided.”⁵

Eventually, the case wound up in the Supreme Court where the focus was on the true construction of the contractual terms as well as the practical application of the “reasonable endeavours” obligation in removing the force majeure event. The Supreme Court found that:

• “Making arrangements for non-contractual payment does not, however, enable the contract to be performed. The impediment to contractual performance remains and is not affected thereby, still less overcome. The banking delay for US Dollar payments resulting from the imposition of sanctions remained in place and was not “overcome” by offering non-contractual performance.”

THE DERIVING PRINCIPLE

The principle that arises from RTI Ltd v MUR Shipping BV is that the performance of the actual contractual obligation is crucial. The force majeure clause in question was interpreted to mean that a party must make “reasonable endeavours” to perform the actual contractual obligation and not some other, non-contractual obligation.

This reasoning followed previous cases. Most notably, a frustration case concerning a charterparty for a vessel journeying from Genoa to India: Ocean Tramp Tankers Corpn v V/O Sovfracht, The Eugenia⁶, commonly known as “The Eugenia”. The vessel went via the Suez Canal, becoming trapped for several months and eventually reverting to Genoa before taking the long route via the Cape of Good Hope. The charterers claimed that the contract had been frustrated by the blocking of the canal. The Court of Appeal disagreed and held that the contractual performance had not “radically” changed. Lord Denning MR stated⁷:

• “I think that there⁸, as here, there was no obligation to go through the Suez Canal, but only to go by the route which was customary at the time of performance…and that route had become the Cape of Good Hope.”

Accordingly, the Supreme Court held that MUR was not required to give up its contractual entitlement to be paid in USD even if it would be reasonable to do so. In addition, the contractual terms did not make any provisions, whether expressly or impliedly, for another currency to be offered and that:

• “…it is common ground that the contract required payment in US Dollars and the importance of certainty is maintained so long as the reasonable endeavours proviso is interpreted as focusing on that as the relevant contractual performance.”⁹

COMMON LAW CONSIDERATIONS

Whilst this case was primarily concerned with the interpretation of “reasonable endeavours” in relation to force majeure, the overall interpretation centred on what the performance obligations were. The Supreme Court felt that the performance obligation was not merely payment, but payment in a specified currency, and that any deviation from that, unless the contract provided for such a deviation, would not remedy the force majeure event. In other words, the event would continue because RTI would not be able to discharge the express contractual obligation to pay in USD.

Importantly, the Supreme Court followed the obita dicta of Pollock B in Bulman, which stated:

• “It is not a question between the plaintiffs and the defendants as to what is reasonable or unreasonable, it is a question of contract between the parties.”¹⁰

This obita dicta, described as a “pithy phrase” by the Supreme Court, sets out clearly that a party is not required to give up a contractual right. It is this element that was central to the Supreme Court’s interpretation of the issue in MUR. The Supreme Court felt that the payment in USD was more of a condition, something that went to the very root of the contract and because there was no provision, either expressed or implied, to vary the currency in such situations it was irrelevant whether RTI’s offer was reasonable or not.

The Supreme Court commented, albeit obita, that:

• “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.”¹¹

This suggests that, had the contract provided for a mechanism to make payment in an alternate currency, then the outcome would have been markedly different and MUR’s reliance on the force majeure clause may have faltered.

UAE CIVIL LAW CONSIDERATIONS

RTI Ltd v MUR Shipping BV would likely be treated differently in other jurisdictions such as the UAE. Unlike the English common law, UAE law does not contain the “reasonable endeavours” principle. The UAE Civil Transactions Code¹² specifically provides for force majeure and offers two distinctly separate scenarios both centred around “impossibility”. Article 276 (1) identifies a situation whereby if something intervenes that makes the performance of the contract impossible then all contractual obligations cease. This only applies, however, when the intervening force majeure event can never cease, making the impossibility total and there is nothing that can be done to prevent that because it would be to make an obligation to the impossible. For example, the permanent destruction of custom-made goods, caused by floods, would allow for the contract to be cancelled.

This can be contrasted with Article 276 (2) which only applies to a temporary impossibility. For example, leasing land that is subsequently flooded depriving the tenant of use. This could allow the tenant to claim a temporary force majeure event, foregoing rental payments over the flooded period or claim that the contract is cancellable, as opposed to being automatically cancelled under Article 276 (1).

Whilst Article 276 offers some guidance, the law does not impose an obligation upon a party to take reasonable endeavours to alleviate the force majeure events impact, and it is highly unlikely that a Court would imply such a term. Generally, the UAE Courts generally do not interfere with contractual terms freely agreed between the parties.

CONCLUSION

Regardless of what jurisdiction the contract is subject to, the requirement to have clear, certain and unambiguous terms is crucial. It is easy to check list a contract when one is reviewing, considering certain terms as low risk or having limited impact, but the fact remains that overlooking such terms can lead to harm that is not contemplated at the time of contract creation. Not only did RTI lose the contract but also expended considerable legal fees in doing so.

Of course, it was not contemplated by the parties that sanctions on a parent company would jeopardise the contract which means that the parties had no contractual provisions available to cope with this. It may seem punitive that RTI, who had made a reasonable offer to MUR that would have resulted in MUR obtaining payment albeit in another currency, lost the case. However, to side with RTI’s legal reasoning

would be akin to forcing parties to accept performance terms that were never contemplated. In the words of Jacobs J, this would amount to:

• “…the contractual rights becomes tenuous, and the contract is then necessarily beset by uncertainty which is generally avoided in commercial transactions.”¹³

¹ [2024] UKSC 18

² [2022] EWHC 467 (Comm)

³ [2022] EWCA Civ 1406; [2023] 1 Lloyd’s Rep 463

⁴ Males LJ, at Para 54

⁵ Newey LJ, at Para 78

⁶ [1964] 2 QB 226

⁷ Ibid, page 240

⁸ Societe Franco Tunisienne D’Armement v Sidermar SpA, The Massalia [1961] 2 QB 278

⁹ RTI Ltd v MUR Shipping BV [2024], Lord Hambelin & Lord Burrows at Para 59

¹⁰ ibid, para 63

¹¹ ibid, para. 55

¹² Law (5) of 1985

¹³ ibid, at para. 16