A recent Supreme Court judgement, RTI Ltd v MUR Shipping BV, has highlighted the importance of certainty in commercial contractual terms. It was unanimously ruled that, while a force majeure clause can only be relied upon if a party has taken reasonable steps to avoid the effect of the force majeure event, these reasonable steps do not oblige a party to accept performance that differs from the agreed contract.
What is a ‘force majeure’ clause?
Commonly found in commercial contracts, force majeure provisions are used to relieve parties from performing their contractual obligations in certain situations where performance has been made impossible – or at least extremely difficult – due to unforeseen circumstances beyond their control. This can encompass situations such as natural disasters, wars, labour strikes or medical epidemics, such as the Covid-19 pandemic. The general premise is to ensure that parties are not in breach of contract if these circumstances arise and make contract performance commercially impractical or impossible.
It is important that these provisions are drafted carefully, as the courts tend to interpret them narrowly. This means that only the types of circumstances specified in the clause are likely to be covered, and non-performance for an unlisted reason may leave a party in breach of contract, regardless of the inclusion of a force majeure provision.
RTI Ltd v MUR Shipping BV
This is a case highlighting the need for clear drafting in contracts, and has been the subject of disagreement between courts. The contract between RTI and MUR contained an obligation for RTI to pay MUR in US dollars and included a standard force majeure clause.
The problem arose in 2018 when RTI’s parent company faced US sanctions, which rendered RTI unable to continue making payments in US dollars. MUR sought to invoke the force majeure clause and stop performance of the contract, despite RTI offering to make the payments in Euros instead.
In arbitration, it was found that as the wording of the force majeure clause included a criterion that a force majeure event, ‘cannot be overcome by reasonable endeavours from the Party affected’, MUR should accept the alternative payments offered by RTI. This decision was overturned by the Commercial Court, which held that the contractual obligations agreed between the parties – namely that payments would be made in US dollars – were paramount and MUR were not required to accept the alternative payment. The Court of Appeal, however, subsequently overturned the decision of the Commercial Court and restored the decision made by the arbitration Tribunal, stating that the payment RTI was offering would overcome the effects of the force majeure event. This led the case to be brought before the Supreme Court.
Interestingly, the Supreme Court unanimously agreed with the decision made by the Commercial Court, in favour of MUR. It was found that a party seeking to rely on force majeure provisions are required to demonstrate that the event in question was beyond its reasonable control and that they could not avoid the force majeure event by taking reasonable steps. In addition to this, perhaps more importantly in this case, the Supreme Court ruled that if the terms of the contract clearly state how an obligation will be performed, the obligation to take reasonable steps under force majeure provisions does not oblige a party to perform or accept performance that deviate from the agreed contractual terms. Therefore, MUR were not obliged to accept the payments in euros in order for RTI to avoid invoking the force majeure provisions.
Berry Smith Comment
The final judgement made by the Supreme Court serves as guidance on the approach English and Welsh courts will take if issues arise around the performance of contractual obligations. It is clear that parties who have entered commercial contracts should be entitled to rely on performance of the obligations as set out in the contractual terms and cannot be obliged to accept performance if it differs from what is agreed.
Force majeure clauses, however, are still an important tool in commercial contracts to provide parties with protection should circumstances arise that are beyond their control and prevent performance of the contractual obligations. That said, it is important to ensure these are clearly drafted and that a party does not seek to rely on these provisions without taking any reasonable steps to avoid non-performance.
In conclusion, clear drafting, certainty and predictability in commercial contracts are extremely important in avoiding the risk of disputes arising and it is worth ensuring that commercial contracts are carefully drafted and negotiated to avoid uncertainty later down the line.
The Commercial & IP Team at Berry Smith can provide specialist advice on drafting, reviewing and refining commercial contracts, as well as general commercial and business advice.
Please contact us if you would like more information about the issue raised in this article or any other aspect of Commercial law at 029 2034 5511 or commercial@berrysmith.com