Why paying heed to force majeure clauses is crucial in contracts
In contract law, force majeure clauses are widely used to protect against the ‘unexpected’: typically, occurrences of extreme or unforeseeable events which could prevent or delay a party from performing contractual obligations.
Parties enter a contract looking to benefit from the agreed arrangements, so worst-case scenarios may not always be prioritised. However, the risk in neglecting force majeure clauses and not giving them the care and attention they deserve when agreeing a deal can be significant.
A recent commercial contract dispute which went all the way to the Supreme Court demonstrates the risks of relying on force majeure clauses which have not been rigorously drafted, how far they can be stretched and why certainty of terms is crucial in contracts.
What is force majeure?
Force majeure clauses typically define acts, events or circumstances beyond a party’s reasonable control. The use of a force majeure clause may provide not just for the scenario of an extreme or unforeseeable event occurring, preventing or delaying a party from performing contractual obligations, but can also stipulate that a party will not be in breach of contract for any delay or non-performance due to the force majeure events. Force Majeure clauses appear in a wide variety of contracts including services agreements, distribution agreements or sale and purchase agreements.
Importantly, the use of force majeure terms in contracts is separate from the legal doctrine of frustration. Whereas frustration allows a contract to be discharged due to unexpected events beyond the parties’ control, force majeure clauses can set out specific circumstances alongside or in addition to frustration events. Force majeure clauses can therefore be negotiated by the parties ahead of time, and contracts can provide for suspension of services, or ways around frustration events, rather than the contract automatically being brought to an end as it would otherwise be under the doctrine of frustration.
Traditionally force majeure clauses include acts of god (an event for which no human is responsible such as a natural disaster), extreme weather (such as floods, hurricanes or earthquakes), strikes and wars. More recently, they are likely to also include events such as pandemics, epidemics or public health emergencies. Some clauses simply refer to events “beyond a party’s control”.
The case: RTI v MUR Shipping
A subsidiary of Russian-owned United Company Rusal, RTI was the charterer of freight ships owned and operated by MUR, a maritime logistics and freight services provider. The contract between the parties was originally entered into in June 2016, and allowed for the transport of 280,000 tonnes of bauxite (raw ore aluminium) each month from Guinea to Ukraine.
In April 2018, American sanctions were imposed on United Company Rusal, which affected RTI as a subsidiary. MUR invoked the contractual force majeure clause, stating it was entitled to receive payment in US dollars as specified in the contract. With this payment no longer being legal, the contract could not be performed.
RTI countered it was happy to pay the contract amount in Euros instead, as well as an additional amount to cover the cost of converting the Euros into USD. MUR refused this, maintaining it was entitled to receive payment in USD, and suspended its services to RTI.
The force majeure clause (as is standard) contained a number of events which could constitute a non-fault inability to complete a contract, such as war, explosions, insurrection, stoppage by ice, etc. The fact these sanctions would constitute force majeure was not disputed.
However, and importantly for this case, a clause at the end of the force majeure section of the contract noted that circumstances would only be force majeure events if they “cannot be overcome by reasonable endeavours”.
Arbitration
An arbitration clause in the contract led to the parties first seeking an arbitral award. Arbitration is one of the most commonly used forms of Alternative Dispute Resolution and can enable parties to resolve a dispute without going to court. A chosen impartial third party, an Arbitrator, listens to both sides of the dispute in order to make a binding decision.
The arbitrators considered the sanctions would ordinarily constitute a valid force majeure event. However, accepting payment in Euros, as offered by RTI, would have overcome the event, and therefore constituted “reasonable endeavours” by MUR.
MUR was therefore not entitled to rely on the force majeure clause and should have accepted the payment in Euros (which would have caused it no detriment). RTI was subsequently awarded damages for MUR’s breach of contract.
Subsequent Judgments from High Court and Court of Appeal
MUR appealed the arbitration decision to the High Court, claiming “reasonable endeavours” were for situations where the impediment could be surmounted so the contract could be performed according to its terms. MUR stated that as payment in USD was itself a term of the contract, changing the payment to Euros was separate to overcoming force majeure, and instead amounted to an offer to accept non-contractual performance (or vary the terms of the contract), which MUR was not legally bound to accept. Mr Justice Jacobs agreed and reversed the arbitration decision.
Following this judgment, RTI appealed to the Court of Appeal. The Court (Lord Justice Arnold dissenting) took a holistic view rather than a technical and contractual one, noting that as long as MUR was paid the correct value in USD at the correct time, this would be a valid solution to overcome the force majeure event – practically, the event was overcome, with no detriment to MUR. As such, the arbitration finding was reinstated.
Judgment from the Supreme Court
MUR submitted to the Supreme Court that the appeal judgment overlooked a crucial aspect of contracting between parties – that there should be certainty of terms. As such, offers of non-contractual performance should not be legally enforceable upon a party unless there is an express agreement to that end.
The Judges of the Supreme Court unanimously agreed, concluding that while taking a broader approach (as the Court of Appeal had done) might be appealing, doing so would reduce the certainty of contractual terms, which could not be tolerated.
Quoting cases from as far back as 1774, the Court noted the entire purpose of contracts is to have certainty in what the parties are agreeing to, and to remove this without an express provision allowing it, would negate the purpose of having a contract in the first place.
Conclusion
As RTI was not able to pay in US dollars, MUR was entitled to rely on the force majeure clause, and could argue the contract could not be performed and suspend all services, without being seen as having breached the contract.
Had the contract been drafted slightly differently, MUR would not have been able to suspend services without paying damages for breaching the contract. This would have saved RTI significant legal fees incurred in arbitration, High Court, Court of Appeal, and Supreme Court proceedings, alongside the loss of USD$2,170,050.03 (the original damages award, and so the approximate value of the contractual loss), as well as the legal fees of the other side, given that fees usually follow the outcome of a case.
Above all else, certainty of terms is vital to contracts. No party is legally bound to accept offers of non-contractual performance which go against the terms of an agreed contract, even if they would cause no detriment. Parties can of course agree to vary a contract, but this would be a separate agreement.
The Hamlins Commercial Disputes team has a depth of experience in resolving disputes swiftly and painlessly, and provides sensible, practical solutions and sound advice. We understand individuals and businesses need realistic solutions to their issues and we take a commercial approach, providing pragmatic and straightforward advice to guide clients to the route best suited to their situation.
If you would like help reviewing your contracts, or have concerns over a potential contractual dispute, the team will be happy to discuss your options. If you would like a conversation to find out how we might help you, please get in touch.