The background to this case is RTI Ltd, as “Charterers”, and MUR Shipping BV, as “Owners”, were parties to an amended GENCON form of contract of affreightment (“COA”), which provided for monthly shipments of bauxite from Guinea to Ukraine.

The key terms of the COA for present purposes were: (i) a requirement to make freight payments in US Dollars, which would be routed through a correspondent bank in New York, and (ii) a force majeure (“FM”) clause enabling a party to avoid liability in specified circumstances. The FM clause did not specifically mention sanctions, but did refer to “any rules or regulations of governments or any interference or acts or directions of governments, [and]… restrictions on monetary transfers and exchanges”. The FM clause contained other requirements, including that the parties use reasonable endeavours to overcome the FM, and that the FM affected cargo operations.

On 6 April 2018, OFAC applied sanctions to RTI’s parent company and added them to the US ‘Specially Designated Nationals and Blocked Persons List’. Owners were concerned that further performance of the COA could expose them to risk of sanctions, in particular due to the US nexus created by payments in USD.

Owners had noted internally that the COA did not contain a dedicated sanctions clause. As such, they needed to fall back on the FM clause, and sent an FM notice to Charterers. Owners subsequently refused to nominate ships to load the cargo under the COA. The FM notice was rejected by Charterers.

Owners’ position was that the imposition of sanctions created a practical barrier to payment in USD, and that they could not be expected to load and discharge the cargo without receiving payment. It is well known that US banks are extremely wary of processing transactions that involve sanctioned persons, and that such transactions can be delayed or blocked. This is due to the serious risk of sanctions being imposed against the banks themselves. As such, Owners argued that an FM event had occurred (and that it continued until 23 April 2018, when OFAC issued a relevant General License).

It is, however, not unusual for parties to seek to agree alternative arrangements, where this would not violate sanctions. The Charterers’ position was that it would be reasonable for payments to be made in EURO and,  in any case, cargo operations were not prevented by the sanctions. During the 6-23 April 2018, Charterers obtained alternative tonnage to carry the cargo of bauxite. Charterers then brought a claim in arbitration for the additional costs incurred in securing this extra tonnage.

The Arbitrator’s Decision

The Tribunal found in Charterers’ favour, ruling that while sanctions were covered by the FM clause, the ‘reasonable endeavours’ obligation in the FM clause required Owners to accept payment in an alternative currency. It was relevant that Owners could have adopted this alternative with no detriment to themselves as the Charterers had offered to bear any additional costs or exchange rate losses in converting EURO to USD. They also did not consider that there was a ‘bright line’ distinguishing the variation of contractual terms from other commercial endeavours.

Owners appealed to the English High Court under Section 69 of the Arbitration Act 1996, in particular on the ground that reasonable endeavours does not require a party to change the terms of its contract. 

The High Court Decision

The Owners’ appeal was successful. The Court ruled that the exercise of ‘reasonable endeavours’ in the FM clause did not require the Owners to accept a ‘non-contractual’ payment in Euro, as opposed to a payment in USD. The Court rejected the Charterers’ alternative argument that the sanctions imposed did not directly affect cargo operations.

Mr Justice Jacobs found that the contract required payment in US dollars and 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 or similar clause”.

The Court of Appeal’s Decision

Males LJ, giving the leading judgment of the majority of the Court (himself and Newey LJ), emphasised that the judgment was concerned with the specific terms of this FM Clause only. Males LJ then focused on the word “overcome” in the FM Clause instead of “reasonable endeavours”. He considered that the “real question” in this case was whether acceptance of Charterers’ proposal to pay freight in euros and to bear the cost of converting those euros into dollars would overcome the Force Majeure Event (i.e. the “state of affairs” caused by the imposition of sanctions).

Looking at the “broad” and “non-technical” terms in the FM Clause, Males LJ held that the FM Clause should be applied in a common sense way. To him, the fact that Owners could have accepted Charterers’ proposal without any detriment to themselves, and achieved the exact same result as contractual performance would have achieved (i.e. the receipt of the right amount of US dollars at the right time), meant that the Force Majeure Event could be overcome. He did, however, note that this would not be the case if Owners would have suffered any detriment or disadvantage in accepting Charterers’ proposal.

Arnold LJ disagreed with the Males LJ and Newey LJ. He considered that, whilst there was “no merit” in Owners refusing Charterers’ proposal where no detriment was caused to them, as a general principle, Owners were entitled to insist on strict contractual performance. It could not therefore be said that the Force Majeure event had been “overcome” if non-contractual performance was what had allowed that to happen.

In a split decision, the Court therefore overturned the decision of the High Court and agreed with the Tribunal that the Force Majeure Event could be overcome by Owners accepting payment in Euros.

Comment

When discussing the High Court’s judgment with clients, the harshness of the decision on the Charterers has frequently been highlighted. However, like Arnold LJ acknowledged in his dissenting judgment, it was recognised by our clients that the principal underlying the High Court’s judgment was sound; a party is entitled to strict contractual performance.

Whilst achieving what many in the industry would consider a fair result, the Court of Appeal seem to have swerved the question whether the use of “reasonable endeavours” to overcome a force majeure event requires non-contractual performance, and have handed down a controversial judgment which we believe is likely to be appealed to the Supreme Court.

Until such an appeal is made successfully, we expect to see many parties relying on this decision to support the proposition, subject of course to the specific wording of the force majeure clause, that non-contractual performance may be required if no “disadvantage” or “detriment” is suffered by the party invoking force majeure.

Whether a party will suffer a disadvantage or detriment is sure to be fertile ground for further disputes.