Bristows SnippITs - “Overcome” with excitement about Force Majeure Clauses!

This post is part of the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

Whether a supplier can rely on a force majeure clause may not be as straight forward as determining if there has been an "act of god" that has affected performance of a contract.

Need to know for customers:

• There is real value in ensuring that either: (a) the definition of “Force Majeure Event” (‘FME’); or (b) a condition of invoking relief for an FME, includes an obligation on the affected party to use reasonable endeavours to avoid the impact of the FME. This may require the supplier to accept a commercial offer from the customer which could overcome the effects of the FME (and ensure service continuity).

Need to know for suppliers:

• Where relief for an FME is contingent on using reasonable endeavours to mitigate, overcome or avoid the impact, the supplier will need to carefully consider whether it needs to accept an offer from the customer in order to discharge the pre-condition where it could effectively negate the impact of the FME – even where this offer is inconsistent with the supplier’s contractual rights.

The Court of Appeal has allowed an appeal from RTI Ltd (RTI), a company that chartered the respondent, MUR Shipping BV (MUR), to load cargo. The Court of Appeal found that, in requiring the contract to be performed strictly in accordance with its terms, MUR had missed an opportunity to overcome the effects of the FME.

US sanctions imposed on the majority owner of RTI led to this dispute. MUR regarded this imposition of sanctions as an FME as, according to their interpretation, the continued performance of the Contract of Affreightment (COA) would constitute a breach of the sanctions. Furthermore, the sanctions prevented US dollar payments from RTI, and as RTI were contractually obliged to pay freight in US dollars, MUR argued they had no option but to claim force majeure under Clause 36 of the COA and served their notice accordingly.

RTI maintained that the sanctions would not interfere with cargo operation, and also offered to pay the full price in euros which could then be swiftly converted into US dollars. Further, RTI offered to indemnify MUR for any costs associated with the currency exchange. MUR rejected this offer despite evidence that they had previously accepted payments in euros (which had then been swiftly converted into USD). RTI claimed that MUR’s rejection of the offer was a failure to make reasonable endeavours that would have overcome the FME.

The judgment discusses the application of reasonable endeavours to an FME at length. Males LJ noted that the specific terms of the COA were key, and that the Court was not concerned with general reasonable endeavours clauses or force majeure clauses. In the COA, an FME was defined as “an event or state of affairs” which met four specified conditions, although only the fourth condition was at issue in the appeal. The relevant provision is Clause 36.3(d):

“[An FME or state of affairs which] cannot be overcome by reasonable endeavours from the Party affected.”

MUR’s counsel submitted that MUR had exercised reasonable endeavours, and that this was all that mattered. Males LJ found that this missed the point of 36.3(d): the key was whether the endeavours in question could have been successful in overcoming the FME. Any other reasonable endeavours are irrelevant. The Court took a “common sense” approach to the interpretation of this clause. The Court held – albeit with a dissenting Arnold LJ –  that the alternative payment solution posed by RTI would have “overcome” the “event or state of affairs” with no disadvantages to the party affected, even though the offer was for non-contractual performance.

You can find all Bristows SnippITs articles here.