MUR Shipping BV v RTI Ltd - Court of Appeal decision
DMC/SandT/22/17
England
MUR Shipping BV v RTI Ltd
English Court of Appeal: Newey, Males & Arnold LLJ: [2022] EWCA Civ 1406: 27 October 2022
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2022/467.html
Vasanti Selvaratnam KC and James Shirley (instructed by Clyde & Co) for RTI (Appellant-Charterers)
Nigel Eaton KC and Adam Woolnough (instructed by Rosling King LLP) for MUR (Respondent-Owners)
CONTRACT OF AFFREIGHTMENT: FORCE MAJEURE EVENT: US RUSSIAN SANCTIONS PREVENTED PAYMENT OF FREIGHT IN US DOLLARS: WHETHER “REASONABLE ENDEAVOURS” EXTENDED TO ACCEPTING PAYMENT IN (NON-CONTRACTUAL) EUROS INSTEAD OF (CONTRACTUAL) US DOLLARS: WHETHER OWNERS OBLIGED TO “OVERCOME” FORCE MAJEURE EVENT BY ACCEPTING ALTERNATIVE PERFORMANCE OF PAYMENT OBLIGATION: ARBITRATION ACT 1996 SECTION 69 APPEAL ON A POINT OF LAW
Summary
By a majority decision, the Court of Appeal, in allowing Charterers’ appeal from the High Court (which had allowed Owners’ appeal from a final arbitration award on a question of law) held that the force majeure provision at clause 36.3 of the contract of affreightment in this case required Owners, as the party affected by the force majeure event (Charterers being subjected to US sanctions), to accept non-contractual performance to “overcome” that force majeure event by receiving the freight payment in a different currency, where in doing so there was perceived to have been no disadvantage or detriment resulting to Owners.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Registered Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes
Background
MUR (“Owners”) of the Netherlands agreed a contract of affreightment (“COA”) with RTI of Jersey (“Charterers”) for the shipment of consignments of bauxite from Conakry, Guinea to Dneprobugsky, Ukraine on vessels nominated by MUR.
During the course of the performance of the COA, the US Department of the Treasury’s Office of Foreign Assets Control applied sanctions to RTI’s majority owner parent company, United Company Rusal plc of Jersey, adding them to the Specially Designated Nationals and Blocked Persons lists, as part of the US’s retaliatory response, in this instance targeted against Oleg Deripaska (the majority owner of Rusal at the time), to Russia’s annexation of Crimea.
A force majeure notice was served on RTI stating that MUR would be in breach of US sanctions to continue to perform the COA. MUR noted in particular that the “sanctions will prevent dollar payments, which are required under the COA”.
RTI pointed out that MUR was a Dutch company, so was not a “US person” caught by the sanctions. However, MUR responded that freight under the COA was to be paid in US dollars, which would have to be processed via the US banking system. Such payments would be blocked. Accordingly, MUR could not be expected to load and discharge cargo without receiving payment in accordance with the COA. MUR then declined to nominate vessels under the COA for a relatively short period, relying upon the force majeure event. RTI obtained alternative tonnage and brought a claim against MUR for the additional costs incurred.
The arbitral tribunal appointed determined that, in applying the terms of the force majeure clause in the COA, the problem could have been “overcome by reasonable endeavours from the Party affected”. This was on the basis that “reasonable endeavours” required MUR to accept RTI’s proposal to pay in Euros, which the tribunal viewed as a “completely realistic alternative” to payment in US dollars. As a result, the tribunal found in favour of RTI.
MUR obtained leave to appeal under section 69 of the Arbitration Act 1996 on a point of law, namely whether “reasonable endeavours” extended to accepting payment in (non-contractual) Euros instead of (contractual) US dollars. The High Court allowed MUR’s appeal. RTI then appealed to the Court of Appeal. The case note on the High Court judgment can be found [[1]]
Judgment
The majority judgment, of Males and Newey LJJ, was given by Males LJ, with Arnold LJ dissenting. Males LJ first outlined the facts (above), the key terms of the COA (fn.1), the arbitral tribunal’s award, the High Court’s judgment and the parties’ submissions, before addressing the substance of the appeal, as he saw it.
Males LJ took the view that the concern in the appeal was with the specific terms of clause 36, rather than with reasonable endeavours clauses or force majeure clauses in general. As a result, he made the following key points:
First, the opening word “It” in paragraphs (a) to (d) was a reference to the "event or state of affairs" mentioned in the opening words of clause 36.3. That required the event or state of affairs to (i) be outside the immediate control of the party giving the notice, (ii) prevent or delay the loading of cargo, (iii) be caused by one of the specified matters, and (iv) be impossible to overcome by reasonable endeavours from the party affected.
Second, an event, being something that happened at a particular time and place, was not necessarily the same as a state of affairs, which was more to do with the situation which results from the happening of one or more events. As the definition of "Force Majeure Event" extended both to an event or to a state of affairs, this suggested an element of flexibility in the application of clause 36.3 and, in particular, that it was relevant to consider not only the event itself (i.e. the imposition of sanctions on Rusal, RTI’s parent entity) but also the state of affairs resulting from that event (i.e. the likelihood of delay in making USD payments from entities associated with Rusal).
Third, the "Party affected" was the party giving the notice who sought to rely on force majeure, so it was MUR’s reasonable endeavours with which clause 36.3(d) was concerned. As such, it was irrelevant that, had it chosen to do so, RTI might have sought to rely on force majeure and to serve a notice itself.
Fourth, clause 36.3(d) was not concerned with the exercise of reasonable endeavours in the abstract. The question was whether the relevant event or state of affairs could have been overcome by such endeavours from the party affected. However reasonable a party’s endeavours might be, they were irrelevant if they did not result in the overcoming of the event or state of affairs in question.
As a result, Males LJ considered irrelevant RTI’s own submissions (fn.2), along with any parallels RTI drew from the law of mitigation of damage or frustration, which were very different issues, or the Gilbert-Ash (fn.3) principle (that parties do not give up their legal rights in the absence of clear express words to that effect), on which MUR relied, as he accepted that MUR was not required to abandon or to vary its right to receive payment of the freight in USD.
Rather, in Males LJ’s view, the real question was whether accepting payment in Euros would “overcome” the “state of affairs” resulting from the imposition of sanctions on Rusal. If it would, MUR’s contractual right to receive payment in USD would remain unaffected, and the only consequence would be that MUR would not be entitled to invoke force majeure as excusing it from its obligation to nominate vessels under the COA.
Turning to the arbitrators’ finding in their award, Males LJ noted that RTI’s proposal would have presented “no disadvantages” to MUR and could have been accepted with “no detriment” to MUR. There was also no doubt about RTI’s ability and willingness to pay in Euros, and to bear any additional costs or exchange rate losses in converting Euros to USD.
As such, in Males LJ’s view, acceptance of RTI’s proposal would have achieved precisely the same result as performance of the obligation to pay in USD; namely, the receipt in MUR’s bank account of the right quantity of USD at the right time. That meant MUR’s contractual right to payment in USD remained but there was no damage whatever as a result of RTI’s breach, consisting of paying in Euros.
Against that background, Males LJ considered that, unless the word “overcome” necessarily meant that the COA must be performed in strict accordance with its terms, which in his judgment it did not, then the arbitrators’ conclusion that the force majeure could have been “overcome by reasonable endeavours from the Party affected” was a finding of fact, or at any rate of mixed fact and law, being a conclusion with which the court should not interfere.
Consequently, having found, specifically, that MUR’s “acceptance of RTI’s proposal would have overcome the force majeure event” (emphasis added), Males LJ, in effect, held, by allowing RTI’s appeal, that clause 36.3(d) required MUR to accept a non-contractual payment of freight in Euros, contrary to RTI’s obligation to pay and MUR’s right to receive the freight in USD under the COA.
Comment
This judgment provides, in the author’s view (which is in line with the dissenting opinion of Arnold LJ), an unwelcome twist to the High Court’s consideration of the impact of sanctions on shipping contracts that involve sanctioned and related parties in the context of force majeure clauses. As Arnold LJ aptly highlighted: “… the presumption [of the Gilbert-Ash principle] that parties do not give up their legal rights in the absence of clear express words to that effect is an important part of the context in which clause 36.3(d) falls to be interpreted.”
It was apparent that Males LJ had in mind doing what he considered to be justice in this case, despite the appeal being heard on the premise that it raised a matter of general importance, as he noted the reason why MUR did not accept RTI’s proposal was because performing the COA had become disadvantageous to MUR. That is, in the author’s view, not a good reason to depart from the appeal’s premise: i.e. the answer depends on the meaning of “reasonable endeavours”.
In effect, Males LJ sidestepped the question of law posed, by seeking to change the emphasis from “reasonable endeavours” to “overcome”, with the result that “reasonable endeavours” was robbed of significance. While you can often overcome an obstacle by various practical means, the fundamental legal question remains: are you obliged to do so if it requires performance contrary to the contract terms absent clear express words to the effect that you are required to do so? If that question is not posed and answered, then “reasonable endeavours” is ignored, contrary to the requirement to interpret the parties’ objective intent when they agreed to the language used to express their agreement.
If the question is posed and answered, then the issue turns on whether “reasonable endeavours” is sufficiently clear express language to require non-contractual performance. The obvious answer is “no”, as signaled by the decision made in the High Court and Arnold LJ’s dissenting opinion. This is not like a situation, for example, where the contact had, instead, said “if payment cannot be made in USD then it shall be made in Euros to the equivalent USD value”, because the highly probable result of US banks blocking timely USD payments from RTI to MUR would obviously have been overcome within the scope of what was agreed by the terms of the contract, not contrary to it.
The floodgates have now been opened because trying to determine if Males LJ’s expansive exception (there are no disadvantages or detriment to the affected party accepting alternative performance) applies is vague. A party facilitating a sanctioned party to trade may in turn face being sanctioned, which would be a clear detriment. As such, and given the strong dissenting view of Arnold LJ, the author hopes that this issue will be appealed to the UK Supreme Court and the judgment of the Court of Appeal will then be overturned.
If that does not happen, parties will struggle to obtain reliable advice on how far they must go, in seeking to avoid a force majeure event or its consequences, before they would be entitled to rely on a force majeure clause in defence to their non-performance. It is important to bear in mind that in this case, as for many force majeure clauses, MUR only had 48 hours to give notice to RTI (under clause 36.4), which makes obtaining sound advice on such a potentially contentious issue even harder. That undermines the desire for certainty in commercial matters.
Footnote 1:
“36.1. Subject to the terms of this Clause 36, neither Owners nor Charterers shall be liable to the other for loss, damage, delay or failure in performance caused by a Force Majeure Event as hereinafter defined. While such Force Majeure Event is in operation the obligation of each Party to perform this Charter Party … shall be suspended. … 36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:
a) It is outside the immediate control of the Party giving the Force Majeure Notice;
b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
c) It is caused by one or more of … restrictions on monetary transfers and exchanges;
d) It cannot be overcome by reasonable endeavours from the Party affected.
36.4. A Party wishing to claim force majeure in respect of a Force Majeure Event must give the other Party a Force Majeure Notice within 48 hours (Saturdays, Sundays and holidays excepted) of becoming aware of the Force Majeure Event. …”
Footnote 2:
RTI’s broad argument was that, in considering whether MUR as “the Party affected” had exercised reasonable endeavours, the only question was whether it had acted reasonably, the arbitrators having found as a fact that it had not.
RTI’s narrow argument was that, even if reasonable endeavours did not require MUR to accept non-contractual performance of obligations relating directly to loading or discharge, these being matters expressly mentioned in clause 36, different considerations applied to the obligation to make payment in USD, so that MUR could be required - in the exercise of reasonable endeavours - to accept payment in another currency.
Footnote 3:
Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (HL), pp 717-718 per Lord Diplock
