MUR Shipping BV v RTI Ltd
DMC/SandT/22/05
England
MUR Shipping BV v RTI Ltd
English Commercial Court: Jacobs J: [2022] EWHC 467 (Comm): 3 March 2022
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2022/467.html
Nigel Eaton QC and Adam Woolnough (instructed by Rosling King LLP) for MUR (Owners)
Vasanti Selvaratnam QC and James Shirley (instructed by Clyde & Co) for RTI (Charterers)
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: ARBITRATION ACT 1996 SECTION 69 APPEAL ON A POINT OF LAW
Summary
The High Court, in allowing Owners’ appeal from a final arbitration award on a point of law, held that the “reasonable endeavours” provision in the contract of affreightment did not require Owners, the party affected by the force majeure event, to agree to vary the terms of the contract or to agree to a non-contractual performance by receiving the payment of freight in a different currency.
Note: this decision has been overturned by a judgment of the Court of Appeal on 27 October 2022 - see here [[1]]
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, 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 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 through 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 instead obtained alternative tonnage and brought a claim against MUR for the additional costs incurred.
The arbitral tribunal appointed to resolve the dispute determined all but one issue in MUR’s favour, that being that, 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.
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.
Judgment
The Judge first outlined the facts (above), the key terms of the COA (fn.1) and the arbitral tribunal’s award before turning to address the substance of the appeal.
On a preliminary issue, the Judge held that, as the COA required the currency of the payment of freight to be US dollars and the method of payment - via a US correspondent bank into a US dollar denomination account with a Dutch bank - was specified, RTI was contractually obliged to pay the freight in US dollars and was not, therefore, contractually permitted to pay MUR in Euros instead.
On that basis, the point of law under appeal directly arose based on the arbitral tribunal’s award, the question being whether or not “reasonable endeavours” in clause 36.3(d) of the COA required MUR to accept a non-contractual payment. Upon hearing the submissions of the parties, the Judge indicated that he broadly agreed with those of MUR, being that:
(1) There was no authority which supported the arbitral tribunal's view that reasonable endeavours could extend to requiring the affected party to agree to vary the terms of the contract or to agree to a non-contractual performance, despite the fact that force majeure clauses had long been held to be subject to an implied "reasonable endeavours" proviso, and that an express proviso (such as that in clause 36.3 (d)) was also common;
(2) Since force majeure provisions are directed to impediments to performance of the contract according to its terms, it logically followed that a reasonable endeavours proviso (whether express or implied) is directed to a situation in which the impediment can be surmounted so that the contract can be performed according to its terms; so such a proviso did not extend to varying the terms of the contract and/or performance; and
(3) In emphasising the importance of certainty in commercial contracts, there would be great uncertainty as to the scope of a "reasonable endeavours" provision if it were to be divorced from endeavours to perform the contract in accordance with its terms – whilst contracting parties can agree provisions which do vary performance in response to impediments, or require renegotiation, there was no relevant provision in the present COA which required this.
Reference to a number of cases in support of these propositions, in particular the importance of identifying the obligation in question and whether or not the party affected by force majeure (or its equivalent) was contractually required to perform in some other way, were made (fn.2).
RTI broadly submitted that when a question arises concerning the exercise of reasonable endeavours, there is some significance that might be attached to the nature of the parties’ obligations, including whether in any particular case reasonable endeavours required a party to accept non-contractual performance. However, the significance of any contractual obligation was simply one factor to be weighed in the balance in deciding the overall question of reasonableness. That overall question was for the arbitral tribunal to determine.
The Judge was not prepared to accept that broad submission because there was no authority that supported it, and it was contrary to the principles of law apparent from Bulman v Fenwick (fn.3) and Vancouver Strikes (fn.2). Both cases concerned strikes that caused delay in cargo operations, which led to the owners claiming demurrage from the charterers, who were held entitled to rely on strikes clauses (which are akin to force majeure clauses) and not required to change their orders following the exercise of their options under the charters, respectively, concerning the place where the cargo was to be discharged and what type of cargo was to be loaded.
Further, in the present charter, unlike Bulmer v Fenwick and Vancouver Strikes, the relevant obligation under consideration did not contain a range of possible choices for either party. The obligation was for RTI to pay US dollars: neither party had the option to select anything else. The absence of an option could not, however, strengthen RTI’s case because MUR could not be in a worse position in a contract where there was only one currency in which the payment obligation could be performed, than a case where the contract contained options for the payment in different currencies which MUR had not exercised.
Having considered the case law in this area, the Judge was ultimately persuaded that the exercise of reasonable endeavours did not require MUR to sacrifice their contractual right to payment in US dollars, and with it their right to rely upon the force majeure clause. The exercise of reasonable endeavours required endeavours towards the performance of that bargain; not towards a performance directed towards achieving a different result that formed no part of the parties’ agreement.
Because reasonable endeavours did not require the acceptance of different contractual performance in Bulman v Fenwick and (by implication) Vancouver Strikes, the Judge did not consider that it required such acceptance in the present case. He also accepted that if the loss of a contractual right turned purely on what is reasonable in a case, then the contractual right became tenuous, and the contract is then necessarily beset by uncertainty, which is generally to be avoided in commercial transactions
Accordingly, the Judge held, in allowing MUR’s appeal, that “reasonable endeavours” in clause 36.3(d) of the COA did not require MUR to accept a non-contractual payment of freight in Euros contrary to RTI’s obligation to pay and MUR’s right to receive payment of the freight in US dollars.
Comment
This judgment provides an interesting and timely consideration of the impact of sanctions on shipping contracts that involve Russian and related parties.
Because much of international trade and shipping is transacted in US dollars, US sanctions that block payments through US banks are a potent weapon. This case shows that, unless the contract expressly provides for payment in a different currency, US secondary sanctions (which adversely impact third parties because performance must but cannot be achieved through US persons who are directly subject to the sanctions) can prevent performance.
That does not stop parties from varying their contract if they wish to do so, although once sanctions are in play, parties will have concerns. There is now also strong reluctance to be seen to be trading with sanctioned parties, and “reasonable endeavours” may not oblige such trading. Indeed, as one oil major recently found out, even if agreeing to and performing a contract is legal, serious reputational consequences can then arise.
Whilst the “reasonable endeavours” obligation was express in this case, there is such an obligation otherwise implied into force majeure clauses. When sanctions arise after contracting, force majeure clauses are one of several avenues that may be utilised to seek to avoid continued performance. When such clauses may be relevant, it is necessary to identify what performance the contract required, in order to test whether the event prevents that performance.
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:
The Rookwood (1894) 10 TLR 314 (CA); Brightman v Bunge y Born [1924] 2 KB 619 (CA); Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food ("the Vancouver Strikes" case) [1963] AC 691 (HL)
Footnote 3:
[1894] 1 QB 179
