Contract party could not refuse payment in alternative currency and invoke force majeure

10 November 2022

The Court of Appeal has held that a party to a contract could not invoke a force majeure clause on the basis that payments could not be made in the contract currency, because the other party had offered to make payments in a different currency and to reimburse any costs.

Three key take-aways
  • The precise effect of a force majeure clause is a matter of contractual interpretation and depends on the individual circumstances of each case.
  • The courts will generally be more sympathetic to parties that find ways to continue performing a contract and will be reluctant to allow a party to invoke a force majeure lightly.
  • Parties that wish to include an FM clause should spell out clearly what it entails. In particular, they should state clearly whether the parties are required to take steps to overcome the force majeure and what the consequence is if they fail to do so.

What happened?

MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406 concerned a contract of affreightment, under which RTI contracted MUR to provide a vessel for the purpose of transporting bauxite.

The contract stated that RTI would pay MUR in US dollars (USD).

The contract contained a force majeure clause stating that a party would not be liable for any loss if it were unable to perform the contract due to certain, specified “events or states of affairs” beyond its control if they were caused by (among other things) “restrictions on monetary transfers and exchanges”.

Importantly, the contract stated that an event or state of affairs would amount to a force majeure only if it could not be “overcome by reasonable endeavours from the [p]arty affected”.

What is a force majeure clause?

Force majeure (or FM) is a contractual mechanism that excuses a party from liability for breach of contract if the breach is caused by an event outside the party’s control. It recognises that a party should not be penalised where it cannot fulfil the contract due to events it cannot influence.

An FM clause normally suspends a party’s obligations while it tries to rectify the issue. It will also normally allow a party – possibly only the “innocent” party or possibly either party – to end the contract if the FM is not resolved after a specified period of time.

The contract will usually set out what qualifies as an FM. This often includes a rather bleak panoply of events, including natural disasters, epidemics, civil unrest and war. If the contract relates to a specific project, parties might also include more specific events.

RTI was a subsidiary of a company controlled by a Russian individual.

Just under two years into the contract’s term, the US Office of Foreign Assets Control (OFAC) imposed financial sanctions on the Russian individual and companies which he controlled. However, OFAC did not impose sanctions specifically on RTI.

MUR took the view that these sanctions applied to RTI and so prevented MUR from continuing to comply with the contract of affreightment, other than to continue transporting certain cargoes that had already been loaded. It also said that the sanctions prevented RTI from complying with its obligation to pay MUR in USD.

As a result, MUR notified RTI, claiming that a force majeure event had arisen.

RTI rejected MUR’s notice and offered to pay MUR in euros and to reimburse MUR for any additional costs or exchange rate losses incurred in converting the euros to USD.

MUR rejected RTI’s offer. Disputes ensued over various matters, including whether the sanctions in fact prevented MUR from performing the contract or RTI from paying in USD, whether MUR had served its FM notice in time under the contract, and whether RTI’s offer to pay in euros “overcame” the force majeure under the contract.

Initially, the parties submitted their dispute to arbitration. The arbitrators concluded that the sanctions would not in fact have prevented RTI from paying MUR in USD. However, they also said it was reasonable to expect that payments in USD would have been delayed due to increased vigilance by US banks and that payment in euros was a much more realistic possibility.

As a result, they concluded, there had not been a force majeure as defined in the contract, because MUR could have overcome the alleged force majeure event by accepting payment in euros, which would have amounted to “reasonable endeavours”.

MUR appealed the arbitrator’s decision on this last point, namely whether accepting payment in euros would have “overcome” the restrictions, to the High Court. The High Court upheld MUR’s appeal, finding that, although using euros would have allowed payments to continue, MUR could not be required to accept “non-contractual performance” in the form of payments in a currency different from that set out in the contract (namely, USD).

RTI appealed to the Court of Appeal.

What did the Court of Appeal say?

The Court of Appeal upheld RTI’s appeal and overturned the High Court’s decision, although the three judges were split on the decision.

Lord Justice Males gave the principal judgment, and Lord Justice Newey agreed with him.

Males LJ noted that the key question was whether accepting payment in euros would overcome the state of affairs that had resulted from sanctions being imposed on RTI’s holding company. If it would, then accepting payment in euros would have been “a very straightforward matter for MUR”.

In approaching this question, Males LJ found that the term “overcome” had to be given a broad and non-technical meaning. He rejected the argument that the state of affairs could be overcome only if the parties found some other way to pay in USD.

In his words, a solution that ensured MUR received the right amount of USD in its bank account at the right time would overcome the state of affairs resulting from the imposition of sanctions. This included a mechanism where MUR was paid in euros, then that sum was immediately converted into USD. This would have achieved “precisely the same result” as the contractual obligation to pay in USD.

Interestingly, Males LJ also noted that “[t]he position would have been different if RTI’s proposal would have resulted in any detriment to MUR”. In that case, the state of affairs would at most have been only “partially overcome”, which would not have prevented it from being a force majeure.

In this case, RTI had also offered to reimburse MUR for the costs of converting the euros into USD. In Males LJ’s view, this was sufficient to avoid MUR suffering any detriment.

The implication, however, is that, if RTI had not offered to foot the costs of conversion, paying MUR in euros would arguably not have overcome (or would only partially have overcome) the state of affairs, as MUR would have had to incur the costs of conversion itself. Had the state of affairs not been fully overcome, this might have allowed MUR to claim that a force majeure was occurring.

Finally, it’s worth noting that Lord Justice Arnold gave a different view. He agreed with Males LJ that it would have been reasonable for MUR to accept payment in euros as a way to solve the difficulty with paying in USD.

However, in his view, there was a presumption that contract parties do not give up their contractual rights unless they have agreed to do so in clear, express words. That had not happened here, and so MUR was entitled to insist on its strict contractual right, namely to be paid in USD, not euros.

Should MUR wish to appeal to the Supreme Court, Arnold LJ’s comments could be influential. However, as things stand, it is Males LJ’s judgment which prevails.

What does this mean for me?

First and foremost, the decision reaffirms that the courts will always interpret the words of a given commercial contract in light of the particular circumstances. Although the principles of contractual interpretation remain the same in all cases, the factual context will always differ from case to case.

This was particularly illustrated when Males LJ flatly rejected arguments that the court should interpret the contract in line with the common law doctrines of mitigation of loss and frustration. These were general doctrines that did not bear on the specific meaning of the contract.

It will no doubt have helped RTI’s case that it offered swiftly to make payment by another means and, by offering to defray any increased costs, to ensure MUR was not put at any disadvantage. Although each contract is different, the courts will generally not allow a party to invoke an FM mechanism lightly. If a party can still perform a contract, the court will normally hold them to it. The decision therefore arguably shows the benefit of a constructive approach to addressing difficulty in performance.

It is also, however, worth noting that the FM clause in this case was quite bespoke. It is quite common for a “force majeure” to be defined as a matter outside the parties’ control and, usually, from a list of specified events or circumstances.

It is also quite common for an FM clause to require the parties to use reasonable endeavours to resolve, or at least mitigate the effect of, the force majeure. However, if a party fails to do so, this does not stop the event from being a force majeure. It is less common for an FM clause (as here) to state that an event is not a force majeure at all if it can be overcome by reasonable endeavours.

This should give contract parties pause for thought. FM clauses are often copied over from previous contracts and treated almost as boilerplate drafting. But, as this case shows, the precise wording of an FM clause can matter greatly. Prospective parties to a contract should therefore consider carefully how they want their FM clause to operate in practice.

  • what kind of events should amount to a force majeure? Should this be any of certain specified events, any event that is beyond the parties’ control, either or both? Will this be limited to natural disasters, war and the like, or will it extend to industrial relations issues, supply disruption and government or regulator action?
  • should the parties be required to work around the force majeure? What happens if a party fails to do so? Will it merely be in breach of contract, or will the event cease to be considered a force majeure at all?
  • what is the consequence of a force majeure arising? Will it merely suspend a party’s duty to perform the contract, or will it allow one or more parties to terminate the contract? If the latter, how long do the parties need to wait before they can terminate? Should this depend on the nature of the force majeure, with some types of FM event justifying immediate termination?