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Russian Sanctions – Does English law protect parties who now have non-performable contracts (Part II)?

14 December 2022

DWF experts Jonathan Moss, Slava Kiryushin and Joshua Coleman-Pecha review their conclusions derived from MUR Shipping BV v RTI Ltd [2022] EWCH (Comm) in light of judgment recently delivered in the appeal: MUR Shipping BV v RTI Ltd [2022] EWCA 1406.

In May 2022, our expert team reviewed the judgment handed down by the English Commercial Court in MUR Shipping BV v RTI Ltd [2022] EWCH (Comm). The English Commercial Court upheld an appeal from an arbitration that a 'reasonable endeavours' requirement in a force majeure clause, invoked due to sanctions on Russia in 2018, did not require a party to accept non-performance of a contract. The factual background, summaries of the arbitration award and Commercial Court judgment, and our conclusion can be found here.

In brief, we noted that:

"The judgment of the English Commercial Court confirms that, subject to the exact terms of any given force majeure clause, the imposition of sanctions can be an event of force majeure. Whilst there is an obligation on parties to exercise reasonable endeavours to overcome events of force majeure this does not extend to requiring parties to accept non-performance of a contract [the non-performance, in this instance, being a failure to pay in the currency stipulated in the contract because this was deemed by the English Commercial Court to be a material contractual provision]."

The Appeal

By way of background, The Court of Appeal (Males LJ) considered various matters surrounding the case and:

  • accepted that the imposition of sanctions was an event outside the parties' control;
  • questioned whether the imposition of sanctions had, in fact: (i) prevented loading and shipping of cargo; and / or (ii) was caused by an event of force majeure as specified by the contract; and
  • cautioned against parties seeking to rely on a flexible approach to contractual interpretation, as adopted by the arbitral tribunal, which held that it could be reasonable for parties to consider the impact of sanctions on contractual performance.

The crucial element to the case, however, was that Males LJ emphasised the importance of considering contractual clauses on their own terms. In this instance, it was germane to closely examine the wording of the force majeure clause. The key question before the Court of Appeal was:

"whether the force majeure event or state of affairs could have been overcome by reasonable endeavours [acceptance of EUR payment instead of USD] from MUR as the party affected."

Males LJ rejected the two arguments put forward by RTI (as Charterers): (i) the broad argument that all that matters is whether the affected party had acted reasonably; and (ii) the specific argument that proposing payment in EUR (rather than USD) did not amount to non-performance of the contract. Males LJ found that the parties' arguments and the Commercial Court had only considered the requirement to perform 'reasonable endeavours' in general terms. He stated:

"the real question in this case is whether acceptance of RTI’s proposal to pay freight in euros and to bear the cost of converting those euros into dollars would overcome the state of affairs caused by the imposition of sanctions on Russia. If it would, it would have been a very straightforward matter for MUR to accept that proposal, requiring no exertion on its part. If it would not, no amount of endeavours, reasonable or otherwise, would change that situation."

Instead, close examination of the specific force majeure clause was required. In this instance, it was necessary to consider whether the "reasonable endeavour" (i.e. payment in EUR) was sufficient to overcome an "event" or "state of affairs". 

Males LJ found that the language of the contract was broad and non-technical. The core requirement under the contract was that MUR should receive the correct value of USD in its account at the correct time. The conclusion was that the solution proposed by RTI, to pay in EUR rather than USD, overcame the "event" or "state of affairs" as "reasonable endeavours" had been deployed to ensure that MUR's requirements were met.

Conclusion

The Court of Appeal judgment emphasised the need to closely examine contractual provisions and to interpret them accurately. Close examination of the Force Majeure clause in this contract led the Court of Appeal to overturn the award of the arbitral tribunal and the Commercial Court judgment. This was because, in this instance, the Force Majeure clause stated that 'reasonable endeavours' must be used to overcome the effect of force majeure (sanctions). The offer and acceptance of payment in EUR instead of USD (and to pay extra for the cost of currency conversion) amount to a 'reasonable endeavour'.

Looking at the impact of this judgment, It is important to consider:

  • that not all force majeure clauses will contain 'reasonable endeavour' wording. Each clause and contract must be carefully interpreted on its own terms;
  • attention must be given to the form of any wording regarding 'reasonable endeavours', 'all reasonable endeavours', 'best endeavours' etc. as this may materially impact meaning;
  • sanctions can be an event of force majeure – depending on the wording of the contract;
  • payments in alternate currencies may not always overcome the impact of sanctions (where they are an event of force majeure);
  • the judgment does not, therefore, impose a general obligation to accept payment in alternate currencies in similar circumstances; and
  • the Court of Appeal distinguished authorities relied on by the Commercial Court that say a party does not have to accept non-contractual performance.

We wait to see whether the Court of Appeal judgment is appealed.

Further Reading