Force Majeure and Sanctions

The recent flurry of financial measures imposed in response to Russia’s invasion of Ukraine has brought the issue of sanctions back into the spotlight. As ever the imposition of sanctions has generated considerable uncertainty as firms assess their commercial relationships and navigate the changing landscape, wary of setting a foot wrong and the financial and reputational harm that might follow from doing business with a sanctioned company. 

One way of managing the risk is to exit contracts already in place, either by way of an express right of termination or in reliance on force majeure provisions. However, force majeure clauses often impose obligations on an affected party to take steps to avoid the consequences of the event that has given rise to the force majeure. Formulations such as a requirement to “exercise reasonable endeavours” are common, but generally lead to questions as to how far a party must reasonably go to overcome the difficulty. This consideration may be particularly pertinent in circumstances where the counterparty is not itself sanctioned but is related to a sanctioned entity, and where business can still legally be done, but only by performing the contract in a slightly different way to that envisaged by its terms. 

This is the question that was considered in a recent appeal against an arbitration award in MUR Shipping v RTI Ltd [2022] EWHC 467 (Comm).

Background  

The facts were as follows:

• The parties entered into a COA for the carriage of 280,000 mt per month of bauxite from Conakry in Guinea to Dneprobugsky in Ukraine. Freight was to be paid to owners’ bank account in the Netherlands in US dollars. 
• The COA included a force majeure clause providing in material part as follows:

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

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 acts of God…any rules or regulations of governments or any interference or acts or directions of governments…restrictions on monetary transfers and exchanges;
d) It cannot be overcome by reasonable endeavors from the Party affected. 

• Charterers’ parent company was placed on a sanctions list by US authorities.
• Owners relied on the force majeure clause in seeking to terminate. They said it would be a breach of sanctions for them to continue with the performance of the COA, and that the sanctions would prevent US Dollar payments. 
• Charterers rejected owners’ notice, alleging that the sanctions would not prevent loading or discharging of cargo and that the freight could be paid in Euros which could have been with no detriment to owners as charterers would bear any additional costs or exchange rate losses. 
• Owners declined to nominate vessels, charterers arranged for alternative vessels and brought a claim against owners for the additional costs of chartering in substitute tonnage. 

The Award

The tribunal found that, although charterers themselves were not sanctioned, and although owners’ performance of the COA would not have contravened sanctions, the effect would nonetheless have been drastic. In particular, counterparties would have been afraid of trading with a party that is affected by sanctions, bank finance may have been frozen, and it may have been difficult to maintain insurance for normal trading activities. As for the requirement that charterers pay freight in US Dollars, the tribunal found that it was highly probable that the payment would pass through a US bank and that the US bank would stop the transfer so it could investigate whether the payment complied with sanctions. 

For these reasons owners would have been entitled to rely on the clause but for one point, which was that the Force Majeure Event could have been overcome by reasonable endeavours. The tribunal accepted the argument that payment could have been made in Euros with no disadvantage to owners because owners’ bank in the Netherlands would have converted the funds into US Dollars and that charterers would have covered any additional costs involved. This was said to be a realistic alternative to payment in US Dollars. On this basis they found in favour of charterers, awarding them damages for the additional costs of chartering in additional tonnage. 

The Appeal 

Owners appealed, arguing that there was nothing to support the view that exercise of “reasonable endeavours” could extend to requiring the affected party to agree to non-contractual performance, regardless of how reasonable that might be. Since force majeure provisions were directed at obstacles that might prevent performance of the contract according to its terms, it was necessary to consider those terms to determine what performance was required. A reasonable endeavours proviso could only require a party to take steps to overcome the impediment so that the contract could still be performed according to its terms. It could not require agreeing to a variation of the terms or accepting performance that did not comply with those terms. 

Charterers on the other hand submitted that it was wrong to say any form of non-contractual performance would be automatically ruled out. According to charterers the fact that the alternative performance would be uncontractual was merely one factor to be taken into account. Whether or not owners were required to accept that alternative performance depended on whether it was reasonable. 

In allowing owners’ appeal, Jacobs J agreed that the exercise of reasonable endeavours did not require owners to give up a contractual right to receive payment in US Dollars. The judge did not accept charterers’ argument that the fact that alternative performance was non-contractual was merely a factor to be weighed up, or that it was necessary to consider whether it was reasonable to accept that performance. That would result in judgements having to be made about the importance of the right and the suitability of the alternative performance, which would introduce considerable uncertainty when relying on a reasonable endeavours proviso. 

Comments 

The decision provides helpful guidance to parties who may be seeking to rely on a force majeure clause that includes a reasonable endeavours proviso. What it tells us is that no matter how easy, convenient or reasonable it is to accept alternative performance, where such performance varies from the terms of the contract, the exercise of reasonable endeavours does not extend to a requirement that it be accepted. It confirms that it is not necessary to make value judgments about how valuable a contractual right is, and how much the affected party may be disadvantaged by giving it up. It may be of considerable value to a party looking to exit commercial arrangements with a partner whose connections with a sanctioned entity are too close for comfort.