Case law update - reasonable endeavours of the non defaulting party in force majeure provisions

Case law update - reasonable endeavours of the non defaulting party in force majeure provisions

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Recent sanctions and the ongoing pandemic have given rise to an increase in cases examining the scope of force majeure clauses.

These clauses commonly include a “reasonable endeavours” threshold or an express obligation to mitigate placed on the party seeking to rely on the protection of the force majeure clause. Thresholds such are these were examined in the force majeure provisions that came before the court in the two recent cases of MUR Shipping BV v RTI Ltd and European Professional Club Rugby v RDA Television LLP. In these cases the application of 2018 U.S. Russian sanctions and the Covid-19 pandemic, respectively, constituted force majeure events, which caused the parties to invoke the force majeure provisions included in each contract.

MUR Shipping BV v RTI Ltd

Background

In 2016 ship-owners, MUR Shipping BV, and charterers, RTI Ltd, entered into a standard shipping contract (Gencon), pursuant to which MUR agreed to carry bauxite from Guinea to Ukraine. Under the contract, payment was to be made in U.S. dollars, and a force majeure event was defined as something that “cannot be overcome by reasonable endeavors from the party affected”.

RTI’s parent company was sanctioned by the U.S. Office of Foreign Assets Control in 2018, leading to MUR’s service of a force majeure notice. RTI commenced an arbitration seated in London, where the tribunal found that the sanctions did not constitute force majeure on the basis that MUR could have accepted payment in (non-contractual) Euros instead of (contractual) U.S. dollars, and that this fell under the scope of MUR’s “reasonable endeavours”. MUR appealed to the English court on the question of whether “reasonable endeavours extended to accepting payment in Euros instead of U.S dollars”.

Decision

The High Court held in favour of MUR. Applying Bulman v Fenwick, the court found that the parties’ contractual obligations were not just one factor to be considered; they were “paramount and determinative”, and on that basis, it held that “reasonable endeavours” did not extend to requiring owners to accept payment in a non-contractual currency.   The exercise of reasonable endeavours required endeavours towards performance of the agreed bargain (i.e. to pay in U.S. dollars), not towards a different result which formed no part of the parties’ agreement.  Further, following the authority of Vancouver Strikes the court said even where the contract provides for alternative methods of performance, provided they are "true", "unfettered" or "business" options, the affected party is not required to exercise them to overcome a force majeure.

In rejecting RTI’s alternative argument that the obligation to pay in U.S. dollars was qualitatively different from the obligations in prior cases, the court confirmed that paying in the agreed contractual currency is an “important contractual obligation”. The court added that treating contractual terms differently in the context of force majeure based on their “relative importance” would introduce “considerable uncertainty” in the operation of force majeure clauses.

European Professional Club Rugby v RDA Television LLP

Background

In bringing a claim against RDA Television LLP (RDA) for the alleged wrongful repudiation of a contract to broadcast the 2018-22 European Rugby Champions Cup and European Rugby Challenge Cup, European Professional Club Rugby (EPCR) argued that RDA was required to use reasonable endeavours to mitigate the impact of the force majeure event as it was also affected by the same event.

The parties’ contract provided that EPCR would stage each of the competitions during each season. It also contained force majeure provisions which:

  • Protected a party from a claim for damages for a breach arising by a force majeure event (subject to the obligation to mitigate),
  • Required a party affected by a force majeure event to use all reasonable endeavours to mitigate the consequences and inform the other party of such actions and
  • Gave 'the party not affected by the Force Majeure Event' the right to terminate the agreement if the force majeure event delayed the other party's performance by more than 60 days. 

Due to Covid-19 restrictions, many 2019-2020 rugby matches were postponed until the 2020-2021 season. There was no dispute between the parties that the pandemic was a force majeure event. The question for the court to decide was whether RDA was entitled to terminate the agreement as a result.

Decision

The court held that RDA could validly terminate the contract under the force majeure clause. The provision requiring a party to mitigate a force majeure event’s impact did not apply generally to RDA as a party also affected by the pandemic and was only to be read in the context of the clause providing protection from liability for breach.  It did not affect the provision entitling a party to terminate. Further, the provision of the termination right in favour of “the party not affected by the Force Majeure Event” was to be read in the context of the agreement and was clearly intended to distinguish between the defaulting party and the party to whom the performance is owed. The fact that RDA was affected in a general sense by the same force majeure event did not prevent it from terminating, and to interpret the contract otherwise would lead to a commercially absurd outcome.

Conclusion

These cases serve to remind contracting parties that force majeure is not a term of art in English law. The extent to which any force majeure clause can be invoked or relied upon, and what the contractual effect of any such reliance will be, depends entirely upon the proper construction of the contract terms.

The court’s decisions in these cases support the approach taken by the Court of Appeal’s in another force majeure case, Nord Naphtha Ltd v New Stream Trading AG, from November 2021. The Court of Appeal emphasised the commercial unreality of any alternative proposed contractual interpretation in its decision confirming the buyer’s right to repayment of an advance in force majeure circumstances where delivery of the goods could not take place.

Accordingly, where contracting parties are considering agreeing force majeure provisions in their contracts, they should bear in mind the commercially pragmatic approach to interpretation taken by the court in these recent cases.

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