Force Majeure And Expecting Non-Contractual Performance
Reliance on force majeure provisions in commercial contracts has been increasingly visible since the covid-19 pandemic, and subsequently, the impositions of sanctions against the background of the Ukraine/Russia war.
Given the current climate, guidance from the Supreme Court on force majeure clauses and contractual performance is particularly important for businesses and commercial lawyers.
Force majeure clauses operate to relieve a party from its contractual obligation where certain events occur that are beyond the parties’ reasonable control. Examples include ‘acts of God’, terrorism and strikes.
Overcoming force majeure by non-performance
Briefly, US-imposed sanctions would have prevented contractual payment being made to a shipping company in US$. However, the contract expressly provided for payment in US$. The other party proposed paying in euros but the shipping company refused, suspending operations.
The contract contained a force majeure clause that included a reasonable endeavours proviso requiring the affected party to exercise reasonable endeavours to overcome the force majeure.
At issue was whether the shipping company, in seeking to rely on the force majeure clause, should accept the other party’s offer of non-contractual performance to continue the contract.
The lower courts took opposing views, but the Supreme Court has now concluded that the shipping company was not required to accept a non-contractual performance. Refusing to accept it did not constitute a failure to exercise reasonable endeavours. Therefore they could invoke the force majeure clause.
In so doing, the Supreme Court upheld the fundamental principle of freedom of contract – that a contractual party cannot be forced to accept non-contractual performance.
Guidance
The justices went on to set out four key principles:
· Force majeure clauses and reasonable endeavours provisos concern the causal effects of impediments to contractual performance. The party affected must be able to show the force majeure event caused the failure to perform. That means showing that exercising reasonable endeavours could not have avoided failure to perform according to the contractual terms.
· The principle of freedom of contract includes the freedom not to contract. This extends to the freedom not to accept non-contractual performance .
· Clear words are needed to forego valuable contractual rights. The shipping company had a clear contractual right to insist on payment in $US - and to refuse payment in another currency.
· Certainty and predictability are particularly important in English commercial law. Without clear wording, a reasonable endeavours proviso does not require acceptance of an offer of noncontractual performance.
What does this mean?
Businesses negotiating and entering into commercial contracts benefit from the fundamental principle of freedom of contract – they are free to agree the terms on which they wish to base their commercial relationship.
Furthermore, if the terms agreed are clear and predictable – neither party can insist on performing its obligations in a way not agreed. This ruling confirms these important principles.
1RTI Ltd v MUR Shipping BV v 2024] UKSC 18
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