The Supreme Court recently confirmed that using the term “reasonable endeavours” in a force majeure clause does not mean oblige a party to accept the other’s alternative arrangements. So, what happens next?
Background
The case of RTI Ltd and MUR Shipping BV concerned a contract under which MUR agreed to deliver Bauxite from Guinea to Ukraine. The agreement required RTI to pay MUR in US dollars.
Due to various sanctions applied to RTI’s parent company in 2018, RTI was no longer able to make the payment in US dollars and offered to make the payment in euros instead (and pay any additional conversion costs).
MUR refused to accept this offer and declined to perform its obligations under the agreement.
Reasonable Endeavours
The force majeure clause in the agreement covered an event or state of affairs that could not be overcome by “reasonable endeavours”. RTI argued that their offer to pay in euros was a “reasonable endeavour” as MUR would suffer no loss in accepting payment in another currency. The Court of Appeal agreed with RTI’s argument, but on appeal the Supreme Court had to consider what was meant by the term “reasonable endeavours”.
They concluded that including the term “reasonable endeavours” does not necessarily mean that the other party must accept an offer to change the nature of the contract unless there is clear wording to that effect.
The agreement between RTI and MUR had a specific reference to the payment being in US dollars, which was a contractual right for MUR. Generally, parties do not lose valuable contractual rights unless there is a clear intention to do so. The agreement did not provide for payment in an alternative currency and the proposal to pay in euros was a non-contractual offer to perform the payment obligation in a different way to that agreed. The reasonable endeavours obligation in the force majeure clause gave MUR the right decline RTI’s proposal as it was a non-contractual offer of performance.
The Supreme Court acknowledged that parties could provide for “reasonable endeavours” to require the acceptance of a non-contractual performance offer from the other party, but such a provision needs to make it clear that this is the intention. Parties can do this by including wording that sets out the circumstances where a party must accept such an offer.
What does this mean?
The Supreme Court’s decision confirms the courts’ willingness to interpret contracts by giving words their literal meaning as they appear in the contract. Using “clear, express words” which aim to identify whether a party must accept a reasonable non-contractual offer would offer both parties clarity in situations outside of their control.
While it might be thought that there would be little harm to MUR in receiving payment in euros rather than US dollars (assuming it was compensated for any exchange rate fluctuations), this decision is a salutary reminder of the importance of getting the wording right when negotiating a contract. If the wording doesn’t provide for exactly what is desired, it would be wrong to assume that common sense will prevail. In the context of force majeure clauses it is important to consider the circumstances outside the parties’ control which might impact the contract and, if such a worst case scenario came about, what should happen next to enable the contract to continue. The challenge with this is that if a clause is too specific, there is a risk that it ends up being too narrow and doesn’t cater for enough future situations and, if the one party declines to take a commercially pragmatic approach, the other party could come unstuck on a literal interpretation of the contract.
More generally, the use of “clear, express words” is always good practice to reduce the risk of disputes arising and there is no substitute for checking – and checking again – the terms of any contract before it is signed.
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