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Russian sanctions - a force majeure to be reckoned with?

News / / London

MUR Shipping BV v. RTI Ltd [2022] EWHC 467 (Comm)
This dispute related to Owners’ purported exercise of a force majeure provision in a contract of affreightment in response to Charterers’ difficulties paying freight in US dollars (the contractual currency of payment) due to the impact of US sanctions on Russia. Allowing an appeal from the arbitral tribunal’s decision on this point, the Court held that the “reasonable endeavours” requirement in force majeure clauses did not require Owners to accept non-contractual performance and so did not oblige Owners in this case to accept payment in Euros instead of US dollars.

Whilst the decision relates to 2018 sanctions on Russian entities, it will be equally relevant in relation to the February/March 2022 sanctions on Russia following on from events in Ukraine.

The background facts

Owners concluded a Contract of Affreightment (“COA”) with Charterers in June 2016, pursuant to which Owners agreed to carry bauxite for Charterers from Conakry, Guinea to Dneprobugsky, Ukraine.

The COA contained a term requiring payment in US dollars as well as a force majeure (“FM”) clause specifying that a FM event had to meet a number of criteria, including that “it cannot be overcome by reasonable endeavours from the Party affected”.

In April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) applied sanctions to Charterers’ parent company. This led to Owners invoking the FM clause in the COA by sending a FM Notice, in which they stated that it would be a breach of sanctions for Owners to continue with the performance of the COA and that the sanctions would prevent US dollar payments as required under the COA.

Charterers disagreed, contending that sanctions would not interfere with cargo operations, that payment could be made in Euros, and that Owners, being a Dutch company, were not a “US person” caught by sanctions.

Owners declined to nominate ships under the COA, albeit for a relatively short period of time until they obtained an exempting licence. They relied on FM and argued that if monetary transfers from Charterers to Owners were restricted, Owners could not be expected to load and discharge without receiving payment in accordance with the COA.

Charterers obtained alternative tonnage for the relevant period of time and brought a claim for the additional costs incurred.

The arbitration

The tribunal accepted that both “primary” and “secondary” sanctions had drastic effects on commercial transactions and that commercial counterparties would understandably be deterred from trading with a sanctioned party as bank finance was likely to be frozen and underwriters would be reluctant to insure normal trading activities. Therefore, Owners’ FM case would have succeeded, in the tribunal’s view, bar its finding that the FM event could have been overcome by “reasonable endeavours”, namely accepting payment in Euros. Owners’ bank could have credited them with the equivalent US dollars and Charterers had agreed to make up any currency exchange loss or shortfall.

The Commercial Court decision

Owners appealed, arguing that the sanctions had affected Charterers’ ability to make payment under the COA and that the tribunal was wrong to find that reasonable endeavours extended to accepting payment in a different currency than that contractually agreed.

Owners’ case

There were two aspects to Owners’ FM case: (1) the “penalties” aspect (namely that Owners would have been exposed to penalties as a matter of US sanctions law); and (2) the “payments” aspect (namely that banks would not in practice clear US dollars payments for Charterers without investigation, and would exercise extreme caution before crediting a payment).

Owners argued that there was no authority to support the tribunal’s view that reasonable endeavours extended to requiring the affected party to agree to vary the terms of the contract. On the contrary, in Reardon Smith Line Ltd v. Ministry of Agriculture, Fisheries and Food (“the Vancouver Strikes” case) [1963] AC 691 (HL), it was held that the exercise of reasonable endeavours did not require the affected party to agree to vary the terms of the contract or to agree to non-contractual performance.

Furthermore, if contractual rights were made subject to what was reasonable in any particular case, then this would make rights and obligations under commercial contracts tenuous and uncertain.

As to Owners’ obligation to load and discharge cargo, Owners argued that they could not be expected to continue without being paid. Charterers’ inability to make contractual payments would delay performance, not least because Owners would be entitled to exercise a lien on the cargo for unpaid freight.

Finally, Owners argued that in any event, where a contracting party finds itself in a doubtful position and exposed to possible peril, it is entitled to take reasonable time to review the situation.

Charterers’ submissions

Charterers argued that as a transfer made by Charterers in Euros would be “automatically” converted into US dollars in Owners’ bank account, with all additional charges to be borne by Charterers, accepting such payment qualified as reasonable endeavours. Since Owners were not being asked to give up a right to receive US dollars, there was no commercial difference between the performance offered and the performance required.

Charterers went further and argued that if the funds had been transferred in Euros and these were “automatically” credited in US dollars, Charterers’ contractual obligations would be performed.

Charterers also submitted that the tribunal should not have found that there was a sufficient causal connection between non-payment of freight and prevention of or delay in loading or discharging. The currency clause related only to payment and had no effect on the obligations relating and critical to loading or discharging. Payment in Euros would have unblocked any obstacle to loading and discharging and ultimately this was what mattered.

In Charterers’ view also, FM clauses should be read as requiring a physical prevention or legal impossibility. Here, the sanctions did not (as held by the tribunal) lead to the consequence that performance of the COA was physically or legally impossible.

The decision

The Court held that the COA could not be construed as giving Charterers an option to pay in the currency of their choosing. The Court also held that the award did not find that a payment in Euros would “automatically” be credited upon receipt, but rather that Owners’ bank “could have credited” Owners with US dollars. It concluded that Charterers were contractually required to pay in US dollars.

As to whether the “reasonable endeavours” clause could require a party to accept a non-contractual payment, the Court stated that the exercise of reasonable endeavours required endeavours towards the performance of that bargain; not towards a performance directed towards achieving a different result which formed no part of the parties’ agreement. Owners were entitled to require the contract to be performed in accordance with its terms.

The Court noted the tribunal’s finding that, whilst legally US dollar payments were still permitted, this did not mean in practice that they could be made. Further, that it was highly probable that the US intermediary banks would have initially stopped the transfer on the basis of Charterers’ status as a blocked party until the bank could investigate whether the transaction complied with US sanctions requirements. In such situations, loading or discharging would remain physically possible, but the parties to the FM clause nevertheless contemplated that these restrictions might, on appropriate facts, prevent or delay loading or discharge. The Court, therefore, dismissed Charterers’ argument that the payment obligation was separate to the loading/discharging obligation and added that the obligation to pay freight in the agreed contractual currency was an important contractual obligation. The Court agreed with Owners that if a contractual right could turn on what was reasonable in a case, then the contract would be beset by uncertainty which was to be avoided in commercial transactions.

The Court also agreed that Owners were entitled to take reasonable time to consider their next steps. Owners’ reaction to the sanctions (as a secondary party) was reasonable and the tribunal was entitled to find that there was no break in the chain of causation.

Comment

The Court has demonstrated an understanding of the far-reaching implications of sanctions and their effects on secondary parties. While the decision suggests that the English courts may be sympathetic to parties who err on the side of caution when dealing with sanctioned parties, it is still important for potentially affected parties to consider carefully the steps they take in this regard and to obtain legal advice as necessary.

More generally, where a FM clause includes a provision that the clause will not apply where “reasonable endeavours” could overcome the FM event, the Court will not expect parties to accept performance achieving a different result not contemplated by the underlying agreement.

Finally, the Court’s comments on a party’s right to pause and consider the implications of sanctions before proceeding may be relevant to other perils such as claims for delay in response to the Covid-19 pandemic.

Paul Crane

Paul Crane Partner

Sophie Forsyth

Sophie Forsyth Associate

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