A recent decision of the Supreme Court of the United Kingdom provides useful insight into the effect of ‘reasonable endeavours’ clauses. Reasonable endeavours clauses commonly give rise to disagreements, particularly where one party is asked to accept a reduced benefit or performance from another.

In MUR Shipping BV v RTI Ltd [2024] UKSC 18, the Supreme Court considered the clause in the context of a force majeure event arising out of international sanctions. The Court determined that a reasonable endeavours provision does not require a party to accept an offer of non-contractual performance to prevent or minimise the impact of the force majeure event, even where it might be reasonable for the affected party to make such an offer.

Facts of the case

MUR Shipping BV (MUR), a shipowner, and RTI Ltd (RTI), a charterer, entered into an agreement for MUR to transport shipments of bauxite for RTI from Guinea to Ukraine. The agreement provided for RTI’s payments to MUR to be made in US dollars. It also included a clause which relieved both parties from performance in the event of a force majeure event. “Force majeure event” was defined to include circumstances in which a relevant event or state of affairs “cannot be overcome by reasonable endeavours from the Party affected”.

Subsequently, RTI’s parent company became subject to US sanctions, to which RTI was also subject as a majority-owned subsidiary. MUR sent a force majeure notice to RTI on the grounds that the sanctions prevented RTI from making payment in US dollars. RTI rejected the notice and offered to pay in euros instead, on the basis that it would also bear any additional costs or exchange rate losses suffered by MUR out of those transactions. MUR rejected this offer and maintained its right to payment in US dollars. MUR then suspended performance, relying on the force majeure clause.

Arguments

RTI commenced arbitration proceedings under the contract, claiming damages for the cost of replacement vessels. The arbitral tribunal decided that RTI’s offer of payment in alternative currency was a “reasonable endeavour” that if accepted would have overcome the force majeure event or state of affairs. The tribunal found that RTI’s offer should have been accepted, because MUR would not have suffered any detriment.

In the High Court, on an appeal of the arbitrator’s decision, MUR succeeded in its argument that the “reasonable endeavours” clause required the parties to use reasonable endeavours towards achieving contractual performance but did not include extending or varying the terms or performance of the contract. MUR had a contractual right to payment in US dollars. The requirement to take reasonable endeavours could not vary contractual rights, as this would undermine those rights and would create uncertainty.

In the Court of Appeal, the majority considered that the real question was whether acceptance of RTI’s proposal for alternative payment arrangements would overcome the state of affairs caused by the sanctions. The Court of Appeal found for RTI, largely agreeing with the arbitrators’ findings that the force majeure event would have been overcome in a practical sense if MUR had accepted RTI’s offer. Given that MUR would have suffered no damage, the adverse consequences of the force majeure event would have been avoided and therefore be ‘overcome’ for the purposes of the force majeure clause. In so finding, the Court ruled that the word ‘overcome’ does not necessarily mean that the contract must be performed in strict accordance with its terms.

MUR appealed to the Supreme Court. It submitted that, in the interests of certainty, reasonable endeavours clauses should not extend to imposing an obligation to accept offers of non-contractual performance unless that was expressly agreed by the parties. RTI, in response, sought to support the reasoning of the Court of Appeal, submitting that a reasonable endeavours clause will require the party invoking it to accept an offer of non-contractual performance if that party suffers no detriment or other prejudice and if the offer achieves the same result as performance of the contractual obligations in question.

Supreme Court decision

The Supreme Court found in favour of MUR, holding that a reasonable endeavours clause does not require a party to accept an offer of non-contractual performance, even if it would be reasonable for it to do so. The Supreme Court relied on four key principles.

• First, the principle that reasonable endeavours clauses are concerned with steps that an affected party should take to continue or resume contractual performance, rather than steps that could or should be taken to obtain some alternative or non-contractual performance. In this case, the relevant contractual performance obligation was payment in US dollars. Therefore, the offer of payment in alternative currency was determined to be an offer of substituted performance, rather than an endeavour that sought to continue or enable contractual performance.
• Second, the fundamental principle of freedom of contract, which includes “freedom not to contract; and freedom not to contract includes freedom not to accept the offer of non-contractual performance of the contract”.
• Third, clear words are needed for a party to forego a valuable contractual right. It was accepted that MUR had an undoubted right to insist on payment in US dollars and to refuse payment in any other currency. There was nothing in the contract to suggest that MUR would be required to give up that right. The Court reaffirmed the general principle of contractual interpretation that parties are not to be taken to forego a valuable right without it being clear that was their intention.
• Fourth, the importance of certainty in commercial contracts, especially in the context of a force majeure clause which required urgent decisions to be made. Parties need to know with reasonable confidence whether a force majeure clause can be relied upon at the relevant time, not after some retrospective inquiry. Therefore, the Court favoured a straightforward approach to reasonable endeavours clauses that was anchored to the contract. Adoption of an alternative view was thought to “beg a number of questions and give rise to considerable legal and factual uncertainty” by requiring further inquiries to be made as to the effects of the non-contractual performance.

Key takeaways

The decision will be relevant to many transactions in the current economic and geopolitical climate, with the imposition of sanctions and other restrictions on cross border transactions leading to supply chain issues across numerous sectors. Contracting parties often have to act quickly in such circumstances and knowing the bounds of their obligations (and the extent to which compromises should be entertained) is critical.

Although arising in the context of a force majeure event, the decision in this case is also likely to be of relevance when assessing reasonable endeavours generally. The following essential points arise from the decision:

• Reminder of fundamental principles of contract – it serves as a reminder of the importance of certainty and freedom of contract, two fundamental and established principles. It reinforces the need for commercial predictability in contractual interpretation and the principle that contractual rights should not be interfered with unless there are express and clear words to that effect.
• Reaffirms the sanctity of contract – it reaffirms the sanctity of the words of the contract which serve as the anchor for, and to provide limits to, parties’ conduct. Special regard should be had for the bargain that the contract seeks to preserve. If there has been a potential force majeure event, parties should consider their options carefully. Although action proposed or taken by a party in those circumstances may appear reasonable or even preferable, it does not have to be accepted. As the Supreme Court made clear: “it is not unmeritorious or unjust to insist on contractual performance, all the more so if being precluded from doing so would introduce uncertainty contrary to the expectations of reasonable business people”.
• The importance of precise drafting – it highlights the importance of clear and diligent drafting of contracts. It is important for contracting parties to consider and clearly account for risks to avoid unforeseen ambiguity or disputes. If parties consider that contractual rights may need to be varied as a result of future events, this should be clearly stated alongside guidance on the circumstances which would require this.

Force majeure clauses have been of increasingly relevance in recent times as a result of COVID-19 and global sanctions. We will continue to monitor any progress in the law in this area. In the meantime, please get in touch if you have any concerns or queries regarding force majeure clauses or the impact of sanctions on your organisation’s existing or future contracts.

This article was co-authored by Hasaan Malik, a Solicitor in our Litigation and Dispute Resolution team.