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Russian Sanctions – Does English law protect parties who now have non-performable contracts?

17 May 2022
DWF experts Jonathan Moss, Slava Kiryushin and Joshua Coleman-Pecha review the case of MUR Shipping BV v RTI Ltd [2022] EWCH 467 (Comm) in light of the current sanctions being placed on Russia.

In the recent case of MUR Shipping BV v RTI Ltd [2022] EWCH 467 (Comm) the English Commercial Court upheld an appeal from an arbitration that a 'reasonable endeavours' requirement in a force majeure clause, invoked due to sanctions on Russia in 2018, did not require a party to accept non-performance of a contract.

The case arose as a result of sanctions placed on Russian entities in 2018. However, the judgment remains valuable in relation to new sanctions being placed on Russia.

Background

The Parties were MUR Shipping BV ("MUR") and RTI Ltd ("RTI"). The dispute related to a Contract of Affreightment entered into in June 2016 ("Contract"). The purpose of the Contract was for RTI to ship and MUR to carry approx. 280,000 metric tons of bauxite per month from Guinea to Ukraine.

In April 2018, the USA applied sanctions to RTI's parent company, which led MUR to invoke a force majeure clause in the Contract. MUR stated to RTI, in its force majeure notice, that it would breach sanctions applied to RTI's parent if it performed the Contract. This was because the sanctions prevented US Dollar payments which were an express requirement in the Contract.

RTI argued that the sanctions were not relevant and did not amount to force majeure because it would accept payment in Euros and because MUR was a Dutch company, not a US company, and was therefore not caught by the sanctions. MUR insisted that payment was to be made in US Dollars and, as such, the Contract could not be performed.  

In the end, RTI shipped alternative material but brought a claim against MUR for additional costs it incurred in performing the Contract.

Arbitration Award

The Arbitral Tribunal found in favour of RTI. MUR's arguments in respect of force majeure were accepted. In addition, the Arbitral Tribunal expressed understanding that in the face of sanctions, most parties would not want to deal in US Dollars with a company that had a sanctioned parent entity.

However, the Arbitral Tribunal found that MUR could have overcome the problem by taking the reasonable step of accepting RTI's offer to pay in Euros rather than US Dollars. The Arbitral Tribunal found that payment in Euros was 'realistic' especially in circumstances where RTI had offered to bear additional costs caused by exchange rate losses when converting US Dollars to Euros.

In May 2021 MUR appealed under s.69 of the Arbitration Act 1996 on a question of law arising from the Arbitral Tribunal's Award. The point of law was whether the principle of 'reasonable endeavours' required a party claiming force majeure to accept non-contractual performance.

English Commercial Court Judgment

The English Commercial Court found in favour of MUR. The judge held that the requirement in the Contract to pay in US Dollars was a key term in the Contract. If the Contract had permitted payment in a currency other than US Dollars a force majeure would not have existed.

The judge held that the obligation on MUR to accept 'reasonable endeavours' did not stretch as far as requiring them to sacrifice a key contractual term (to pay in US Dollars) and, therefore, a right to rely on the force majeure clause.

The judge found that, crucially, the principle of 'reasonable endeavours' requires parties to be reasonable in performance of the terms of the agreed Contract. However, it does not require parties to fundamentally alter that Contract to create an opportunity for performance.

Conclusion

The judgment of the English Commercial Court confirms that, subject to the exact terms of any given force majeure clause, the imposition of sanctions can be an event of force majeure. Whilst there is an obligation on parties to exercise reasonable endeavours to overcome events of force majeure this does not extend to requiring parties to accept non-performance of a contract.

This judgment will, no doubt, become of significant relevance going forward. Parties should pay close attention to the language used when expressing what endeavours parties must make to overcome an event of force majeure and consider what impact, if any, even slightly different language may have.

The Contract referred to 'reasonable endeavours' but it should not be assumed that a court would reach the same judgment if, for example, a contract refers to 'all reasonable endeavours', 'all endeavours', 'best endeavours' or other similar language.

These clauses may also be expressed to apply within a particular timescale, may relate to degrees of expenditure and/or contain other salient points that impact meaning and effect.

Further Reading