Force Majeure: When Performance Is Not Enough

In a recent decision¹ the UK Supreme Court ruled that parties are required to exercise "reasonable endeavours" in an attempt to overcome a force majeure event, but this does not require them to accept alternative performance of the contract.

What is a force majeure clause?

Force majeure clauses are commonly included in contracts to entitle one or more of the parties to cancel the contract, or be excused from performing their contractual duties, upon the occurrence of a specified event or state of affairs. For example, force majeure clauses often relieve parties of their obligations where there may be a change in government regulations rendering performance impossible.

The Facts

Under a contract of affreightment (the “Contract”), the charterer agreed to pay the shipowner in U.S. dollars to transport bauxite. The Contract contained a force majeure clause stating that the party affected by a force majeure event must exercise “reasonable endeavours” to “overcome” it.

In 2018, the U.S. levied sanctions against the charterer’s parent company that made it almost impossible for it to make payments under the Contract in U.S. dollars on time. However, the charterer denied that a force majeure event had occurred, offering instead to pay the shipowner in Euros and cover the cost of converting the payment from Euros to U.S. dollars, thereby negating any detriment caused to the shipowner. The shipowner rejected this offer and suspended operations under the Contract.

The Decision

This case was appealed all the way to the UK Supreme Court, which decided that the reasonable endeavours requirement did not obligate the shipowner to accept non-contractual performance of the Contract. In summary, the Court decided the following:

Case of general importance

This case addressed a matter of principle and did not turn solely on the construction of the force majeure clause in question. The Court held that even if a force majeure clause did not explicitly contain a reasonable endeavours proviso, the Court would have likely interpreted the clause as including such a proviso or would have implied such a term into the clause.

“Reasonable endeavours” do not require acceptance of non-contractual performance

There is a presumption that only contractual performance of the contract, i.e. performance within the terms of the contract, would invoke the obligation on the affected party to exercise reasonable endeavours to avoid the effects of a force majeure event.

The presumption is rebuttable

However, this presumption can be rebutted if the parties expressly agree. In this case, the Court held that the reasonable endeavours requirement was not sufficiently clear to override the shipowner’s valuable right to be paid in U.S. dollars and refuse payment in any other currency.

Importance of certainty

The Court dismissed the notion that the reasonable endeavours proviso requires the affected party to accept non-contractual performance if that party would not suffer any detriment. This is because detriment is a subjective concept, and the Court sought to ensure certainty in commercial transactions.

Analysis

Certainty and fairness

The Court’s judgment provides commercial certainty to those relying on a force majeure provision. Parties seeking to discharge their obligations under a contract (and potentially relieve themselves of a bad bargain) by relying on the force majeure clause only need to consider if the counterparty’s proposal for alternative performance falls within the terms of the contract. If it does not, then even if the alternative performance would not cause the affected party any detriment, and would ultimately achieve the same goal as contractual performance, is immaterial.

While the Court’s judgment may result in the performing party being unfairly prejudiced in these circumstances, it does not mean that parties are unable to accept non-contractual performance of a contract. Parties may agree from the outset, or later choose to amend or vary the contract when a force majeure event occurs, to allow the acceptance of non-contractual performance. Commercial parties are likely to adopt a pragmatic approach if the contractual goals can be achieved by non-contractual performance, without causing undue detriment to one another.

Drafting considerations

Recent events, such as the COVID-19 pandemic and Russia’s invasion of Ukraine, have underscored the critical importance of force majeure clauses. As such, businesses should review their contracts to determine if they need to strengthen or amend these clauses. For example, businesses may wish to avoid or alternatively strengthen the imposition of a reasonable endeavours requirement, and should amend the drafting accordingly. Further, should parties want to obligate the affected party to accept non-contractual performance when a force majeure event occurs, we would suggest that express wording be included to that effect.