As the UK and EU continue to expand their sanctions lists, a recent English Court of Appeal decision provides comfort to businesses trying to understand how international sanctions regimes affect their supply and sales contracts. As many businesses did when COVID-19 prevented them from operating, shipping provider MUR looked to its force majeure clause. The court found that it had been entitled to do so: it had been reasonable to take time to review the situation, and the shipper was not obliged to mitigate the effects of the sanctions by accepting payment in euros instead of dollars.
What was the dispute about?
The dispute in this case (MUR Shipping v. RTI) relates not to the current conflict in Ukraine but to sanctions imposed by the US in April 2018 against a number of Russian individuals and entities. Shipping firm MUR had an ongoing contract with RTI, which was a subsidiary of one of the entities that had been sanctioned. As a result of the sanctions being imposed, MUR refused to ship RTI’s goods, citing a force majeure clause that excused the party giving notice of its obligations under the contract.
The relevant clause defined a force majeure event as one that prevented the loading or unloading of goods, by reference to various categories of events including war, embargo, restrictions on monetary transfers or “any rules or regulations of governments or any acts of interference or acts or directions of governments”. The relevant event would only be considered force majeure if it could not be overcome by the reasonable endeavours of the party affected.
MUR asserted that the sanctions prevented it from dealing with RTI, particularly given that RTI would not be able to make the payments in dollars required under the contract. RTI denied that the US sanctions prevented MUR, a Dutch entity, from trading with it and argued that the reasonable endeavours wording in the force majeure contract required MUR to accept payment in euros instead of dollars. The parties referred the dispute to arbitration and when the tribunal awarded RTI damages, MUR appealed to the English courts.
Reasonable endeavours
The Court of Appeal found in favour of MUR. On the question of accepting payment in another currency, force majeure clauses carry an implied duty, which in this case was made express, to take reasonable steps to avoid or mitigate the effects of the relevant event. However, this does not require a party to perform or accept performance outside the terms of the contract. Even where the contract provides for alternative ways in which it can be performed, if a party has chosen one method, they cannot be compelled to accept another in order to mitigate a force majeure event.
Here, there were no alternatives: the contract required payment in dollars. It did not matter that MUR’s Dutch bank, receiving a payment in euros, would credit it with a dollar equivalent, since the actions of an intervening third party should not be taken into account.
The situation would have been different if MUR had been an English company. There is a specific rule that allows a party to pay an amount due in England in sterling, even if the contract provides for payment in another currency. The court did not consider that this extended to other jurisdictions, allowing payments to be made in whatever the local currency of the receiving party was.
Causation
The judge also rejected the argument that the delay or prevention of payment fell outside the force majeure clause because the goods could still have been physically loaded and discharged. The references to monetary transfers and government regulations in the list of force majeure events clearly indicated that the clause was intended to cover not just physical prevention but also other ways in which performance of the contract may be rendered impossible.
To the extent that the inability to perform was a result of MUR’s reaction to the force majeure event, rather than the event itself, this did not break the chain of causation. A reasonable decision made in response to a force majeure event should not disqualify reliance on the clause.
The tribunal and the Court of Appeal also considered whether, aside from the arguments about payment, MUR was entitled to suspend trading with RTI because of sanctions. The expert evidence was that, as a non-US entity, the sanctions did not in fact prevent MUR from dealing with RTI. Nevertheless, the tribunal had found that it was reasonable for MUR to “take time to review the position and opt for caution”. The judge agreed: “situations can arise where it is reasonable for a party to delay in the performance of a contractual obligation where there is a difficult and uncertain situation”. This may be the case even where the contract does not contain a force majeure clause.
Comment
A huge number of businesses, in a variety of sectors, have suspended trading in Russia or with Russian businesses. Sanctions compliance is often cited as a key risk, particularly given the difficulties posed by separate US, UK and EU sanctions regimes that may differ in terms of scope and impact on both “primary” and “secondary” targets.
For those who find themselves in a difficult position, this case is helpful in that it acknowledges that, beyond the strict legal effect of sanctions rules, the imposition of sanctions may cause practical difficulties, with banks taking time to review transactions and transport lines being closed off. It is reasonable for parties to take a cautious approach while you assess your position, although continued delay or refusing to perform when there is no legal basis can expose you to a significant damages claim.
The nationalities of relevant parties, the nature of performance and the wording of force majeure and other clauses will all feed into what can be a complex analysis. If you think your contracts may be affected by sanctions, it is important to take legal advice both on regulatory compliance and on your contractual rights, in order to navigate an increasingly challenging international trading landscape.
