UK case a reminder for Australian contractors on force majeure clauses

Force majeure clauses allocate the risk of parties being unable to fulfil their contractual obligations due to an extraordinary event or circumstance beyond their control. Increasingly, force majeure clauses in construction contracts for Australian projects are the subject of intense negotiation. Given the high risk of extreme weather events and supply chain disruptions, particularly in recent times, this is unsurprising.

It is common for force majeure clauses to require either the affected party or both parties to use ‘reasonable endeavours’ to reduce or overcome the effects of the relevant event. In the recent case between charterer RTI Ltd and shipowner MUR Shipping (31-page / 205KB PDF), the UK Supreme Court considered the application of a force majeure clause and what constituted reasonable endeavours to mitigate the effects of a particular event in the context of a shipping contract.

RTI and MUR agreed that RTI would pay MUR in US dollars. In the contract, the definition of ‘force majeure event’ included a requirement that the event could not be overcome by ‘reasonable endeavours’. Such a requirement is often expressly provided for in commercial contracts and even where it is not, it will usually be implied.

During the contracted work, the US imposed sanctions on RTI’s parent company. MUR sought to rely on the force majeure clause because it could not receive payment from RTI in US dollars, as provided for in the contract. To avoid the effects of the sanctions, RTI offered to pay MUR in euros which MUR could then convert into US dollars. In addition, RTI offered to compensate MUR for any losses or costs incurred because of the currency exchange. MUR, however, did not agree to RTI’s proposal.

Initially, a tribunal found in favour of RTI, saying that MUR could not rely on the force majeure clause because the impact of the event could have been reduced or overcome if MUR had agreed to payment in euros. The tribunal found that MUR could have accepted the alternative method of payment and that because this was a ‘reasonable endeavour’, the sanctions did not amount to a force majeure event.

On appeal from the UK Court of Appeal, however, the UK Supreme Court found that a reasonable endeavours proviso does not require one party to accept an offer from the other party to perform the contract differently. The court ruled that contractual performance must be in keeping with the agreed contractual terms.

The case shows that where a force majeure event occurs, the party seeking to rely on it will not be obliged to accept alternative measures even if the proposed alternative would not result in a loss. The court in this case found that requiring the shipowner to accept the charterer’s offer to pay in euros, instead of US dollars as required under the contract, was not a failure on the part of the shipowner to use reasonable endeavours to avoid the adverse effects of the event.

Lessons for Australian contractors

The UK court’s decision promotes certainty of contract and shows that courts are interested in holding parties to their contractual bargains.

Australian courts also favour outcomes that promote certainty of contract and, while there are examples of differences in approach between the UK and Australia, we expect an Australian court would come to a similar conclusion.

To avoid potential issues, parties undertaking projects in Australia should, when preparing or reviewing contracts, consider the specific force majeure events which may affect the project and the ways the impact of these events can be reduced or overcome. It may appropriate to include such alternatives expressly within the contract.

As construction contracts do not often express the ‘means’ by which the contractor is to achieve the outcomes of the contract, ascertaining the bounds of an obligation to use reasonable endeavours in light of a force majeure event can be a challenge. As soon as possible after the occurrence of the event, all commercial, legal and practical considerations should be carefully weighed up.

Finally, parties should consider whether short notification periods are realistic. Notice periods should be of an appropriate duration to allow the parties to properly assess and determine a course of action.

Co-written by Ceres Zhou of Pinsent Masons.