Sanctions and non-contractual performance

There have been two recent decisions concerning sanctions, in which the courts have taken a common-sense approach as to whether payment in a non-contractual currency is required.

In the first case, the Court of Appeal’s decision in MUR Shipping v RTI Ltd confirms that a force majeure clause that requires the affected party to use reasonable endeavours to overcome the force majeure event or state of affairs, can require them to accept a non-contractual mode of performance, in this case payment in a different currency.

In the second case, Gravelor Shipping Limited v GTLK Asia M5 Limited & GTLK Asia M6 Limited, the High Court took a similar approach and held that a clause requiring the owners and charterers to cooperate and take “all necessary steps” for payments to be resumed If the owner became a sanctioned entity, required the sanctioned owner to accept payment in a non-contractual currency into a frozen account.

MUR Shipping v RTI Ltd
In 2016, MUR Shipping BV as owners, entered into a contract of affreightment (“COA”) with RTI Ltd as charterers. The COA contained a detailed force majeure clause which included “restrictions on monetary transfers” and further defined force majeure as being an event or state of affairs which (amongst others) “cannot be overcome by reasonable endeavours from the Party affected”.

In April 2018, the US imposed sanctions on RTI’s majority owner. Whilst RTI itself was not the subject of sanctions the impact of sanctions on its parent company created prospective difficulties and delays for RTI paying in US Dollars. MUR invoked the force majeure clause. RTI rejected the force majeure notification arguing that it was not a US entity caught by the sanctions and proposed that payment could be made in Euros and converted by MUR’s bank into USD, with RTI bearing any additional costs or losses resulting form the currency exchange. MUR refused to accept this, insisting that the COA required payment in US Dollars.

London Arbitration
The Tribunal found as fact that it would not have been a breach of US sanctions for MUR to continue performance of the COA, nor would it have been unlawful for RTI to pay freight in US Dollars. However, the Tribunal accepted that there was high probability that there would have been difficulty in RTI making timely payments in US Dollars.

Crucially, the Tribunal further found as fact that whilst RTI could not insist on payment in Euros because the contract stipulated US Dollars, payment in Euros was a realistic alternative without disadvantage to MUR. MUR’s bank could have credited their account with US Dollars as soon as payment in Euros was received. For this reason, the Tribunal decided that MUR’s case on force majeure failed because the event/state of affairs could have been overcome by reasonable endeavours from the party affected.

Appeal to Commercial Court
MUR appealed. The question on appeal was whether reasonable endeavours required them to accept payment in Euros instead of US Dollars as per the terms of the COA.

MUR succeeded. Mr Jacobs J held that the exercise of reasonable endeavours did not require a party to accept non-contractual performance to circumvent the effect of force majeure.

Appeal to Court of Appeal
RTI appealed. The issue before the Court of Appeal was whether the force majeure event or state of affairs could have been overcome by reasonable endeavours by MUR, as the party affected. It is important to note that the Court of Appeal did not have jurisdiction to re-examine the Tribunal’s earlier findings of fact.

The appeal was granted by a majority of two. The majority concluded the state of affairs could have been overcome by RTI making payment in Euros. A key point in the reasoning was that the Tribunal had already made a finding of fact, as set out above, that this arrangement would not have caused any detriment to MUR. Thus, RTI’s proposal to pay in Euros would have overcome the state of affairs caused by the imposition of sanctions.

Whilst the dissenting Lord Justice agreed that payment in Euro would have solved the problem, he did not agree as a matter of principle, that an event or state of affairs could be overcome by an offer of non-contractual performance.

It is important to note that the majority acknowledged the outcome would not have been the same had payment in a different currency involved any detriment to MUR or resulted in something different than what was required by the contract. In neither situation would that have overcome the force majeure event/state of affairs.

Gravelor Shipping v GTLK Asia M5 Limited & GTLK Asia M6 Limited
Gravelor was the bareboat charterer of two vessels. The charterparties contained provision for Gravelor to purchase the vessels against payment of US Dollars into the owners’ account.

The owners were one ship companies that were part of the GTLK group and ultimately owned by and/or controlled by the Russian Ministry of Transportation. In April, 2022 the EU imposed sanctions on the GTLK group owner and in August 2022 the US imposed sanctions on the group and its subsidiaries. Gravelor contended the sanctions prevented them from paying hire, which ultimately led to Gravelor exercising its purchase option. The owners nominated a Russian bank account for payment.

The charterparty anticipated the possibility that owners could become sanctioned and clause 8.10 provided that where a payment had not been received by the owner due to it becoming the subject of sanctions, owners and charterers “shall cooperate and promptly take all necessary steps in order for the payments to be resumed”.

Gravelor argued that due to sanctions, it could not pay in US Dollars and/or to the Russian bank account nominated by owners. The dispute included whether clause 8.10 permitted Gravelor to make payment in a currency other than US Dollars and into an account other than the Russian account owners had nominated. Gravelor sought an order requiring owners to nominate a Euro account for payment.

Owners argued that Gravelor could not obtain title to the vessels unless payment was made in US Dollars to their nominated Russian account and that clause 8.10 did not oblige owners to create a situation which resulted in payment being made into a Euro account which they could not access due to the sanctions.

The  court  held that  (a)  payment  into  a  frozen  bank  account  did  constitute  payment  under the charterparty, (b) that the requirement to take “all necessary steps” did require owners to nominate an alternative account, even if their access to that account was restricted, and finally (c) that owners were required to accept payment in a non-contractual currency.

Final thoughts
With increasing interest in sanctions and force majeure due to recent world events, careful thought should always be given to the drafting of such clauses. Force majeure is not a general concept of English law and therefore, whether a force majeure clause can be invoked will turn on the specific wording. These cases illustrate the possibility that the courts may require a party to accept and, or make payment in a non-contractual currency. Members should therefore consider when drafting force majeure and sanctions clauses whether that is an acceptable result or something they want to avoid. As ever, we remain available to assist in reviewing and drafting such provisions.