Supreme Court decision on force majeure clauses
20 May 2024
On 15 May 2024, the Supreme Court ruled that a duty to use reasonable endeavours to overcome a force majeure event does not require the party not affected by the force majeure event to accept an offer of non-contractual performance from the other party.
Background
The case itself revolved around whether a party should be required to accept an alternative currency for payment due to US sanctions (but at no loss to the receiving party). The party affected by the sanctions claimed that the sanctions constituted a force majeure event which made it difficult for it to pay the non-affected party on time is US Dollars. Instead, it proposed to pay in Euros.
In October 2022, the Court of Appeal said that the payment in Euros should be accepted because this constituted the affected party using “reasonable endeavours” to overcome the force majeure event (as stated in the force majeure clause).
However, the Supreme Court reversed the Court of Appeal’s decision by stating the issue needed to be decided on: (i) certainty in commercial contracts; (ii) freedom of contract; (iii) the need for clear words to dispense of a contractual right; and (iv) the object of a reasonable endeavours clause.
Practical effect
The practical effect of this decision is that if the parties, in the event of force majeure, wish for either party to be required to accept non-contractual performance, express wording to that effect must be included in the contract. It is the writers’ opinions that it would be interesting to see how the courts would interpret such a clause in standard terms of business (that are not negotiated).
If an obligation to accept non-contractual performance is included, the draftsperson should:
- consider how the obligation might impact the parties;
- consider whether there should be exclusions as to the scope of the obligation; and
- ensure that the drafting is sufficiently clear and unambiguous to spell out that it is the intention for the obligation to apply.
On a literal interpretation, payment in an alternative currency would be a reasonable commercial solution to the force majeure event. However, the Supreme Court decided that this clashed with upholding the terms of the contract and the certainty that clear drafting brings.
Conclusion
The Supreme Court’s decision has re-emphasised the importance of contractual certainty and freedom of contract being paramount. This places greater value on well-drafted contracts that accurately reflect each party’s rights and obligations and set out the circumstances (if any) when those rights and obligations change.
If you would like any assistance in relation to force majeure clauses or commercial contracts in general, please do not hesitate to get in touch with your main contact at Birketts or contact Joseph Thompson or Jack Shreeve.
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Jack Shreeve
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Joseph Thompson
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2024.