The Court of Appeal overturned, by a majority, the decision of the High Court and held that the effect of the sanctions imposed on RTI could have been overcome by MUR’s acceptance of payments in euros, and therefore, MUR cannot rely on the force majeure provision to suspend its performance under the contract. In reaching this decision, Males LJ, who delivered the leading judgment, adopted a common sense approach in interpreting the force majeure clause “which achieved the purpose underlying the parties’ obligations” and focused on a key point that the non-contractual performance would have caused no damage to MUR.
While force majeure event definitions are often drafted to refer to an event making performance impossible, it is less common for such definitions to contain a mitigation requirement that the situation “cannot be overcome by reasonable endeavours from the Party affected.” With such language now being interpreted (in this case) by the Court of Appeal as requiring the affected party to accept an alternative form of payment (in euros), which was not specified as an agreed payment method, we anticipate that in the current climate of greater sanctions-related uncertainties:
- In lease agreements or loan agreements, where lessors or lenders perform a significant amount of their active obligations upfront (e.g., delivery of an aircraft or a vessel by a lessor or funding a utilization under a loan) in return for a subsequent payment stream of rent or interest payments, there is usually a currency indemnity and illegality-related provisions to deal with a similar fact pattern, and instead, a force majeure event is often a defined set of circumstances that excuse the lessee or debtor from performing its undertakings, for example, to complete a certain project, achieve compliance with certain standards, or obtain a license by a pre-determined date. In this scenario, the creditor is likely a third party to the project or a standard-setting or licensing regime, and therefore, the creditor is often unable to mitigate the force majeure event, meaning such contracts are unlikely to be affected.
- In sale and purchase agreements, conditional sale agreements, or service contracts, where payments are made by one party to ensure the active performance by another party (e.g., delivery of a sale item or delivery of a service), purchasers and paying parties will look to incorporate similar mitigation requirements to force the seller or payee to accept alternative payment methods and avoid the extreme outcome of releasing both parties from performance.
In reaching its decision (which was not unanimous), the Court of Appeal’s reasoning was that the payment in alternative currency would have dealt with the sanctioned payment issues with no detriment to MUR.
However, an alternate currency may not always be the answer. Therefore, parties should not see this decision as a general obligation to accept payment in an alternative currency, should sanctions prevent the contractually prescribed route.
Clearly, in the current and evolving climate, these types of issues will be increasingly frequent, and Reed Smith has a market-leading aviation and regulatory team that is ready to assist.
Client Alert 2023-005
