Freedom of contract – free of activism: Trends in contractual interpretation emerging from recent UK supreme court judgments
During 2024, the UK’s highest court, the Supreme Court, has demonstrated continued judicial fidelity to the parties’ agreement and a determination to protect certainty and predictability as key pillars of English commercial law. Its decisions in RTI Ltd v MUR Shipping BV [2024] UKSC 18 and Herculito Maritime Ltd and others v Gunvor International BV and others [2024] UKSC 2 (The Polar) have exemplified this respect for the doctrine of freedom of contract. Both decisions evidence the Supreme Court’s reticence to adopt an activist approach and renegotiate commercial bargains.
Its decisions in RTI Ltd v MUR Shipping BV [2024] UKSC 18 and Herculito Maritime Ltd and others v Gunvor International BV and others [2024] UKSC 2 (The Polar) have exemplified this respect for the doctrine of freedom of contract. Both decisions evidence the Supreme Court’s reticence to adopt an activist approach and renegotiate commercial bargains.
The doctrine of freedom of contract is a fundamental building block of the English common law. It establishes that parties have a general freedom to enter into legally binding agreements and formulate individual terms within such an agreement. The court must respect the terms of a contract entered into by freely consenting parties of full capacity and refrain from illegitimately rewriting the agreement they have reached.
RTI Limited (RTI) v MUR Shipping BV (MUR)
In 2016, MUR and RTI entered into a contract of affreightment (COA) under which MUR was to make monthly shipments of bauxite and RTI was to make corresponding monthly payments in US dollars. The COA contained a force majeure (FM) clause which stated that an event would only be considered a FM event if it could not “be overcome by reasonable endeavours from the party affected”.
In 2018, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) applied sanctions to RTI’s parent company, making RTI subject to the same restrictions as its parent. As a result, MUR sent an FM notice, suspending performance under the COA and noting that payment in US dollars (as required by the COA) would be delayed by the sanctions. RTI rejected the FM notice and offered to pay in Euros instead and to bear any additional costs or exchange rate losses suffered by MUR as a consequence. MUR maintained its right to payment in US dollars.
RTI commenced arbitration, claiming damages for the costs of chartering seven replacement vessels for the period during which MUR had suspended performance. The tribunal found for RTI and held that, although the imposition of sanctions causing delay in payments in US dollars would otherwise constitute a FM event, MUR could not rely on the FM clause because that event could have been overcome by MUR’s reasonable endeavours (accepting payment in Euros instead of US dollars).
MUR appealed to the High Court. The Court held that the exercise of reasonable endeavours could not require MUR to accept non- contractual performance. RTI appealed. In a majority decision, the Court of Appeal reinstated the decision of the tribunal. MUR appealed.
The Supreme Court was tasked with deciding “whether the requirement of overcoming [force majeure] by reasonable endeavours extends to the party affected having to accept some form of non-contractual performance by the other party”.1 MUR submitted that in the interests of contractual certainty, reasonable endeavours provisos should not be extended to offers of non-contractual performance unless the parties expressly agree otherwise.
The Supreme Court agreed, holding that “the principle of freedom of contract includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non- contractual performance of the contract”.2 It confirmed that in order to forego valuable contractual rights, clear words are needed and that certainty and predictability are of particular importance in the context of English commercial law.
This decision has the obvious benefits of commerciality and certainty: if the Supreme Court had found that reasonable endeavours provisos did extend to non-contractual performance, it would have required potentially complex inquiries as to whether the acceptance of non-contractual performance would, in fact, be of no detriment to the innocent party and whether it would achieve the same result as the contractual performance in question.
The Polar
The MT POLAR was seized by Somali Pirates in 2010 whilst transiting the Gulf of Aden. It was released in 2011 after a substantial ransom payment. The shipowner declared general average and a large proportion of the general average adjustment related to the ransom. Cargo interests claimed they had no liability in general average in respect of the ransom payment. They argued that on the true construction of the bills of lading, the shipowner’s only remedy was to recover under the terms of additional insurance cover, taken out in relation to such risks pursuant to the terms of the voyage charterparty, the premium for which was payable by the charterer. They described this as an “exclusive insurance code.”
The dispute was referred to arbitration and the tribunal held that the cargo interests did not have to contribute to general average. The shipowner’s appeal was upheld by the Commercial Court. Cargo interests appealed to the Court of Appeal which dismissed the appeal, finding that the cargo interests did have to contribute to general average. The case went to the Supreme Court.
The Supreme Court had to consider (1) whether the charterparty contained an implied insurance code; (2) whether clauses in the charterparty had been incorporated into bills of lading; (3) whether on the proper interpretation of those clauses in the bills of lading and/or by implication, the shipowner was similarly precluded from claiming for such losses against the bill of lading holders; and (4) whether wording of clauses should be manipulated to substitute the words “the Charterers” with “the holders of the bill of lading.”
The Supreme Court found that an implied insurance code did not exist, that charterparty clauses had been incorporated into the bills of lading and that the wording of the relevant clauses should not be manipulated in order to substitute the words “the Charterers” with “the holders of the bill of lading”.
In its decision, the Supreme Court held that to find that an insurance code had been agreed between the parties, it would have to be shown that an insurance code was a necessary consequence of what had been agreed. This was not the case. To search for an implied insurance code would necessarily introduce uncertainty and, if parties had intended to provide that there be no right of recovery in respect of insured losses, that could have been easily stated in the charterparty.
When determining whether clauses in the charterparty had been incorporated into the bills of lading, the Supreme Court emphasised the importance of certainty and predictability again and cited Bingham LJ in The Federal Bulker: “it is preferable that the law should be clear, certain and well understood than that it should be perfect”.3
Finally, the Supreme Court ruled that there should be no manipulation of charter clauses in order to make the wording fit the bill of lading unless this was “necessary”. It was not necessary in this case and to manipulate the wording would introduce uncertainty for holders of bills of lading.
HFW Comment
In both of these cases, the Supreme Court has affirmed that it is not the courts’ role to interfere in the drafting of a contract agreed between commercial parties. Terms will not be implied into commercial contracts unless it is necessary to do so. The parties will be free to formulate individual terms governing their relationship and the courts will refrain from adopting an activist approach and re-negotiating commercial bargains. Certainty and predictability remain key pillars in English commercial law.
Footnotes
- Professor Edwin Peel, “Overcoming force majeure by reasonable endeavours” [2023] LMCLQ 177.
- RTI Ltd v MUR Shipping BV [2024] UKSC 18 [42]
- Federal Bulk Carriers Inc v C Itoh & Co Ltd (The Federal Bulker) [1989] 1 Lloyd’s Rep. 103