Company could not rely on force majeure clause
The High Court has found that a company was not entitled to end a contract due to force majeure, because its failure to comply with the contract was not caused solely by the force majeure event.
Seadrill Ghana Operations Limited v Tullow Ghana Limited concerned a contract under which Seadrill provided a floating production storage and offloading vessel (or FPSO) to Tullow. An FPSO is a floating vessel used to receive, process and store hydrocarbons until they can be offloaded to a larger vessel, such as a tanker.
Tullow had planned to use the FPSO in two oil fields in offshore Ghana over which it had exploration rights.
Under the terms of the contract, Tullow was able to end the contract at any time “for convenience” (i.e. without giving a reason), in which case it would pay Seadrill a “for convenience” fee equal to 60% of the headline contract rate for the rest of the contract term.
In addition, Tullow was entitled to end the contract if a force majeure event arose which prevented Tullow from fulfilling its contractual obligations, and the event continued for 60 consecutive days.
The contract specifically stated that a drilling moratorium imposed by the Ghanaian government would constitute a force majeure.
What is a "force majeure"?
Force majeure (or FM) is a contractual mechanism that relieves a party from liability for breach of contract if the breach is caused by an event outside the party’s control. It is designed to recognise that a party should not be culpable if it simply cannot avoid contravening the agreement.
An FM clause normally suspends a party’s obligations while it tries to rectify the issue. It will also normally allow a party to end the contract if the FM is not resolved after a specified period of time.
The contract will usually set out what constitutes an FM. As we mentioned in our Corporate Law Update earlier this year, this often includes a rather bleak panoply of natural disasters, epidemics, civil unrest and war. However, if the contract relates to a specific project, the parties can (as they did here) include more specific events in their definition of “force majeure”.
What was in dispute?
Over time a territorial dispute arose between Ghana and its neighbour, Côte d’Ivoire, over who owned which parts of the oil fields. In April 2015, Côte d’Ivoire obtained an order requiring Ghana to prevent new drilling in the disputed areas. This led to Ghana imposing a drilling moratorium over parts of the fields.
In addition, in February 2016, a technical problem arose on the FPSO. Concerned by the fault, the Government of Ghana refused to approve Tullow’s plan to develop and drill one of the oil fields.
In March 2016, Tullow notified Seadrill that it was terminating the FPSO contract under the FM clause. Tullow’s notice referred to both the drilling moratorium and the Ghanaian government’s refusal to approve its drilling plan. It alleged that both events prevented Tullow from performing its obligation under the FPSO contract to provide Seadrill with a drilling programme.
Seadrill rejected Tullow’s notice. It argued (among other things) that Tullow’s failure was caused both by an FM event (the moratorium) and a non-FM event (the plan refusal). In those circumstances, Seadrill said, Tullow could not rely on the FM clause to end the contract.
This issue was important. If Tullow could end the contract under the FM clause, it would not be required to pay the “for convenience” fee. However, if the FM clause was not available, it would only be able to end the contract “for convenience”, so incurring the fee.
What did the court say?
The court agreed with Seadrill. It said the moratorium was one reason why Tullow was unable to continue drilling and so could not provide Seadrill with a drilling programme.
However, the greater impediment to continued drilling was the Ghanaian government’s refusal to approve Tullow’s drilling plan. That refusal did not arise from the arbitral order or the moratorium; it arose from the technical problem affecting the FPSO, which was not an FM event under the contract.
The judge therefore concluded that Tullow’s breach of its obligations arose from both an FM event and a separate event that did not constitute a force majeure.
Drawing on previous case law, the court concluded that Tullow was not entitled to end the contract on the basis of a force majeure.
This decision emphasises the need to tread carefully when trying to invoke an FM clause. Normally it is not enough to show that a force majeure has occurred. Often a party will need to show that an FM event actually prevented it from fulfilling its contractual obligations and that it was the sole cause.
The operation of an FM clause will always depend on the precise wording of the contract. However, if looking to end a contract under an FM clause, there are certain questions a contact party can ask itself:
- Is the event within the scope of the FM clause? The clause will normally set out what constitutes an FM. If the event is not listed, the party is unlikely to be able to invoke the clause.
- Does the event need to have prevented performance of the contract? Can a party invoke the FM clause if the party’s performance is merely hindered or delayed?
- If so, did the event actually prevent the party from performing a contractual obligation? An FM event might make a contract unprofitable or compromise a contract party’s objectives, but if it doesn't result in a breach of contract, it may not be possible to use the FM clause to end the agreement. Likewise, if the party was looking to end the contract anyway, there may be an argument that it was not the FM event itself that led to the party failing to perform.
- Are there any other reasons why the party is unable to perform its obligations? As this decision shows, if the failure is also attributable to an event that is not an FM, the party will probably not be able to end the contract under the FM clause.