"Drilling for oil is a risky business", as the judge in the recent Commercial Court case of Seadrill Ghana Operations Limited v Tullow Ghana Limited (Seadrill)1 observed. One of the contractual mechanisms by which businesses have traditionally sought to protect themselves from such risk is the "force majeure" clause.
Force majeure clauses provide comfort to contracting parties that on the occurrence of specified events beyond either party's reasonable control, they will not be liable for a resulting failure to perform their contractual obligations. However, there is no general definition of a force majeure event under English law and, ultimately, it is up to the parties to define both the sorts of events which will trigger a force majeure clause and their legal consequences.
It is therefore important at the drafting stage to give careful thought to the circumstances that should fall within the ambit of the force majeure clause. In a market where contracts are often both high value and long term, seemingly trivial drafting choices can have serious commercial consequences when a force majeure clause comes under scrutiny in a subsequent dispute.
In this article we explore the implications of the Seadrill case, in which the hirer of an oil rig sought to rely on a force majeure clause as the basis for its early termination of the contract, and highlight certain practical drafting points which may be particularly relevant to contractors in the energy and natural resources sector.
Seadrill Ghana Operations Limited v Tullow Ghana Limited
In Seadrill, the defendant entered into a contract with the claimant pursuant to which the defendant was obliged to pay a daily operating rate of c.US$600,000 for the hire of an oil rig. The defendant intended to use the oil rig in connection with offshore petroleum licenses granted by the Government of Ghana for the development of marine oilfields off the coast of Ghana. The contract contained a force majeure clause which specified a "drilling moratorium imposed by the government" as one of a number of force majeure events.
During the course of arbitration proceedings between Ghana and Côte d'Ivoire relating to a territorial sea dispute, the International Tribunal for the Law of the Sea gave an order requiring Ghana to ensure that no new drilling would take place in the disputed area, where the defendant was intending to commence new drilling. Subsequently, there was a further unexpected event in February 2016 when a major technical problem was identified with a Floating Production Storage and Offloading unit being used for existing work in another oilfield, which significantly reduced the amount of oil which could be extracted. As a result of this issue (so argued the defendant), Ghana refused to approve the defendant's plan for the development of that oilfield.
When its existing work in the first oilfield was completed in October 2016, the defendant asserted that due to a moratorium on new drilling, it no longer had any use for the rig: in other words, the defendant argued that the force majeure clause had been engaged. At that time, due to falling oil prices the defendant was paying nearly twice the market rate for the rig. The defendant ceased paying the daily rate and in potential breach of the contract, failed to issue further drilling programmes. The defendant then decided to terminate the contract in December 2016, relying in doing so on the force majeure clause (or, alternatively on a "termination for convenience" clause). The claimant's case was that the force majeure clause did not apply in the circumstances and, as such, that it was owed some US$277.4 million due under the remainder of the contract as a result of the defendant's early termination.
As is often the case with force majeure clauses, the wording of the clause in Seadrill provided that in order for the clause to be triggered, there was a requirement not only that a force majeure event had occurred, but also that the defendant's breach of contract was caused by the force majeure event.
Accordingly, having decided in light of the clear terms of the clause that the drilling moratorium imposed by the Government of Ghana did constitute a force majeure event, the court had to determine whether that event caused the defendant's failure to perform the contract (ie its failure to issue further drilling programmes in October 2016 in accordance with the contract). The claimant's case was that the only effective cause of the defendant's breach was the Government's refusal to approve the defendant's development plan, which was not a force majeure event.
The court held that both the moratorium and the Government's refusal were (on a common sense view) causative of the defendant's inability to issue drilling programmes in October 2016. There were therefore two concurrent causes of the defendant's breach. However, only one of those (namely the drilling moratorium) was a force majeure event.
Citing the case of Intertradex v Lesieur,2 which is regarded as establishing the proposition that a force majeure event must be the sole cause of the failure to perform an obligation, it was decided by the court that the defendant could not rely on the force majeure clause: it had been Ghana's refusal of approval, not the moratorium, that was the main cause and therefore the force majeure clause was not engaged.
The court emphasised that the question was ultimately one of construction of the contract and, in the particular circumstances of the case, the force majeure event (which took place in April 2015) had not prevented or delayed the defendant from performing its contractual duties in October 2016. Instead, as a result of the other (non-force majeure) events, there was simply no longer any profitable work for the rig in October 2016, meaning that the defendant was unable to perform the contract. The defendant was therefore liable to the claimant for the sums due under the contract and for its early termination, which was deemed to have taken place pursuant to the termination for convenience clause.
Drafting of force majeure clauses
English common law only provides limited remedies and relief for parties to a contract that has become impossible to perform. As a result, force majeure clauses have developed as way for parties to manage the risk that for one or more of them, the contract will become unworkable (but not necessarily impossible) as a result of matters outside of their reasonable control.
English law recognises no standard definition of a force majeure event and, as such, it falls upon the parties at the drafting stage to agree upon an appropriate definition. Absent such a definition, use of the term "force majeure" alone is likely to be void for uncertainty.3 Typically, force majeure is defined as an act, event or circumstance beyond the reasonable control of the relevant party.
Parties will often seek to list the particular events (or the sorts of events) falling within the scope of the definition. When doing so, the parties should keep in mind the rules of contractual interpretation. For example, the expressio unius rule means that by expressly listing particular force majeure events, the parties may be taken to have intended to exclude other events (which may otherwise have been implied). As a result, parties should make it clear whether or not any list is intended to be exhaustive. To that end, parties seeking to include a non-exhaustive list of force majeure events may also consider including "catch-all" language within that list, although when doing so they should be aware that because of the eiusdem generis rule (which, when applied, means that a general word will be assumed to be qualified by any preceding specific words within the same category), this supposedly "catch-all" language may be interpreted in a more limited manner.4
Ultimately, however, when interpreting a force majeure clause the court will have regard to the intentions of the parties in all the circumstances, and in particular what (objectively) appears to have been intended on the basis of the express words of the contract. The key practical lesson for contracting parties is therefore to have due regard to the precise drafting of the force majeure clause at the negotiation stage, and in particular the sorts of events that may warrant express inclusion in the definition of force majeure.
In that regard, although the appropriate drafting will depend to a large degree on the particular project in question and the jurisdiction(s) in which it is located, energy and natural resource businesses may wish to consider including the following events in their force majeure clauses:
- Compliance with governmental decisions: although these are standard inclusions, a party's actions may affect whether it can benefit from such clauses. For example, while the governmental refusal described in Seadrill did constitute a force majeure event (albeit not an operative one in the circumstances), in Okta Crude Oil Refinery AD v Mamidoil-Jetoil Greek Petroleum Co SA,5 the Court of Appeal found that a government authority's request for a party not to perform the contract was not within the meaning of the force majeure clause because the non-performing party had itself instigated the procurement of that request. As a general rule, the English courts will take the parties to have intended that relief will only be available where there was an event which was genuinely outside their control.
- Natural disaster and civil unrest: these are standard inclusions, but important ones.
- Terrorism: an increasingly regular inclusion in force majeure clauses, which might not otherwise be captured.
- Other important force majeure events include:
- Strikes, labour disputes
- Revocation or failure to grant or renew a consent, other than for cause
- Chemical or radioactive contamination at the project site
- Expropriation or nationalisation of project facilities
- The discovery of archaeological or paleontological remains
- It is worth noting that a change in law or tax does not usually constitute force majeure.
Taking proper care over the precise drafting of force majeure clauses is especially important in relation to energy and natural resources contracts, and parties often seek to tailor each of its elements to the circumstances of the transaction. Parties should be mindful of the following tips when drafting:
- As well as dealing with the events expressly to be included, parties should also consider whether there are events which might warrant express exclusion, such as one party's lack of funds or changes in the cost of materials.
- Force majeure clauses should be drafted so that the relief provided for continues while the effects of the force majeure event continue, not just the event itself. For example, if a workers' strike prevents the delivery of supplies under the contract, the relief should continue for so long as the disruption is ongoing, which may extend beyond the end of the strike.6
- Force majeure provisions should be consistent (or "back-to-back") where there are various related project agreements. For example, if A's supplier can claim force majeure for an interruption in the supply of a raw material, it is important that force majeure relief is also available to A under the offtake contract as a result of that interruption in supply. It may also be necessary to include a provision specifically referring to circumstances where a party is prevented from performing its obligations under another agreement due to force majeure.
- It may be appropriate for there to be different categories of force majeure event that give rise to different consequences. We often see a distinction between "natural" force majeure events (such as acts of God, fire, contamination, etc.) and "political" force majeure events (such as acts of war, strikes, etc.). This allows the parties to agree different consequences depending on who is best placed to bear or manage certain risks. In this regard, parties will often take into account which force majeure events can be insured and who is best placed to bear the cost of insurance.
- Seadrill highlights the issues that can arise where there are concurrent causes of a force majeure event. Parties often seek to pre-empt those issues by providing that for the force majeure clause to be engaged, the event or circumstance must materially and adversely affect the defaulting party's performance of its obligations. The materiality requirement in particular imposes a higher hurdle where a party seeks relief for force majeure in circumstances where there are numerous contributing factors. Similarly, parties can consider including contractual wording requiring that the failure or delay in performance is a direct result of the force majeure event for the relief provided by the clause to apply.
- It may sometimes be appropriate for particular events to constitute force majeure for one party but not the other.
- Where the contract includes long-stop dates for achieving certain events, with failure to meet those dates triggering the payment of liquidated damages, the contract should provide for the postponement of such dates to reflect any period where a force majeure event is ongoing.
Naturally, the desired scope of a force majeure clause will depend on the parties' respective roles in the business to be carried out under the contract. While the party most likely to rely upon the force majeure clause will look to broaden the scope of the clause as much as possible, the other party will be concerned to agree only to a more limited clause and it may even wish expressly to exclude certain events.
It is also up to the parties to agree the precise mechanics of the force majeure clause. Common features of force majeure clauses in this regard include:
- An obligation for the party relying on the clause to serve a notice on the other party in order for the clause to take effect.
- A requirement for the party relying on the clause to have taken all possible steps to avoid the event or mitigate its consequences in order for the clause to take effect.
- The temporary suspension (rather than permanent removal) of the non-performing party's obligation to perform under the relevant contractual provisions (and its liability in that regard) while the force majeure event persists.
- The right for one or both of the parties (for example after a certain period of time) to serve a notice terminating the contract without liability.
This article demonstrates the need to take the utmost care in the drafting of and reliance upon force majeure clauses. Indeed, that need is of particular importance for businesses in the energy and natural resources sector, where (as demonstrated by Seadrill) the commercial consequences flowing from one party seeking to rely (rightly or wrongly) on a force majeure clause can be severe.
Further, Seadrill serves as an important reminder of the causation requirement that is inherent in the wording of most force majeure clauses, and the fact that it will generally be necessary for the party relying on the clause to show that the force majeure event is the sole operative cause of its non-performance, rather than merely the lesser of a number of causes. Accordingly, any contractor considering relying on a force majeure clause, especially in circumstances where there may be rival causes of its non-performance, should tread carefully and take appropriate legal advice.