In Seadrill Ghana Operations Limited v. Tullow Ghana Limited [2018] EWHC 1640 (Comm), Tullow Ghana Limited (“Tullow”) sought to defend its termination of a contract for hire of a drilling rig with Seadrill Ghana Operations Limited (“Seadrill”) (the “Contract”) in reliance on the Contract’s force majeure clause. The Commercial Court decided that Tullow was not entitled to rely on the clause in that way and ordered Tullow to make payment to Seadrill an amount of approximately USD 254 million. Tullow has publicly stated it is examining its options, including seeking leave to appeal the judgment.

Facts

Tullow Ghana Limited had interests in two offshore petroleum licences or concessions about 60kms off the coast of Ghana. One, known as West Cape Three Points, included the Jubilee oilfield (“Jubilee Field”), which was considered to be a “flagship asset”. The other, known as Deepwater Tano, included three oilfields collectively known as TEN (Tweneboa, Enyenra and Ntomme) (“TEN”). Tullow was the operator of both TEN and Jubilee on behalf of joint venture partners and the concessions were granted by the Government of Ghana. The West Cape Three Points concession also included other oil fields (referred to as “MTA”) operated by another oil company Kosmos, one of Tullow's joint venture partners. Tullow’s intention was to replace Kosmos as the operator of MTA and to obtain approval from the Government of Ghana to a plan for the development of MTA, known as the Greater Jubilee Full Field Development Plan (the "Greater Jubilee Plan").

Tullow hired from Seadrill a 6th generation ultra deepwater semi-submersible rig (the “Rig”), West Leo, under the Contract. The Contract required Tullow to pay a daily operating rate in the sum of USD 600,000.

Section 2(A), clause 1.14, of the Contract defined the “Contract Area” as Tullow's “concession area and any area used in association therewith”. There was no dispute between the parties that the concession areas were Deepwater Tano and West Cape Three Points for the purposes of the Contract.

Section 2(A) clause 27.1 of the Contract read as follows:

27.1 Neither COMPANY nor CONTRACTOR shall be responsible for any failure to fulfil any term or condition of the Contract if and to the extent that fulfilment has been delayed or temporarily prevented by an occurrence, as hereunder defined as FORCE MAJEURE, which has been notified in accordance with this Clause 27 and which is beyond the control and without the fault or negligence of the party affected and which, by the exercise of reasonable diligence, the said party is unable to prevent or provide against. Both parties shall use their reasonable endeavours to mitigate, avoid, circumvent, or overcome the circumstances of FORCE MAJEURE.

27.2 For the purpose of the Contract, Force majeure shall be limited to the following:

…………

(h) Drilling moratorium imposed by the government

……..

27.5 In the event of force majeure occurrence, the party that is or may be delayed in performing the Contract shall notify the other party without delay giving the full particulars thereof and shall use all reasonable endeavours to remedy the situation without delay.

………

27.8 In the event that a FORCE MAJEURE condition prevails for a period of sixty (60) consecutive days then COMPANY may terminate the CONTRACT forthwith by giving notice, or may elect keeping CONTRCATOR under CONTRCT and keep paying the DAILY FORCE MAJEURE RATE.”

In September 2014, Ghana and Cote d'Ivoire entered into an arbitration pursuant to the United Nations Convention on the Law of the Sea to resolve a dispute between them as to precisely where the offshore boundary between the two states lay. Cote d'Ivoire was successful in seeking a Provisional Measures Order (“PMO”) containing an order to the following effect: “Ghana shall take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area”. Part of the disputed area included TEN. The effect of the PMO meant that, whilst completion of spudded wells could continue in TEN, no new wells could be spudded.

Tullow had several wells that were in the process of being spudded, with the last such well due to be completed in September 2016. Once these were completed, Tullow intended to use the Rig for the purposes that it would be used in the Greater Jubilee Field (upon the assumption that approval had been given by the Government to the Greater Jubilee Plan).

However, a technical problem also arose on the FPSO being used in the Jubilee Field in February 2016, the consequence of which meant, according to Tullow, Ghana was unwilling to approve the Greater Jubilee Plan.

Tullow’s sought to rely on the issuance of the PMO as the force majeure event under the Contract, which prevented it from issuing drilling instructions to Seadrill (which Tullow argued was an obligation under the Contract) and ultimately allowed it to terminate the Contract.

However, Seadrill contended that Tullow's refusal to pay hire was not unconnected with the collapse in the oil price in 2014 which led to a reduction in demand for rigs such as West Leo and, in consequence, to a substantial reduction in the daily market rate of hire for such rigs, from about $600,000 per day to $150,000 to $200,000 per day at the end of 2016.

Decision

The Commercial Court considered two overarching issues:

  1. Whether the cause of Tullow’s failure to comply with its obligations under the Contract in October 2016 was a force majeure, namely, a drilling moratorium imposed by the Government of Ghana; and
  2. If the answer to the first issue was found to be affirmative, whether Tullow had exercised its reasonable endeavours to remedy or avoid the force majeure.

In deciding the first issue, the Commercial Court found that:

  1. First, a letter issued by the Government of Ghana in May 2015 with a clear expectation that Tullow was to comply with the PMO, was sufficient to constitute a moratorium of drilling was imposed by the Government (despite the lack of a formal order or direction).
  2. Second, notwithstanding Tullow’s ability to continue spudding existing wells until September 2016, the Commercial Court found that with respect to timing, the moratorium was imposed when such letter was sent, in May 2015 even though it did not “bite” on West Leo until October 2016.
  3. Third, in relation that a force majeure must relate to a “failure to fulfil any term or condition of the Contract”, it was arguable that, if is assumed that Tullow intended to issue a drilling programme but was prevented from doing so because of a drilling moratorium imposed by the Government, Tullow could say that it had failed to fulfil a term of the contract (namely, Section 2(A), clause 18.1 which required it to provide Seadrill with a drilling programme). However, Tullow appeared to have discretion of whether to issue such programme.
  4. Fourth, Tullow was not correct in its argument that the only question was said to be whether the moratorium was a force majeure. Section 2(A), clause 27.1 of the contract requires Tullow to have been prevented from or delayed in fulfilling its obligations by an occurrence which is a force majeure. Therefore, there is a clear causation requirement between the force majeure and Tullow’s failure to provide drilling instructions to Seadrill.
  5. Fifth, in relation to whether the moratorium was the cause of Tullow’s inability to issue a drilling programme, both the moratorium and the failure of the Government to approve the Greater Jubilee Plan were, on a broad common sense view of the position, causative of Tullow’s inability. Tullow expected to gain approval for the Greater Jubilee Plan and it was not open to Tullow to argue that Tullow never had the right to do any work in the Greater Jubilee Field pending approval. There were, therefore, two effective causes of Tullow being unable to provide drilling instructions in October 2016, one being a force majeure, and the other not.
  6. Sixth, the Court of Appeal’s decision in Intertradex v Lesieur [1978] 2 Lloyd's Reports 509 that where two causes operated to prevent a seller from shipping goods a force majeure notice had to be given in respect of each of them. Where notice had only been given of one the seller could not rely upon the force majeure clause. That decision is regarded as one which establishes the proposition that a force majeure event must be sole cause of the failure to perform an obligation (see Frustration and Force Majeure by Sir Guenter Treitel, 3rd.ed at paragraph 12-032).

As such, in relation to the first issue, Tullow failed to establish force majeure, as one effective cause of its inability to issue a programme was not a force majeure event.

In deciding the second issue, although the Commercial Court accepted that the issue no longer strictly arose due to Tullow’s failure on the force majeure issue, the Commercial Court decided that Tullow ought, but failed, to provide Seadrill with drilling instructions with respect to certain wells in Jubilee. In particular, Tullow’s failure to take remedial steps on the basis that they were less technically straightforward or came at a cost was considered insufficient, as it resulted in a failure by Tullow to consider the interests of Seadrill alongside its own. The Commercial Court confirmed that failure by Tullow to exercise reasonable endeavours was a further reason why Tullow was unable to rely on the force majeure clause.

Tullow was ordered to make payment to Seadrill of approximately USD 254 million.

Comment 

The English Courts remain cautious of oil companies terminating drilling unit contracts for alleged breach or force majeure at times that the rig rate has fallen. This case is one of a list of cases in which, over many years, the English Courts have found against oil companies seeking to terminate in such circumstances. As such, oil companies should remain cautious when terminating drilling unit contracts in a falling market.

In addition the case highlights a number of drafting issues that parties should keep in mind when drafting drilling unit contract force majeure terms:

  1. In the event that part of the definition of force majeure is “any failure to fulfil any term or condition of the Contract”, it might prove difficult for an oil company to claim force majeure, as its performance obligations under the drilling unit contract might be limited. In this case, the Commercial Court seemed to doubt that Tullow had failed to perform any contractual obligation, as the issuing of drilling programmes might have been discretionary.
  2. Unless drafted otherwise, concurrent hindrances on performance, one of which constitutes force majeure and on that does not, will generally not result in force majeure clause being satisfied. If such concurrent causes are intended to result the force majeure provisions of the contract applying to excuse performance, it would be wise to use specific drafting to achieve this end. In this case, the Commercial Court found that concurrent hindrances on performance meant that there was no force majeure.
  3. In this respect, if a failure to provide a drilling programme or location is to be a class of ‘breach’, which if caused by a force majeure event is to trigger the force majeure clause, an oil company may wish the scope of works in the contract to be carefully defined by location to ensure that the clause is triggered. A force majeure clause will usually not be interpreted as being applicable where alternative methods of performance still exist. In many occasions, it will be permissible under the drilling unit contract for the oil company to programme or instruct drilling in another location – resulting in no force majeure arising.

Finally, the case acts as a reminder that all notice provisions should be strictly complied with. When relying on a claim of force majeure to exclude liability for performance of obligations under a contract it is necessary to ensure that notice(s) cover all events that might be the cause of the force majeure.