Importance of Force Majeure Clauses
Force majeure clauses are an important part of many commercial contracts. They allow the parties to a contract to bring the contract to an end, or suspend performance, in limited circumstances, usually prescribed in the contract.
Seadrill Ghana Operations Limited v Tullow Ghana Limited
The importance of force majeure clauses and the circumstances in which they can be relied upon were highlighted in the recent case of Seadrill Ghana Operations Limited v Tullow Ghana Limited. Tullow was ordered to pay $254 million as a result of wrongly relying on a force majeure clause to terminate a contract.
In 2011, Tullow entered into a contract for the hire of an oil rig from Seadrill for the extraction of oil off the coast of Ghana. The contract was for five years, with a daily rate of hire of $600,000 and included a force majeure clause.
Some years later, a dispute arose between Ghana and Cote d’Ivoire as to the location of the boundary between the two countries, which proceeded to arbitration. Cote d’Ivoire obtained a Provisional Measures Order that meant that no new drilling could be undertaken in the disputed area. Tullow operated three oilfields in that disputed area, and while no new drilling could take place, work required to complete existing wells that were already drilled could continue. It was expected that work on the last well would be completed in September 2016 and after this the rig would be relocated to other oilfields, provided the Greater Jubilee Full Field Development Plan (“Greater Jubilee Plan”) was approved by the Government of Ghana.
In February 2016, a technical problem was discovered on a storage and offloading unit that was being used in one of the oilfields and, according to Tullow, the Government of Ghana would therefore not approve the Greater Jubilee Plan. It was argued that, consequently, there was no work left for the rig to undertake from October 2016.
Tullow stopped paying the rig hire charges and terminated the contract with Seadrill, justifying this by reference to the force majeure clause in the contract. Seadrill commenced legal proceedings against Tullow in the Commercial Court in London and argued that Tullow’s termination was in fact due to oil prices falling, which caused a significant reduction in the daily market rate of hire for oil rigs from around $600,000 to $150-$200,000.
Two issues came before the court. Firstly, could Tullow seek to rely on the force majeure clause and secondly, whether Tullow had used reasonable endeavours to avoid or overcome the alleged force majeure circumstances?
The force majeure clause in the contract provided that neither party would be responsible for failing to perform their obligations under the contract, if they were unable to do so by reason of prescribed force majeure circumstances. It also provided that both parties must use reasonable endeavours to avoid, or overcome, the force majeure circumstances. One of the circumstances listed was a “drilling moratorium imposed by the government”.
Given the clear wording of the clause, it perhaps comes as no surprise then that the drilling moratorium imposed by the Government of Ghana was held by the court to be a force majeure event. The key issue, however, was whether it was this force majeure event that meant that Tullow was unable to perform its drilling obligations under the contract.
It was determined by the court that there were two events that caused Tullow to fail to perform its obligations: the moratorium imposed by the Government of Ghana and the Government’s refusal to approve the Greater Jubilee Plan; one being a force majeure event, and the other not.
The court considered an earlier decision in the case of Intertradex v Lesieur , which established that a force majeure event must be the only cause of a party failing to perform its contractual obligations. Whilst the court stated that it will ultimately come down to the proper interpretation of the contract, in the Seadrill case the force majeure event had not prevented Tullow from using the rig from October 2016. It was also, in fact, the Government’s refusal to approve the Greater Jubilee Plan and Tullow’s reluctance to pay the inflated daily rate of hire that had prevented Tullow from performing its obligations under the contract. The court, therefore, held that Tullow could not rely on the force majeure clause and Tullow was ordered to pay the sums due under the rig hire contract, which amounted to $254 million.
Interestingly, although unnecessary in light of the court’s finding, it went on to consider whether Tullow had used all reasonable endeavours to avoid or overcome the force majeure. The court stated that Tullow could not say that it was unreasonable to have used the rig in alternative oilfields, on the basis that it would have been more expensive or unprofitable. The reasons for this are that a party cannot favour its own commercial interests by completely ignoring another party’s commercial interests and where there are many ways of achieving an outcome, a party has a duty to perform its obligations in one of the other ways. Parties to a contract need to be wary of this high threshold when seeking to rely on a clause of this nature.
The Seadrill case is a precautionary tale, not only to those seeking to rely on a force majeure clause, but also to parties negotiating and drafting such clauses.
It is critical that parties spend time at the negotiation stage of a contract considering scenarios that could arise which may make it impossible for them to undertake their contractual obligations, to ensure that those scenarios are stated to be force majeure events. Parties will need to balance this with their respective commercial interests.
Care should also be taken to ensure that the causation requirement is included in the force majeure clause. The clause needs to be drafted in such a way that the mere existence of a force majeure event is not enough for either party to terminate the contract, but rather that the force majeure event is the sole reason for either party being unable to perform their contractual obligations.
As is evident from the Seadrill case, the consequences of wrongly terminating a contract based on a poorly drafted force majeure clause can be significant and costly.
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