The force majeure clause is designed to provide for situations that are completely outside the control of contractual parties and prevent them from fulfilling their side of a contract. The classic example is an 'act of God', which refers to weather-related catastrophes. Recognising that these events can genuinely prevent a party from performing their side of the bargain, a force majeure clause relieves a party from liability for breach of contract if the breach is caused by such happenings.
Force majeure clauses in contracts must be clear on the events that can excuse a party from fulfilling its obligations. Also, inability to perform under the contract must be wholly caused by that event. This was recently upheld by the High Court in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd.(1)
Brief facts of Seadrill v Tullow
Tullow Ghana Ltd hired an oil rig from Seadrill Ghana Operations Ltd under a contract made on 3 November 2011. Tullow had interests in two offshore petroleum concessions about 60 kilometres off the coast of Ghana:
- the Jubilee oil field; and
- three separate oil fields (collectively known as TEN).
Tullow intended to use the oil rig initially in TEN and later in Jubilee, on the assumption that the Ghanaian government would approve the Jubilee drilling.
The force majeure clause in this contract recognised the risks involved in drilling for oil. It stated that it would apply when:
- there was an occurrence of an event listed in the force majeure clause; and
- the occurrence delayed or temporarily prevented the party from fulfilling that term of the contract.
It also specified that:
- the force majeure event must be beyond the control of the party seeking to rely on it; and
- both parties must use their reasonable endeavours to mitigate, avoid, circumvent or overcome the circumstances of the force majeure event.
Alleged force majeure timeline
- September 2014 – Ghana and the Ivory Coast started arbitration proceedings to determine the exact location of the offshore boundary between them.
- April 2015 – Ivory Coast was granted a provisional measures order which stated that "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".
- May 2015 – the Ghanaian government wrote to Tullow saying that it expected it to comply with the provisional measures order. The provisional measures order meant that Tullow could complete the spudded wells on which it was working, but not begin studding any new ones.
- February 2016 – there was a technical problem with a floating production storage and offloading (FPSO) unit to be used in the Jubilee works, which significantly limited the amount of oil which could be processed by it. Remedial costs would be approximately $335 million. In light of the technical issue, the Ghanaian government was unwilling to approve the Jubilee works.
As a result of the drilling moratorium and the Ghanaian government's refusal to approve the drilling plan for the Jubilee works, Tullow alleged that from October 2016, it had no further use for the oil rig hired from Seadrill – it could neither drill and complete the planned TEN works nor drill further wells as part of the Jubilee works. Relying on the force majeure clause, Tullow stopped paying the daily hire charge and terminated the contract.
Seadrill did not accept that the force majeure clause applied in these circumstances and claimed for the outstanding sums due under the contract (approximately $227.4 million).
The judge found that the moratorium imposed in May 2015 had prevented Tullow from providing a drilling programme in TEN (but not in Jubilee). However, the Ghanaian government's failure to approve the Jubilee works to the damaged FPSO, while preventing the drilling, was not a force majeure. Tullow could not therefore rely on the force majeure clause because any force majeure event must be the sole cause of a party's failure to perform a contractual obligation.(2)
While the point was academic in the circumstances, Tullow had failed to use its reasonable endeavours to avoid or circumvent the effect of the force majeure. It had not taken into account Seadrill's interests by failing to finance certain remedial works in Jubilee that could have allowed drilling to continue.
The judge therefore found in favour of Seadrill and ordered Tullow to pay the full amount due under the contract.
How can force majeure clauses be rendered watertight?
Time should be taken to consider all potential risks that may prevent parties from fulfilling their obligations under a contract and spell these out in the force majeure clause. Also, where an event has occurred, parties must be able to demonstrate that the force majeure event was the sole cause of any failure to perform contractual obligations.
For further information on this topic please contact Elizabeth Wiggin or Parham Kouchikali at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
(2) Intertradex v Lesieur [1978] 2 Lloyd's Reports 509.
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