In times of economic and/or political uncertainty, parties to construction contracts may consider whether they have a right to rely on force majeure provisions as a justification for temporarily or permanently failing to perform substantive obligations.
We review the recent decision in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd , relating to the circumstances in which force majeure may be an available remedy.
In brief - key points
- The wording of the specific contract is determinative in deciding whether or not there has been an event of force majeure.
- The force majeure event must be the sole cause of the innocent party being prevented from fulfilling its obligation(s) - using a "broad common sense view of the whole position".
- Where a party has taken the opportunity to benefit from a potential force majeure event, this may well indicate that the force majeure event was not the sole cause.
- Where a force majeure event does arise, and the parties are under an associated obligation to use reasonable endeavours to mitigate its impact, that obligation might require a party to act in a way that is less profitable than its original plan.
Background (in summary)
- Tullow was the operator of two offshore petroleum concessions off the coast of Ghana. It was also seeking approval from the Government of Ghana (Ghana) for the development of wells in a new area.
- In 2011, Tullow hired a semi-submersible drilling rig - the West Leo - from Seadrill (under the Contract), with a daily operating hire rate of US$600,000. Tullow intended to use the West Leo rig in various oilfields within the existing concessions, and thereafter in the new area once approval was received from Ghana.
- In September 2014, Ghana and Cote d'Ivoire entered into an arbitration to resolve an offshore boundary dispute affecting the drilling rights within Tullow's concession (the Boundary Dispute). In April 2015, the tribunal issued a Provisional Measures Order. One of the effects of this Order was that, whilst work on existing wells could continue in the existing concessions, no new drilling in those areas was permitted. The Order did not affect work in the area of the proposed new wells, which were still to be agreed with Ghana.
- In February 2016, a technical problem was discovered in Tullow's equipment, with the effect that Ghana did not approve Tullow's plans for wells in the new area.
- On Tullow's case, as from October 2016, there was no further work for the West Leo rig to perform: no new wells in the area that was the subject of the Order could be drilled and approval from Ghana had not been received in relation to the new area. In December 2016, Tullow - relying upon the Order - sought to assert force majeure, stopped paying the daily hire rate and thereafter terminated the Contract.
- Seadrill claimed outstanding payments of US$277.4m stating that Tullow's refusal to pay was at least partly connected to the drop in the oil price in 2014, which led to a reduction in demand (and thus rates) for rigs of this nature.
The Court had to consider two key issues: force majeure and reasonable endeavours.
The force majeure issue
The force majeure clause in the Contract stated that neither party would be regarded as responsible for any failure to fulfil a contractual term: "if and to the extent that fulfilment has been delayed or temporarily prevented by an occurrence, as hereunder defined as Force Majeure". The list of matters defined as force majeure in the Contract, included: "[a] drilling moratorium imposed by the government".
It was Tullow's case that the Order was effectively a drilling moratorium imposed by Ghana, and that this temporarily prevented it from performing various contractual obligations. It became clear, however, that discussions between Tullow and Ghana about the proposed new wells had progressed through 2015 into early 2016 with continuing emphasis on the price of oil and Tullow's internal rate of return.
The technical problem - discovered in February 2016 - necessitated £335m of repair work. It was Tullow's own case that Ghana was unwilling to approve Tullow's plan for the proposed new wells until the technical problem had been resolved. Tullow thus argued that - from October 2016 - the West Leo rig could not be used in either the existing concessions (due to the Order) or in the new area, as had been originally intended.
The reasonable endeavours issue
Assuming that a force majeure event had arisen, a further question centred upon whether Tullow had exercised reasonable endeavours to remedy or avoid the force majeure. This turned on whether Tullow's obligation to use reasonable endeavours required it to use the West Leo rig to work on wells different to those originally intended.
Mr Justice Teare found that both the moratorium contained in the Order and Ghana's failure to approve Tullow's plans to drill wells in the area unaffected by the Order, were both causative of Tullow's inability to fulfil its contractual obligations, taking a broad common sense view. Of the two effective causes therefore, one was a force majeure event, and the other was not. On the wording of the relevant provision, and consistent with authority, the Court found that this meant that Tullow could not rely on the force majeure clause: "a force majeure event must be the sole cause of the failure to perform an obligation".
The issue of reasonable endeavours was considered by the Court on an obiter basis (i.e. not essential to the decision and therefore not legally binding). On the facts, the Court concluded that Tullow had in any event failed to exercise reasonable endeavours to avoid or circumvent the effect of the force majeure event asserted - because it could have redirected the West Leo rig to other available wells. The Court was of the view that, in the circumstances of this case, the fact that this redirection would have resulted in the scheme being less profitable or less attractive for Tullow was of no consequence.
Seadrill was entitled to judgment in respect of the sums claimed - $277.4m.
This decision is a reminder that, in order to rely successfully on a force majeure clause, the force majeure must be the sole cause of the failure to fulfil contractual obligations. In complex scenarios - such as those under consideration here - this might be a difficult task.
Ultimately, each situation will turn on the wording of the particular contract in question and the facts.
Bear in mind these practical steps to minimise your risks:
- If you are involved during negotiations prior to finalisation of the contract, consider whether the proposed force majeure clause is wide (or narrow) enough for your purposes.
- Consider the wording of force majeure provisions carefully before seeking to rely on them. The straightforward meaning of the words will be key.
- Keep contemporaneous notes of relevant events - this may assist in proving a force majeure event in due course.
- If there are multiple causes (with only one of them being a force majeure event), err on the side of caution before acting (e.g. prior to termination), as force majeure will only be found to exist if that event is the sole cause of the failure to fulfil contractual obligations. Getting this wrong might result in significant financial consequences.
- Do not assume that an obligation, as part of a force majeure procedure, to exercise reasonable endeavours will not require you to act in a way that is less profitable or attractive than the original plan. It very well might.
If you have any queries on this or any related issue, please contact Tom George or Daniel Wood.