Daniel Wood
Partner
Article
8
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 [2018], relating to the circumstances in which force majeure may be an available remedy.
In brief - key points
The Court had to consider two key issues: force majeure and reasonable endeavours.
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.
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 have any queries on this or any related issue, please contact Tom George or Daniel Wood.
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