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Force majeure event: the sole reason for failure to perform?

News / / Force majeure event: the sole reason for failure to perform?

In Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm), the English High Court held that for a party to rely on a force majeure event to terminate a contract, that party’s failure to perform must be caused solely by the force majeure event.

Background

Tullow had interests in the licenses to two oil fields off the coast of Ghana, known as the Jubilee and the TEN fields. Tullow hired a deepwater semi-submersible rig, the West Leo, from Seadrill. The contract was due to expire in June 2018.

The contract area was defined as Ghana, with references made to Tullow’s “concession area and any area used in association therewith”. The “Daily Hire Rate” under the contract was US$600,000. Tullow had the right to terminate for convenience upon payment of 60 per cent of the Daily Hire Rate for the remainder of the term of the contract. The contract also provided for a standby rate of 95 per cent of the Daily Hire Rate.

There was also a force majeure provision which stated that in the event of a force majeure event, “Both parties shall use their reasonable endeavours to mitigate, avoid, circumvent, or overcome the circumstances of FORCE MAJEURE”.

Tullow’s intention was to use West Leo first in TEN and then in Jubilee.

The force majeure event

A maritime border dispute between Ghana and Côte d’Ivoire resulted in a Provisional Measures Order (PMO) being issued by an arbitral tribunal against Ghana on 25 April 2015, which affected the TEN fields. The tribunal ordered Ghana to “take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area”. It was understood that existing drilling in the TEN fields could be continued but no new wells could be spudded.

In February 2016, a technical problem was found with a Floating Production Storage and Offloading unit (FPSO) being used in Jubilee, which caused Ghana to refuse approval of Tullow’s plans to develop the area (known as the Greater Jubilee Plan).

On 01 December 2016, Tullow terminated the contract with Seadrill on the grounds of force majeure resulting from the PMO. Seadrill disputed Tullow’s termination on the basis of force majeure and claimed hire for the remainder of the term of the contract based on a period of standby from September to December 2016 and at the termination for convenience rate from 01 December 2016.

Decision of the Commercial Court

The court (Mr Justice Teare) held that although the issuance of the PMO fell within the contractual definition of a force majeure event (a “drilling moratorium imposed by the government”), such event was not the only cause of Tullow’s failure to perform and accordingly it concluded that Tullow was unable to rely upon the force majeure clause.

In reaching this conclusion, the court found there were two causative factors of the failure to perform, (i) the PMO affecting the TEN fields, and (ii) the lack of government approval of the Greater Jubilee Plan. The court held that a force majeure event must be the sole cause of failure to perform.

The judge found that Tullow’s intentions for the West Leo to continue operating in the area covered by the Greater Jubilee Plan were not thwarted by a force majeure event (the PMO), but rather by the technical issue with the FPSO, a matter in the hands of Tullow to resolve, which prevented the Ghanaian government from being able to approve the Greater Jubilee Plan.

Reasonable endeavours

On the issue of whether Tullow had fulfilled its obligation to use “reasonable endeavours” to avoid, mitigate or overcome the force majeure, Teare J commented that all matters of relevance can be taken into account in assessing whether it is reasonable to expect a party to take certain steps to avoid a force majeure event.

On the facts of this case, the court found that Tullow’s duty to Seadrill to exercise reasonable endeavours to provide it with drilling instructions meant that Tullow had to take into account not only its own interests but also the interests of Seadrill.  The burden rested on Tullow to prove, on a balance of probabilities, that there was nothing it could reasonably have done to avoid or circumvent the force majeure event. Based on the witness evidence, Tullow had not shown that they had regard to Seadrill’s interests and therefore Tullow was unable to show that it had exercised reasonable endeavours to avoid or circumvent the force majeure.

Comment

The effects of this judgment will be felt in the day-to-day operations of the “risky business” of drilling, as acknowledged by Teare J in his opening remarks. While parties can agree contractual wording to make force majeure provisions applicable if the force majeure event is one of the causes of a failure to perform, rather than the sole cause, this is not common practice. The importance of the parties’ obligations to exercise reasonable endeavours should also not be undervalued as it required evidencing a true analysis of the interests of all parties in determining what steps would be reasonable to take in order to mitigate against or circumvent the consequences of the force majeure event. 

Rania Tadros

Rania Tadros Managing Partner

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