Beware – You Cannot Always Rely On A Force Majeure Clause

16/08/2018

Seadrill Ghana Offshore Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm), [2018] All ER (D) 74 (Jul)

The Commercial Court has ordered Tullow Ghana Limited to pay contract termination fees and other standby fees which accumulated in the 60 days prior to the termination of a contract with Seadrill Ghana Offshore Ltd.  The payments are expected to amount to $254 million.

The reason for the decision is the court held a defaulting party to a contract cannot rely on a force majeure clause to end an agreement if only one of the two events preventing contractual performance is a force majeure event.

The facts of the case

Tullow had been granted concessions in two offshore petroleum fields (known as the Jubilee Field and the TEN Field) by Ghana. It also had other oil fields and had plans to develop a wider field.  It had hired a deepwater semi-submersible rig from Seadrill, for which it paid a daily rate.

In 2014 Ghana and Cote d'Ivoire entered into a United Nations Convention on the Law of the Sea arbitration to resolve a dispute over the offshore boundary in their territorial waters.  The tribunal issued a provisional measures order (PMO), requiring Ghana to take steps to ensure no new drilling took place in the disputed area.  Ghana subsequently notified Tullow of the order.

The drilling contract between Tullow and Seadrill was for five years.  However, Tullow terminated the agreement two years early, claiming it was entitled to do so under the contract’s force majeure clause, citing Ghana's drilling moratorium following the PMO, which it said had rendered it unable to fulfil a term of the contract because it could not provide drilling programmes. 

The Commercial Court had to determine:

a)    whether Tullow was entitled to terminate for force majeure, and if so;

b)    whether Tullow had exercised reasonable endeavours to overcome the force majeure event

What is a force majeure clause in a construction contract?

Force majeure translated from French means “superior force”.  A force majeure should not be confused with an “act of God” clause.  Acts of God refer to natural disasters such as earthquakes or floods, whereas force majeure relates to man-made issues which prevent a contract from being performed, such as fire, or changes in the law.  It is important to note that financial uncertainty or disruption, or even total economic collapse will not constitute force majeure (Thames Valley Power Limited v Total Gas & Power Limited).

Force majeure clauses require careful drafting.  Most require parties to the contract to take precautions to avoid the event and use reasonable endeavours to mitigate the event’s effects.

The court’s decision in Seadrill Ghana Offshore Ltd v Tullow Ghana Ltd 

Whenever the court is faced with a construction contract dispute regarding a force majeure clause, it must first examine what was agreed between the parties.  This should detail what constitutes a force majeure event, the responsibilities of the parties in the case of such an event, and what circumstances could give rise to the contract being terminated.

In this instance, the court held the prohibition of new drilling on the TEN Field did constitute ‘a drilling moratorium imposed by government’ and was, therefore, a force majeure event.  But did it prevent Tullow from performing its contractual obligations?

The judge ruled that it did not.  There were other drilling opportunities for Seadrill’s rig which were not explored, and the failure of Tullow to explore them was not caused by the force majeure event.  In addition, the defendant had failed to undertake ‘reasonable endeavours’ required under the clause to mitigate the effects of the force majeure or undertake any remedial steps.

What this decision means for parties entering into a construction contract

When looking at the element of ‘reasonable endeavour’, the court stated that both Seadrill and Tullow’s interests in the performance of the contract had to be taken into consideration.  Therefore, it was not enough for Tullow to claim it would be uneconomical for it to continue the work.

 The judge stated that:

“As a matter of language, “reasonable endeavours” is a phrase which enables account to be taken of all matters which bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure”.

Although consideration for the other party’s interests have not been expressed in this way before, the reasoning is not a drastic departure from other case law involving force majeure.

When it comes to negotiating the risk allocation in construction contracts, parties should be careful in their considerations.  In the opening line of his judgment, Mr Justice Teare noted that “drilling for oil is a risky business”.   And as it turns out, taking on risks such as a change in international policy cannot subsequently be turned into a force majeure to allow a party to exit what retrospectively turns out to be a bad deal.