Force majeure and reasonable endeavours
Seadrill v Tullow (High Court) [2018]
Force majeure (literally ‘superior force’) is a well-known legal phrase that is often bandied about in connection with commercial contracts but it is not particularly well understood. It is comparatively rare for it to be the subject of a reported case.
Facts:
Tullow had existing rights to drill for oil in two areas off the coast of Ghana. It was 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 with a daily ‘operational’ hire rate of US$600,000. The contract was effectively one for the provision of drilling services. Tullow intended to use the West Leo rig initially within the existing drilling areas and thereafter in the new area once approval was received. It is important to note that the contractual obligation in question was regarded as the obligation to give drilling instructions to Seadrill (as distinct from merely to pay the daily hire rate).
Ghana and the Ivory Coast were involved in a territorial boundary dispute affecting the drilling rights within Tullow's existing areas. In April 2015, the tribunal hearing the dispute issued a Provisional Measures Order. One of the effects of this Order was that no new drilling was permitted within the existing drilling area. 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 which needed expensive repairs. As a result, 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 existing areas could be drilled and approval from Ghana had not been received in relation to the new area. In December 2016, Tullow sought to assert force majeure and terminated the Contract.
Under the terms of the Contract Tullow had the right to suspend work at its convenience by giving notice but, if so, certain ‘suspension charges’ were to be payable. There was a termination for convenience clause which also triggered compensation. There was, in addition, a ‘standby rate’ being 95% of the ordinary operational charge if Tullow failed to give instructions to drill. Finally, there was an express right for Tullow to terminate the contract on notice, if a force majeure condition prevailed for a period of 60 consecutive days.
Seadrill claimed outstanding payments of US$277m stating that Tullow's termination was at least partly connected to the drop in the oil price in 2014.
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 "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 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.
Assuming that a force majeure event had occurred, a further question centred upon whether Tullow had exercised reasonable endeavours to remedy or avoid the force majeure situation. The FM clause explicitly said that “Both parties shall use their reasonable endeavours to mitigate, avoid, circumvent, or overcome circumstances of Force Majeure”. The answer to this question 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 which would have been less profitable.
Decision:
The judge 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. Of the two effective causes one (the moratorium) was a force majeure event (because it fell within the terms of the contractual definition) and the other was not. On the wording of the relevant provision in the contract the Court found that Tullow could not rely on the force majeure clause because "a force majeure event must be the sole cause of the failure to perform an obligation". Where a party has taken the opportunity to commercially benefit from a potential force majeure event, this may well indicate that the force majeure event was not the sole cause.
The court concluded that Tullow had 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 fact that this redirection would have resulted in the scheme being less profitable or less attractive for Tullow was of no consequence.
Where a force majeure event does arise, and the parties are under an 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. The judge drew a distinction between a reasonable endeavours commitment in the context of avoiding a force majeure situation and a reasonable endeavours commitment applicable in other circumstances. The judge said that in the former context the party under the obligation “cannot ignore the commercial interests of the other party”. In other contexts, a party obliged to use reasonable endeavours does not have to weigh in the balance the interests of the other party but just had to do “what a reasonable and prudent person acting properly in their own commercial interests and applying their minds to their contractual obligation would have done”. The burden of proof was on Tullow to establish its case as the party seeking to argue that it had indeed exercised reasonable endeavours.
Points to Note:
- This is a very unusual case in that this is a claimed force majeure event affecting the customer not the supplier. The case seems to have been argued on the basis that the claimed force majeure events prevented the customer hirer from giving instructions. This was argued to be a contractual obligation. To us this seems somewhat strange. It seems more like a contractual right than an obligation. It is at least arguable that if it was indeed prevented from giving drilling instructions Tullow was not in any way in breach of contract since it was not obliged to do so. The obligation upon Tullow was an obligation to pay and, arguably, this was completely unaffected by any force majeure event. If the force majeure situation did exist it was perhaps more appropriate to regard it as a force majeure situation preventing the supplier from being able to perform its drilling services.
- What the case does illustrate very clearly is that force majeure is a creature of contract drafting and therefore it can be very important to consider carefully exactly what any ‘FM’ clause says rather than just paying little attention to contractual ‘boiler plate’.
- The case also shines an interesting light on how a ‘reasonable endeavours’ commitment will be assessed in different circumstances.