Limitation of the force majeure clause
On 3 July 2018, the High Court issued its judgment in the case of Seadrill Ghana Operations Limited v Tullow Ghana Limited. The judge found that the defaulting party could not rely upon “force majeure” to terminate the contract because only one of the two events preventing performance was a force majeure event.
Tullow Ghana Limited (Tullow) hired a semi-submersible drilling rig from Seadrill Ghana Operations Limited (Seadrill) for operations off the Ghanaian coast. The contract was signed in 2012 with the term due to continue through to June 2018.
Two events led to Tullow being unable to comply with the contract:
- in April 2015, due to a territorial dispute between Ghana and its neighbour, Côte d’Ivoire, Ghana imposed a drilling moratorium over parts of the oil fields; and
- in February 2016, a technical problem arose on the drilling rig and, concerned by the fault, the Government of Ghana refused to approve Tullow’s plan to develop and drill one of the oil fields.
The drilling moratorium was defined as a force majeure event in the contract and in March 2016, Tullow notified Seadrill that it would be terminating the contract on this basis.
Seadrill disputed Tullow’s right to terminate using the force majeure provisions and instead claimed that Tullow’s failure to perform the contract was caused by a force majeure event (the moratorium) and a non-force majeure event (the failure to obtain approval). In these circumstances, Seadrill argued Tullow could not rely on force majeure and was instead exercising its right to terminate the contract for convenience, entitling Seadrill to an early termination fee of 60% of the day rate of the rig for the remaining period of the contract, which exceeded US$270 million.
Reliance of the force majeure clause
The judge referred to the case of Intertradex v Lesieur and the wording of the contract itself and stated that when relying on a force majeure clause, a force majeure event must be the sole cause of the failure to perform an obligation. In this case, the judge considered there to be two effective causes that prevented performance: (i) the drilling moratorium and (ii) the fact that Tullow had failed to secure permission from the Government of Ghana. As such, he concluded that the force majeure clause could not be relied upon.
Although not central to the decision, the court also considered whether the defendant had used its reasonable endeavours to avoid or circumvent the effect of the force majeure, as per the requirements of the contract’s force majeure clause. The judge highlighted the availability of other wells that were not subject to the moratorium; judging that remedial steps existed but had not been taken solely because they were less technically straightforward and/or commercially attractive.
The judge conceded that when exercising its reasonable endeavours to avoid or circumvent the force majeure event, Tullow was entitled to consider its own interests, and in particular, whether there was a business case for drilling at another well. However, Tullow was also bound to consider the interests of Seadrill, which it did not do.
Although there is case law to assist in the interpretation of force majeure clauses, the fact remains it is a purely contractual concept and thorough drafting can safeguard against unnecessary complications.
This decision also emphasises the need to exercise caution before evoking a force majeure clause. It is not enough to just show that a force majeure event has occurred; the party relying on it must show that the event was the sole cause of the failure to perform its contractual obligations.
Lastly, it is not clear from the judgment where the line is drawn between what are considered to be reasonable endeavours and what are not in relation to force majeure events. Depending on the circumstances, it may be worth defining what is captured by reasonable endeavours at the drafting stage and, for force majeure clauses specifically, expressly including the consideration of the commercial interests of the other party.
This article was written by Lydia Fernandes. For more information please contact Lydia on +44 (0)20 7438 2104 or at email@example.com.
News & Insights
UK Government extends increased powers for reviewing mergers on national security grounds to additional key strategic sectors
The UK Government has further extended its powers to review mergers in certain key strategic sectors on national security grounds
COVID-19: Considerations for companies
An essential toolkit setting out key issues that companies and directors should consider during this uncertain time.