Force majeure must be sole cause of failure to perform

The case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] demonstrates that the wording of the contract is key in determining what events constitute a force majeure. 

In Seadrill two events prevented the defendant from fulfilling its obligations under a contract for the hire of drilling rig. One was defined as a force majeure event and the other was not. The court found that the force majeure event had to be the sole cause of failure to perform an obligation and the defendant could not therefore rely on the force majeure clause to justify early termination of the contract. 

Facts

Tullow had been granted concessions in two offshore petroleum fields by the government of Ghana. It hired a semi-submersible rig from Seadrill (at a daily operating rate of hire of US$600,000) for an initial period of one year, which was subsequently extended to five years. 

Following a dispute between Ghana and Cote d'Ivoire over the offshore boundary of their territorial waters, a provisional measures order (PMO) was issued in April 2015 requiring Ghana to take all necessary steps to ensure that no new drilling took place in the disputed area.

In 2016, a further unexpected event occurred when a technical problem was found with a floating production storage and offloading unit. According to Tullow, the Ghanaian government was unwilling to approve Tullow's plan to develop and drill one of the oil fields as a consequence. 

Since there was no further work for the rig to do, Tullow ceased to pay the daily rate of hire and terminated the contract by reference to the force majeure clause.  Tullow's notice referred to both the drilling moratorium following the PMO and the Ghanaian government's refusal to approve its drilling plan, alleging that both events prevented it from providing a drilling programme in accordance with the contract.

Seadrill rejected the notice, arguing that the Tullow could not end the contract under the force majeure clause and instead should pay the (significant) fee set out in the contract for terminating "for convenience".

What did the court say?

The judge concluded that both the moratorium and the plan refusal were two effective causes of Tullow being unable to fulfil its obligations, the first being a force majeure event and the second not.

Based on the wording of the force majeure clause and consistent with the previous case of Intertradex v Lesieur [1978], the judge found that Tullow could not rely upon the clause since a force majeure event must be the sole cause of the failure to perform an obligation.

Although the court was not required to consider the second issue of whether Tullow had used reasonable endeavours to avoid or circumvent "the circumstances of force majeure", the judge chose to consider this issue. On the facts, the judge concluded that Tullow had failed to exercise reasonable endeavours because it could have redirected the rig to other available wells. The fact that this would have resulted in less profit or otherwise been contrary to Tullow's commercial interests was of no consequence.  

Comment

Ultimately, whether or not a party can rely on a force majeure clause will depend on the wording of a particular contract and the facts.

Parties often seek to end a contract under a force majeure clause in times of economic change.  In this case, there had been a fall in the market rate for the hire of an oil rig. The judge acknowledged that it was not surprising that Tullow had considered how to extract itself from the contract given this fall in market value, but the question remained whether or not Tullow's reliance on the force majeure clause was, on the facts of the case, legitimate or not.

If you are involved in contract negotiations, consider at the outset whether the proposed force majeure clause is wide enough to cover the risks that could materialise over the lifetime of the contract. Conversely, if you are the party less likely to invoke the clause (often the customer), you may wish to limit the list of force majeure events.

If you are considering terminating a contract for a force majeure, consider the wording carefully before taking action, particularly if there could be more than one cause.

Finally, you should be aware that an obligation to exercise reasonable endeavours may require you to act in a way that is contrary to your commercial interests.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions