QCR Autumn 2018: Force majeure – Need for causal link between the force majeure event and the cancellation of the contract – Reasonable endeavours obligation

QCR Autumn 2018: Force majeure – Need for causal link between the force majeure event and the cancellation of the contract – Reasonable endeavours obligation

Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm)

Facts

Tullow Ghana Limited (“Tullow”) was the operator of both the TEN (“TEN”) and the Jubilee (“Jubilee Field”) oilfields in West Cape Three Points, on behalf of joint venture partners under concessions granted by the Government of Ghana. In 2011, Tullow hired from Seadrill a 6th generation ultra deepwater semi-submersible rig, the West Leo with a daily operating hire rate of US$600,000. In May 2013 the Government of Ghana approved the TEN Plan of Development (the “TEN POD”). Tullow decided to use West Leo initially in TEN and then later in the Greater Jubilee Field.

In September 2014, Ghana and Cote d'Ivoire entered into an arbitration pursuant to the United Nations Convention on the Law of the Sea (“UNCLOS”) to resolve a dispute between them as to precisely where the offshore boundary between the two states lay. In April 2015, Cote d'Ivoire was successful in seeking a Provisional Measures Order (“PMO”) containing an order to the following effect: “Ghana shall take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area”. Part of the disputed area included TEN. The effect of the PMO meant that, whilst completion of spudded wells could continue in TEN, no new wells could be spudded. Tullow had several wells that were in the process of being spudded, with the last such well due to be completed in September 2016. Once these were completed, Tullow intended to use the rig in the Jubilee Field. However, according to Tullow, the Government of Ghana was unwilling to approve the Greater Jubilee Plan due to a technical problem with the FPSO unit in use in the Jubilee Field.

The contract contained a force majeure clause and the events listed there under included  “a drilling moratorium imposed by the government”. In March 2016, Tullow sought to rely on the issuance of the PMO as a force majeure event which prevented it from issuing drilling instructions to Seadrill, an obligation under the Contract, and which should ultimately allow it to terminate the contract. Seadrill contended however that Tullow's refusal to pay hire was connected to the collapse in oil price in 2014, which led to a reduction in demand for rigs such as West Leo and, in consequence, to a substantial reduction in the daily market rate of hire for such rigs, from about $600,000 per day to between $150,000 to $200,000 per day at the end of 2016.

Judgement

The Commercial Court considered two issues:

  1. Whether the cause of Tullow’s failure to comply with its obligations under the Contract in October 2016 was a force majeure, namely, a drilling moratorium imposed by the Government of Ghana; and
  2. If the answer to the first issue was found to be affirmative, whether Tullow had exercised its reasonable endeavours to remedy or avoid the force majeure.

With regards to the first issue, Teare J held that the PMO was a “drilling moratorium imposed by government”, an event listed in the force majeure clause in the rig contract. Teare J however held that, assuming the moratorium had prevented the defendant from fulfilling a term of the contract, it was nevertheless not causative of Tullow’s failure to perform the contract. The effective cause of Tullow’s failure to perform was the failure of the government of Ghana to approve a plan for drilling in Greater Jubilee. Therefore, the Court held, with reference to Intertradex v Lesieur-Tourteaux [1978] 2 Lloyd’s Rep 509, that Tullow was not entitled to terminate the contract for force majeure because in order to do so, the force majeure event must be the sole cause of the innocent party being prevented from fulfilling its obligation.

Teare J then went on to consider the second issue, holding that where a force majeure event does arise, the parties are under an associated obligation to use reasonable endeavours to mitigate its impact. 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 were less commercially attractive. Mr Justice Teare pointed out that the reasonable endeavours obligation meant that Tullow had to take Seadrill’s interests into account, in addition to its own, when deciding whether or not to do the work. The court confirmed that failure by Tullow to exercise its reasonable endeavours obligation was a further reason why Tullow cannot terminate the contract “for convenience”.

Comments

This decision emphasises the need to exercise caution when evoking a force majeure clauses. It is not enough just to show that a force majeure event has occurred; the party relying on the clause must also show that the event was the sole cause of its failure to perform its contractual obligations. The judgement imposes additional considerations that must be taken into account in the decision making process when there is a force majeure event. This includes a reasonable endeavours obligation to avoid or to mitigate the event. It is, however, not clear from the judgement where the line between, what are to be considered reasonable endeavours and what are not in relation to force majeure events, is to be drawn.

It is suggested that at the drafting stage, it may be worth the parties trying to define what is to be captured by the reasonable endeavours obligation, and also to include a necessity to consider the commercial interests of the other party. While there is case law to assist in the interpretation of force majeure clauses, the fact remains that force majeure under English law is a purely contractual concept and thorough drafting, to take into account all potential risks and a consideration of how the risks are to be allocated can often assist in avoiding litigation.

Tullow has publicly stated that it is examining its options, including seeking leave to appeal the judgement. We will follow closely any future decision in this case and report on the same.
 

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