The consequences of the COVID-19 outbreak for the energy sector have been wide reaching, with issues such as workers self-isolating, rig closures and disrupted supply chains. Several oil and gas companies have become increasingly concerned that this will result in an inability to fulfil their contractual obligations, causing a surge of enquires related to invoking the “force majeure” provision of contracts. As force majeure is a contractual concept under English law (though not under certain civil law regimes), each case has to be regarded on its own individual merits.
In practice, force majeure clauses may have a variety of forms, some of which are further detailed below, but the overarching principle is that an unprecedented event has occurred, which prevents a party from actually performing its contractual obligations (rather than it is more expensive to do so) and typically that force majeure event is the sole cause of the party’s inability to perform. This may clearly be more of an issue where performance is also influenced by the recent crash in the oil price (which would not qualify as force majeure). In addition, the party relying on force majeure would usually have to take steps to mitigate the effects of a force majeure event – the spread of COVID-19, or government announcements regarding the risks, do not in themselves constitute force majeure.
Current events are particularly notable when contrasted against the Ebola outbreak of 2014 where the government controls were similar (and potentially qualified as a change in law causing force majeure) but the impact was much more localised, allowing greater opportunities for international companies in particular to withdraw employees or otherwise mitigate the effects of force majeure.
Force majeure is distinguished from the English common law doctrine of frustration, which requires a more stringent standard of proof to be met, with the requirement being it has become impossible to perform the contract, rather than merely more difficult. For this reason, it is often more feasible to invoke a force majeure provision, provided that the contract allows for it.
There are four considerations to be made when attempting to rely upon a force majeure clause:
- Are there specific references to “epidemic,” “pandemic,” “acts of God” or “acts of government” in the definition of force majeure event?
- What are the conditions that must be met in order to invoke the clause?
- What would the contractual consequences be if the clause were to be invoked? This could include termination of contract, suspension of particular contractual obligations (e.g. take-or-pay liabilities), extensions of time or allocation of losses.
- Is there any interaction with mandatory local law? It is vital to ensure that enforcing any force majeure provisions would not contravene any legislation in the jurisdiction in which the contract is based.
The table below sets out some of the different applications of force majeure in oil and gas industry standard contracts, varying from the “exhaustive list” approach of LOGIC contracts, to the somewhat more restrictive approach of the AIPN JOA, which covers only “lockouts, and other industrial disturbances.”
Force majeure and COVID-19 in various oil and gas industry standard agreements
|Agreement||Summary of FM provision||Application to COVID-19 and analysis|
|The definition of force majeure in the AIPN JOA and UUOA generally mirrors the associated upstream petroleum contract. The affected party should consider force majeure in line with such agreement.||One of the specific events listed in the optional provision of the AIPN model contract is “lockouts, and other industrial disturbances even if they were not beyond the reasonable control of the Party.” It is arguable on the commonly received meaning of the term that a lockout can only apply in the context of a labour dispute, though an industrial disturbance would likely be of wider application and may be more useful.|
|South Eastern Africa upstream licence||
||One of the specific events listed in the [licence] force majeure clauses is an “epidemic.” COVID-19 has been classified by the World Health Organisation as a pandemic, a further level of materiality, though depending on the circumstances it may be that its local effects (and, most importantly, its effect on the claiming Party) are less severe.
Other events that may be applicable are “quarantines” or “public order disturbance” i.e. the Concessionaire is unable to carry out minimum work obligations due to the lack of manpower caused by a quarantine order issued by the host government.
|Northern Africa upstream licence||
||Whilst the PSA does not contain a list of specified force majeure events, it is drafted very broadly and states that any event causing the delay/preventing the performance of the affected party can be considered as force majeure, provided that such event is irresistible, unforeseeable and independent of the will of the party invoking force majeure.|
|Energy Charter Treaty||Force majeure means “irresistible compulsion or coercion, unforeseeable course of events, fulfilment of contract.”||In the absence of the express inclusion of relevant events such as “epidemics,” “acts of government” or “quarantines” as force majeure events, it is challenging to establish that the non-fulfilment of contractual obligations is impossible.
It may be worth reviewing other applicable provisions in the ECT, such as the stabilisation clause or hardship clause (if applicable). For instance, where a hardship clause is provided, the affected party may be entitled to call for renegotiation of the contract, if the continued performance of the affected party’s obligation has become excessively onerous due to the outbreak of COVID-19.
|LOGIC Contract (Clause 12)
Leading Oil & Gas Industry Competitiveness
||While the force majeure definition is an exhaustive one, as social distancing is now statutory in a number of countries, to the extent that companies are required to close their operations this may qualify as a change in law.|
|Beach UK gas sales terms 2015 (Clause 9)||
||The British government has issued new rules on “social distancing” to address the outbreak of COVID-19. Whilst one of the four reasons that one can leave home is travelling to and from work, this is only permitted where such work cannot be done from home. One potential consequence of these restrictions is a lack of manpower at a Seller’s Facilities, though it is questionable whether, as a Reasonable and Prudent Operator, the Seller would order the complete shutdown of its Facilities.
For the Buyer to invoke force majeure relief, the Buyer must establish that the force majeure event (i.e. failure to transport Natural Gas from the Delivery Point) is caused by the outbreak of COVID-19, not due to the reduced downstream demand or lower market price. The Buyer is also required to show that there are no alternative means for performing its obligations and it has taken reasonable steps to mitigate or avoid the effects of the force majeure event i.e. whether the Buyer has taken steps to solve the transportation issue.
Given the widespread effects of COVID-19, it is important to clarify whether force majeure is applicable in your contracts and to consider an appropriate legal strategy early. Incorrectly invoking force majeure may itself amount to a repudiatory breach and there might be better contractual ways to deal with the current disruption to your operations. If you are currently negotiating a new contract, or conducting due diligence, you should review carefully any proposed force majeure clause and other contractual terms to consider if risks in respect of COVID-19 are appropriately addressed.
If you have any concerns in relation to your oil and gas contracts or require specific assistance with any of the points noted above, please contact a member of the Dentons Energy team.