First publishedin Aggregates Business Europe
Sometimes things happen outside an organisation’s control that are so significant they can have an impact on its ability to fulfil a contract. Simon Trahair-Davies from the specialist mining and minerals team at Stephens Scown discusses the implications of a recent English case on force majeure, which underlines the importance of careful contract drafting.
In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd, a case from earlier this year, the English High Court considered the issue of force majeure. The case concerned a contract for the hire of an oil rig, but the issues involved are also pertinent for the aggregates industry, particularly in light of the value of some of the contracts and risks involved, say for the hire or purchase of significant equipment.
What is force majeure?
The term force majeure derives from French law and has no recognised meaning in English law. This means that for contracts under English law specific force majeure clauses, which must define what constitutes force majeure under the contract (just to say “force majeure” events will not be specific enough), must be included in contracts. The situation varies in other European jurisdictions, so it is always an important issue to consider.
A force majeure clause in a contract is used to guard against events, acts or circumstances which are outside the control of the parties to the contract. Examples could include industrial action or a default by a supplier. When properly drafted, it means that one or both parties to a contract can be excused if certain events take place. As such, there will be no liability for failure to perform the obligations in the contract.
It is important to note however that under English law changes in the economic or market situation that make a contract less profitable than originally expected or harder to perform will not be a force majeure event. Such clauses cannot therefore be used to extricate a party from what turns out to be a bad deal.
About the case
In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd, oil company Tullow had hired an oil rig from Seadrill. The contract (worth hundreds of millions of dollars) contained a force majeure clause. Various issues arose including a territorial sea dispute between two neighbouring states that led to an arbitration tribunal which required drilling to cease. There was also a technical problem with a related marine structure which significantly affected oil production, a government failure to approve drilling for a particular location and a fall in the market value of oil.
The oil company decided to bring the contract to an end, relying upon the arbitration tribunal decision as a force majeure event. The court considered if the oil company was entitled to rely on force majeure in this way.
The court accepted that there were many risks involved in drilling for oil, but found that a force majeure event was not the sole cause of the defendant being unable to fulfill its contractual obligations and it could therefore not rely on the force majeure clause, as drafted, to justify early termination of the contract.
The court also considered if the defendant had used its reasonable endeavours to avoid or circumvent the force majeure, as required by the clause. The court found that the defendant had failed in this regard and should have provided the obligatory drilling instructions.
The importance of this case
This case demonstrates the importance of the wording of a force majeure clause and is a useful reminder that a force majeure event must be the sole cause of the failure to perform a contractual obligation, not just one of them.
Express inclusion or exclusion of certain events may be necessary when drafting and negotiating the clause and enough time must be factored into negotiations to allow for this.