Oil & Gas: Scope of Force Majeure Clauses in Yemen PSAs

Force majeure clauses typically excuse liability for, or suspend performance of, contractual obligations on the occurrence of a specified event. In the recent case of Gujarat State Petroleum Corporation Ltd et al. v Republic of Yemen et al (Civil Action No. 16-cv-1383 (DLF)), the United States District Court for the District of Columbia confirmed an arbitral award deciding that a contractor was entitled to terminate a production sharing agreement pursuant to a force majeure clause. The arbitral award is a useful reminder that the manner in which an arbitral tribunal or court might construe such a clause depends heavily on the precise wording of the clause, and on the relevant laws to be applied.

Facts

The PSAs

In 2008, Gujarat State Petroleum Corporation Ltd and others (the “Contractor”) and the Yemen Ministry of Oil and Minerals and others (the “Ministry”) entered into three production sharing agreements with materially identical terms (the “PSAs”), under which the Contractor was to carry out petroleum exploration and production activities in Yemen.

The PSAs were governed by Yemeni law, and included the following provisions:

1. Article 22.2 of the PSAs defined “Force Majeure” as “any order, regulation or direction of the Government… or any act(s) of God, insurrection, riot, war, strike (or any other labor disturbances), fires, floods, or any cause not due to the fault or negligence of the Party invoking Force Majeure, whether or not similar to the foregoing, provided that any such case is beyond the reasonable control of the party invoking Force Majeure.”
2. Article 22.1 excused the Contractor for any non-performance or delay in performance by the Contractor of any obligation under the PSAs “if, and to the extent that, such non-performance or delay is caused by Force Majeure.”
3. Article 22.4 gave the Contractor the option to terminate its obligations under the PSAs upon prior written notice if the Force Majeure event “continues in effect” for a period of six months.

The Termination

From January 2011, the security situation in Yemen appeared to deteriorate. A number of tribal clashes, attacks and kidnappings took place, and a number of governments advised their citizens to leave Yemen. In March 2011, the Yemen government declared a ‘State of Emergency’.

Following these events, the Contractor issued a notice to the Ministry in April 2011 declaring ‘Force Majeure’ under the PSAs. Around two years later, in February 2013, the Contractor sought to terminate the PSAs pursuant to Article 22.4, and referred the matter to arbitration under the Rules of Arbitration of the International Chamber of Commerce (seated in Paris).

Decision

In deciding that the termination was valid, the arbitral tribunal considered a number of issues, which are outlined below.

Qualifying Events

Article 22.2 listed several events as ‘Force Majeure’ events: (a) direction of the Government, (b) riot, (c) insurrection, and (d) any cause “not due to [the Contractor’s] fault or negligence” which is “beyond [the Contractor’s] reasonable control”.

The Contractor pointed out that category (d) included events “whether or not similar to the foregoing”, and that, therefore, this category should not be interpreted as restricted in any way by the categories preceding it. Although the award did not explore this in any greater detail, it appears that this wording was sufficient to displace the principle of ejusdem generis, to the extent this may have been relevant in Yemeni law. (This principle provides, in summary, that where a list of particular things have a common characteristic, a general term that follows only applies to things that are similar to the particular things.)

(1) Any Cause

The Contractor argued that “the extreme risk of crime and kidnapping and the extreme risk for any kind of transport and logistics activities” and the unavailability of contractors between March 2011 and February 2013 fell within category (d) above and that, therefore, these events qualify as Force Majeure.

The Ministry pointed out that in Yemeni law, the concept of force majeure requires proof that a specified event was unforeseen and that performance of contractual obligations has become impossible. It argued that the PSAs were governed by Yemeni law, and that, therefore, the Yemeni law principles of foreseeability and impossibility must be implied into the PSAs.

In agreeing with the Contractor, the arbitral tribunal made the following remarks:

• Article 212 of the Yemen Civil Code provides that “if the contract provisions are clear, no interpretation may be allowed on the basis of wishing to know the parties intentions”. The arbitral tribunal considered this to mean that if the wording of a provision of the PSAs is clear, those words must be given effect.
• Further, Article 24 of the PSAs stated that “[the PSAs] will be governed and interpreted according to Yemeni laws, except the laws which are inconsistent with [the PSAs]”. Relying on this article, the arbitral tribunal considered that the terms of the PSAs should prevail over general principles of law, insofar as they make specific provisions for particular matters.
• The PSAs made specific provisions for Force Majeure. These provisions were clear. There was therefore, no need to imply any further terms, for example regarding unforeseeability and impossibility. The parties had agreed specific wording and such wording should be given effect.

(2) Direction of the Government, riot, or insurrection

The arbitral tribunal stated that, because the above events amounted to Force Majeure, it did not need to determine whether any other events also qualified as Force Majeure. However, for the sake of completeness, it remarked that there had also been “directions of the Government”, “riots” and “insurrections” falling within the definition of Force Majeure under the PSAs.

In relation to the reference to a “riot” in Article 22.2, the arbitral tribunal decided that it should be given its natural and ordinary meaning, which the Contractor submitted is “an unlawful disturbance of the peace by a number of people”. The arbitral tribunal considered that if the parties intended for the term to have a more specific meaning, the PSAs would have said so. On that basis, the Ministry was wrong to argue that it should be interpreted in a way consistent with Yemeni law, so that it meant “protests which are illegal, not protests which fall within the legitimate right to protest or demonstrate enshrined in the Yemeni constitution”.

Causation

The parties agreed that in order for any non-performance by the Contractor of its contractual obligations to be excused under Article 22 that non-performance must be caused by Force Majeure. However, they disagreed on what that meant.

The Contractor argued that all that was required was “a sufficient link between the event and the consequence, nothing more”. The Ministry argued that the “but-for” test applied, so that the Contract’s non-performance was only excused if it could and would have performed its obligations but for the Force Majeure events.

The arbitral tribunal decided in favour of the Contractor, on the following basis:

• The PSAs (at Article 22) set out a self-contained regime for Force Majeure, and for termination as a result thereof. A requirement to show that a Force Majeure event was the only cause of non-performance is not found in the text of Article 22.1, which simply requires non-performance to be “caused” by Force Majeure. Applying reasoning similar to that applied in relation to Article 22.2 above, it decided that the wording of Article 22.1 was clear and additional requirements should therefore not be implied.
• Therefore, “as long as there is an obligation that a party is prevented from performing because of Force Majeure, then, irrespective of whether some other event could have also caused non-performance, that party is entitled to rely on Article 22 of the PSAs to terminate the PSAs…”. The Contractor did not need to show a willingness to perform had the relevant Force Majeure event not occurred.

The arbitral tribunal then decided that, based on the facts, the Contractor’s non-performance was “caused” by the Force Majeure events, and those events continued in effect for over six months so that the Contractor was entitled to terminate the PSAs in accordance with Article 22.4.

Comment

The decision in this arbitration fell on the precise wording of the force majeure provisions in the PSAs. Had the wording been less clear, the operation of force majeure under Yemeni law and the requirements of unforeseeability and impossibility may have been more relevant, and the outcome of the arbitration may have been different. Further, had the categories of events constituting force majeure been less wide or been defined more restrictively, the events that occurred in Yemen between 2011 and 2013 may not have qualified as Force Majeure events so as to trigger the relevant force majeure provisions.

This case is a good reminder of how drafters can mitigate local political risk through specific and thoughtful drafting of force majeure provisions. Rather than treating such provisions as boilerplate, it would be wise to consider carefully what events should qualify as force majeure, to what extent the parties should exclude or have recourse to principles of the applicable law, and what language should be used to achieve this.

This arbitration also illustrates the significance of the applicable law on the interpretation of force majeure clauses. For example, if the PSAs applied English law, there is a significant body of case law that appears to divide force majeure provisions into (i) contractual frustration clauses or (ii) contractual exclusion clauses. Further, it is suggested that different principles concerning construction of the clause and rules of causation apply depending upon the category into which the clause properly resides.

Interestingly, however, assuming that English law would have classed the force majeure clause in this arbitration as a ‘frustration’ clause, as it discharged the obligation to perform, the result would have been the same and the “but for” test for causation would not have applied. See, in this regard, our recent law-now on Force Majeure Clauses and Causation.

Arbitral Tribunal:

Dr. Laurent Lévy (Chair), Philippe Pinsolle, and Sir Bernard Rix.

References:

Gujarat State Petroleum Corporation Ltd et al. v Republic of Yemen et al (Civil Action No. 16-cv-1383 (DLF)).

The Final Award dated 10 July 2015 in Gujarat State Petroleum Corporation Limited, Alkor Petroo Limited, and Western Drilling Constructors Private Limited v. Republic of Yemen and the Yemeni Ministry of Oil and Minerals (ICC Arbitration No. 19299/MCP).