Drilling down into termination for force majeure

United Kingdom

In Seadrill Ghana Operations Limited v. Tullow Ghana Limited [2018] EWHC 1640 (Comm), Tullow Ghana Limited (“Tullow”) sought to defend its termination of a contract for hire of a drilling rig with Seadrill Ghana Operations Limited (“Seadrill”) (the “Contract”) in reliance on the Contract’s force majeure clause. This is an English decision, as such, it is not technically binding in Scotland but it is highly persuasive.

Facts

Tullow had interests in a number of oil fields off the coast of Ghana and plans to develop another subject to approval from the Government of Ghana.  Tullow hired from Seadrill a semi-submersible drilling rig under the Contract, which required Tullow to pay a daily operating rate in the sum of USD 600,000.

Timeline of Events

In April 2015, Ghana imposed a drilling moratorium over parts of the oil fields due to a territorial dispute with its neighbour.

Subsequently in February 2016, a technical problem arose on the drilling rig and, concerned by the fault, the Government of Ghana refused to approve Tullow’s plan to develop and drill one of the oil fields.

In March 2016, Tullow notified Seadrill that it would be terminating the Contract on the basis that the drilling moratorium was a force majeure event under the Contract, which could trigger termination of the Contract.

Seadrill disputed Tullow’s right to terminate using the force majeure provisions under the Contract. Seadrill contended that Tullow was instead terminating for convenience, pointing to the falling oil price at the time. Seadrill argued that this entitled it to an early termination fee of 60% of the day rate of the rig for the remaining period of the contract (a sum exceeding USD 270 million).

Decision

The Commercial Court held that when a party seeks to rely on a force majeure clause, a force majeure event must be the sole cause of the failure to perform an obligation.

In this case, the Court considered there to be two effective causes that prevented performance. First, the drilling moratorium (i.e. a force majeure event) and second, the failure to secure permission from the Government of Ghana. The Court held that therefore, Tullow was not entitled to rely on the force majeure clause as the basis for terminating the Contract and the Court ordered Tullow to make payment to Seadrill for the amount of approximately USD 254 million.

Although not central to the decision, the Court also considered whether Tullow had used its reasonable endeavours to avoid or circumvent the effect of the force majeure event, as per the requirements of the force majeure clause. The Court held that when exercising its reasonable endeavours, Tullow was entitled to consider its own interests but was also bound to consider the interests of Seadrill alongside its own. This, Tullow had failed to do.

Comment

This case invites caution before evoking a force majeure clause. It is not enough just to show that a force majeure event has occurred but the party seeking to rely on it must show that the event was the sole cause of the failure to perform its contractual obligations.

In addition, the case highlights a number of drafting considerations for force majeure clauses:

  1. In general, a party will not be able to rely on a force majeure clause where failure to perform contractual obligations arises as a result of multiple events (one constituting a force majeure event and the other(s) not). Therefore, specific drafting will be required if the parties intend for the force majeure clause to apply in all circumstances where a force majeure event has occurred, regardless of any other events or factors that may have contributed to a party’s failure to perform.

     

  2. It is not clear from the judgment what constitutes reasonable endeavours. It may be worth defining what is captured by reasonable endeavours for force majeure clauses and expressly including the consideration of the commercial interests of the other party.