18 Sep 2018

The West Leo Case – concurrent causes of termination of a long-term project contract

by Stephen Rayment, Group Managing Director -

Much has been written regarding concurrent delays in relation to long-term project contracts and the matter has not yet been closed. Concurrent causes of termination however seem to be a more original issue, which has been addressed by Mr Justice Teare (the “Judge”) in the Commercial Court decision Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) (The “West Leo Case”).

Background of the West Leo Contract
The case arose from a dispute between the respective Ghanaian subsidiaries of a leading oil and gas company (“Tullow”) and of a deep-water drilling contractor (“Seadrill”) in relation to the termination of a long-term project contract. Tullow hired from Seadrill a sophisticated deep-water rig, referred to as “West Leo” for the provision of drilling services, in consideration of a daily rate, regarding the operation of two concessions off the coasts of Ghana, respectively referred to as (“TEN”) and (“Great Jubilee”).

The contract for the hire of West Leo (the “West Leo Contract”) was entered into by Tullow and Seadrill in 2011 and was due to run until mid-2018. Such contract could come to an early termination without fault, either for the convenience of Tullow, subject however to the payment of an early termination fee (60% of the daily rate of West Leo for the remaining term of the contract) or, without compensation upon the occurrence of force majeure. Tullow opted for the latter.

The Judge set-up the stage at the start of his judgment as follows: “Drilling for oil is a risky business. Oil companies seek to protect themselves against the financial consequences of risks by appropriate clauses in their contracts, for example by a force majeure clause”… “The question to which this case gives rise is whether the oil company was entitled to rely upon the force majeure clause in that way”.

Circumstances leading to the early termination of the West Leo Contract
In 2014, the states of Ghana and Ivory Coast entered into an arbitration pursuant to the United Nations Convention on the Law of the Sea (“UNCLOS”) regarding the determination of their respective offshore boundaries. On 25 April 2015, the arbitral tribunal issued a Provisional Measure Order (“PMO”), ordering that Ghana should take all necessary steps to ensure that no new drilling would take place in TEN, although completion of existing wells could continue in this field. West Leo could therefore continue to be used as scheduled for such completion until September 2016. It was envisaged that West Leo would then be used in the Great Jubilee field, on the assumption that Ghana would grant approval of the Great Jubilee Plan. It was submitted by Tullow in December 2015 but never approved due to the occurrence of another unexpected event.

In February 2016, a technical problem was found in a related marine structure, a Floating Production Storage and Offloading unit (an “FPSO”), which significantly affected the volume of oil which could be extracted from Great Jubilee and compromised the economic balance of the operation for Ghana and Tullow alike.

In addition to these political and technical issues, the economic background of the project had deteriorated. The collapse of the market value of oil combined with lower market rates of hiring rigs conspired to render the operation of Great Jubilee as well as the West Leo Contract financially unattractive.

On 1 September 2016, Tullow gave notice of a force majeure occurrence to Seadrill consisting of the prevention by the PMO to perform further drilling works on TEN. Furthermore, the rejection by the government of the Great Jubilee Plan was alleged to impose a moratorium on future drilling in this field as well. Tullow claimed that these events “either individually and/or cumulatively, give rise to a force majeure occurrence” and ended the West Leo Contract as of 1 December 2016.

Seadrill challenged such termination for force majeure and argued that it was a termination for convenience of Tullow. Seadrill claimed for payment of the convenience fee as well the standby rate until 1 December 2016 for an amount in the region of US$270 million.

The Judge agreed with Seadrill and granted the full amount of its claim (less some VAT which was not due on some invoices).

Applicability of the force majeure Clause of the West Leo Contract
Force majeure is a civil law concept which has never been recognized as having a precise meaning under the law of England and Wales (“English Law”). However, force majeure clauses are commonly used in contracts governed by English Law because they may be tailored to their risk profile and such contractual concept is preferable to the only similar common law concept – the doctrine of frustration, which is of limited use and flawed with uncertainty.

As noted by in Tandrin Aviation Holdings Ltd v. Aero Toy Store Llc & Anor [2010] EWHC 40 (Comm): “Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause; “force majeure” is not a term of art.”

Although the definition of force majeure in the relevant clause of the West Leo Contract was customised and included the event of a “drilling moratorium imposed by the government”, its structure and wording were similar to those encountered in most standard form contracts.

The clause provided that neither party would be responsible for failure to fulfil any term or condition of the contract, to the extent that the affected party had been delayed or prevented by an occurrence of force majeure as defined in the contract. In the event that force majeure prevailed over a period of 60 consecutive day, Tullow was entitled to terminate the contract. Both parties had to use their reasonable endeavours to mitigate, avoid, circumvent or overcome the circumstances of force majeure.

Having accepted that the PMO qualified as force majeure under the contract, the Judge went on to review the matter of causation necessary for the applicability of the clause.

He found that as regards to Tullow’s intended use of West Leo, the PMO had little effect. According to contemporary records, including the rig schedules which represented Tullow’s plans immediately prior to and after the PMO, it was planned to use West Leo from May 2015 until October 2016 in TEN and then from October 2016 until May 2018 on the drilling and completion of wells on Greater Jubilee. Besides, the Judge clarified that force majeure occurred and should have been notified at the time of the PMO and not more than a year later, even if its effects were delayed.

The failure by Tullow to obtain government approval of the Greater Jubilee plan probably had a more significant impact on the use of West Leo after October 2016, but such failure does not qualify as force majeure.

Furthermore, contemporaneous records reveal that Tullow had been thinking of deferring the operation of Great Jubilee “due to low oil prices/high rig rates”.

Having considered relevant precedents, the Judge concluded that both the PMO and the failure to obtain approval of the Greater Jubilee Plan were, on a broad sense view, causative of Tullow’s inability to comply with its contractual obligations, namely the provision of drilling instructions to Seadrill.

Relying on the Court of Appeal decision in Intertradex v Lesieur [1978] 2 Lloyd’s Reports 509, which is regarded as one which establishes the proposition that a force majeure event must be the sole cause of the failure to perform an obligation, the Judge held that Tullow was unable to rely upon the force majeure clause.

Although the issue did not arise in the circumstances, the Judge went on to clarify the meaning of reasonable endeavours deriving from the application of the force majeure clause.

He stated: “It is well established that when a party seeks to rely upon a force majeure clause, he must show that the situation and the consequences are beyond his reasonable control”.

Although Tullow was entitled to consider his own interests, it was also bound to consider the interests of Seadrill before resorting to the force majeure clause. Tullow had to prove, on the balance of probabilities, that there was nothing that he could reasonably have done to avoid or circumvent force majeure. The Judge found that there were at least four other fields where West Leo could have been used to carry out various valuable tasks from October 2016 until 2018, including completion of other wells operated by Tullow and urgent maintenance work.

The Judge concluded: “For these reasons, Tullow is unable to show that it exercised reasonable endeavours to avoid or circumvent the force majeure”.

Take away
This case is of interest because questions of this nature can arise in different contexts and are generally relevant to project long term project contracts, regardless of the industry. Although the wording of the force majeure clause of each contract shall always prevail, the following points are of particular relevance:

  • Force majeure can only be invoked if it is the sole cause of delay or termination of a project contract;
  • There must be a clear line of causation between the occurrence of force majeure and the failure to perform its obligations by the party who invokes such occurrence;
  • A force majeure event has to be notified at the time it occurs and not at the time its effects bite;
  • It is not only the occurrence of force majeure but also its effects which must be beyond the control of the party who relies on it;
  • If the contract imposes that “reasonable endeavours” should be exercised to mitigate, avoid, circumvent or overcome its effects, the party desirous to invoke force majeure has to consider the interests of the other party in addition to its own interests. This is a higher threshold than usually anticipated;
  • Force majeure clauses are complex and should be drafted or tailored by a project lawyer familiar with the risk allocation it is meant to regulate.
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