English Court Rejects Tullow’s Force Majeure Defence to Contract Termination
The Business and Property Courts of England and Wales in the case of Seadrill Ghana Limited v Tullow Ghana Limitedhas rejected a force majeure defence advanced by Tullow in response to an unlawful termination of contract claim by Seadrill.
The relevant facts are as follows. Tullow hired from Seadrill a semi-submersible rig (by name West Leo) to assist it with its oil exploration activities. This was in 2012. But things did not go according to plan.
First, in 2014, Ghana decided to submit the longstanding maritime boundary dispute between her and La Côte d’Ivoire to the International Tribunal of the Law of the Sea (ITLOS). In 2015, La Côte d’Ivoire in furtherance of her adverse claim sought and obtained from the ITLOS an order preventing Ghana from going ahead with the drilling of new wells in the disputed area. Tullow had some concessions in the disputed area. The government notified Tullow of this and as a result, it could not go on with drilling activities.
Then in 2016, a technical problem occurred with Tullow’s Floating Production Storage and Offloading (FPSO) Unit. This technical problem significantly affected the amount of oil which could be extracted. The Ministry of Petroleum, in a communiqué to Tullow stressed that the damage to the FPSO had led to “a curtailment of production and gas export” which was having “unbearable effects on the Ghanaian economy.” In another communication, the Petroleum Minister was reported to have said that the damage to the FPSO has had “serious financial implications for the country”. It was Tullow’s case that in the light of the damage to the FPSO, the Government of Ghana was unwilling to approve drilling activities in the Jubilee area until the issue with the FPSO had been resolved. Tullow pointed out that the failure of Government of Ghana to approve of drilling activities in the Jubilee area meant that there was no work for West Leo to do. In sum, Tullow argued that it had hit a cul-de-sac and was left with no option but to rely on the force majeure clause in the contract for the hire of the West Leo. The terms of the force majeure clause can be summarised as follows:
- Tullow and Seadrill are absolved from any liability arising from the failure to perform a term or condition of the contract due to a drilling moratorium imposed by government;
- Force majeure event must not be a result of the fault or negligence of a party and should not be capable of being resolved or prevented by the exercise of due diligence; and
- Both parties are to use their reasonable endeavours to mitigate, avoid or circumvent the circumstance of force majeure.
Seadrill challenged the basis upon which Tullow terminated the agreement. According to Seadrill, Tullow’s decision to terminate the contract had nothing to do with the moratorium imposed by ITLOS. Rather, Seadrill stressed that its decision is linked to the drop in global oil prices which significantly impacted on the way oil exploration companies did business.
Two main issues were up for determination. The first was “whether the cause of Tullow’s failure to comply with its obligations under the contract was a force majeure, namely, a drilling moratorium imposed by the government of Ghana.” The second issue was whether Tullow exercised its reasonable endeavours to remedy or avoid the force majeure.
The court found that Tullow was unable to perform its side of the bargain for two reasons: (a) the government moratorium on drilling (flowing from the maritime boundary dispute between Ghana and La Côte d’Ivoire) and (b) a faulty FPSO leading to government’s unwillingness to approve drilling works in the Jubilee area. According to Teare J:
“The moratorium prevented Tullow from drilling… But the failure of the government to approve the Greater Jubilee Plan (itself caused by the FPSO problem) caused Tullow to be unable to drill and complete wells A-E in the Greater Jubilee Field as Tullow had intended to do. Both the moratorium and the failure of the government to approve the Greater Jubilee Plan were, on a broad common sense view of the position, causative of Tullow’s inability.”
The first cause (i.e. the drilling moratorium) was provided for in the contract for the hire of the West Leo as a force majeure event. The second cause (failure to obtain government approval) was not provided for in the contract as a force majeure event. The court, therefore, reasoned that Tullow’s force majeure argument would have been applicable if the sole cause of its inability to perform the contract was the drilling moratorium. In the court’s view, in order for Tullow’s force majeure argument to be upheld, Tullow must have been in a position to give separate notices of force majeure in respect of each of the events – which it could not.
In coming to this conclusion, the English court relied on a case which was authority for the proposition that a force majeure event must be the sole cause of the failure to perform the obligation. The court also held that Tullow failed to exercise its reasonable endeavours to avoid or circumvent the force majeure.
See paragraph 77 of the decision in which Teare J argues: “In the business of drilling for oil there are many risks which, if they materialise, may prevent Tullow from being able to fulfil its obligations. If the risk which materialises is a force majeure within the meaning of clause 27 the consequences were agreed to be borne in the manner provided by clause 27. But if the risk which materialises is not a force majeure then Tullow has to bear the consequences save to the extent that it elects to suspend work or terminate the contract “for convenience” as provided by the other clauses of the contract”