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Force Majeure Attempt to Avoid Agreement Fails

Oil exploration is a risky business and industry contracts commonly make provision for unforeseen events that interrupt production – known to lawyers as 'force majeure'. Force majeure clauses are common in many other types of contract also. In a recent case, the High Court analysed the effect of one such clause in awarding more than $270 million to a provider of offshore drilling equipment.

An oil company which held concessions in respect of oilfields off the coast of West Africa had leased an ultra-deep water semi-submersible rig from the provider at a cost of about $600,000 a day. The project hit an obstacle, however, when a territorial sea dispute between two neighbouring states resulted in an arbitration panel requiring the cessation of drilling operations in disputed areas. That prompted the oil company to invoke the force majeure clause and to terminate the contract.

The provider launched proceedings in London, claiming that the oil company had had no right to bring the contract to an end. It pointed out that the project had been blighted by other factors, including a dramatic fall in the market value of oil that had reduced the daily rental rate for such rigs to $200,000 a day at most.

In ruling on the matter, the Court accepted that the drilling moratorium imposed by the panel was capable of amounting to force majeure. However, that was not the sole effective cause of the oil company being unable to fulfil its obligations under the contract. Another operative cause was the oil company's failure to win government approval for a significant part of its oil drilling plans.

The rig could have been redeployed to other parts of the oilfields, to perform tasks that were not embargoed by the arbitration decision, and the oil company had thus failed to use reasonable endeavours to avoid or circumvent the force majeure. In those circumstances, it could not rely on the relevant clause and was obliged to pay rent due on the rig to the end of the contract period.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.