It’s the little things in life that mean so much – why boilerplate clauses can be so important

3 October 2018

Background – the law of frustration

When talking to non-lawyers, you can see their surprise when you tell them that English Law has no concept of “force majeure”: just a concept of “frustration” which is something of a misnomer. A frustrating event is one which renders the contract impossible of performance (at the risk of generalising) – not just more expensive or difficult to do, but for practical purposes impossible.

That explains why just about every commercial contract has a force majeure clause in it, often situated at the back of the contract. It is there because it is dealing with a situation which is not satisfactorily covered by the general law. Such force majeure clauses are sometimes not negotiated, but the parties are happy to accept whatever the template contains although, having said which, the Buncefield fire back in 2005 did cause a number of businesses to dust down their contracts and review the force majeure clause, possibly for the first time. In a typical negotiation of a major services contract nowadays, you can now expect the force majeure clause to receive some attention.

This makes it all the more interesting when a case comes along and reliance is placed on a force majeure clause and we get to see how the courts approach these sorts of clauses and what the outcome is. Now we have two in quick succession!

The first case – where force majeure doesn’t apply at all

In Seadrill Ghana Operations v Tullow Ghana[2018] EWHC 1640 (Comm) the judge, obviously in a laconic moment, began his judgment saying, “drilling for oil is a risky business”. What happened in brief is that Tullow had interests in offshore drilling concessions granted by Ghana. To carry out its operations, it entered into a contract with Seadrill for the hire of a semi-submersible rig, the “West Leo”. However, Ghana got into dispute with neighbouring Cote d’Ivoire over the boundary affecting the oil fields over which Ghana had granted concessions to Tullow. The arbitral tribunal hearing that dispute issued a Provisional Measures Order whereby Ghana was prohibited from starting any new drilling. Ghana passed this on to Tullow, which thereafter had little use for West Leo. Tullow tried to redeploy West Leo, but hit another snag when a Floating Production Storage and Offloading unit suffered a technical failure, leading to Ghana refusing permission for further work. Tullow stopped payments and claimed force majeure.

The relevant clause in the contract provided that neither party would be responsible “for any failure to fulfil any term or condition of the Contract” to the extent that delay was attributable to force majeure. The contract defined force majeure as follows:

“[f]or the purpose of the Contract, Force majeure shall be limited to the following: … (h) Drilling moratorium imposed by the government“.

The problem for Tullow was that Ghana’s instruction, as imposed by the arbitral tribunal, did not stop all work, but only new drilling, so work on existing wells was allowed. The other problem was in identifying the precise term or condition which it was said that Ghana’s instruction prevented. All Tullow could point to was that it was not able to provide a drilling programme for West Leo. Seadrill responded to the effect that how West Leo was deployed was up to Tullow and the contract did not impose a requirement to provide a constant flow of work for it.

Teare J held that, on the strict wording of the force majeure clause, there had not been a drilling moratorium imposed by any government, all that happened was that Ghana had refused permission for further development, but this was more based on Ghana’s realisation that Tullow’s Floating Production Storage and Offloading unit had failed.

The second case – what must the force majeure event cause?

in Classic Maritime v Limbungan Makmur [2018] EWHC 2389 (Comm) Limbungan had a long-term Contract of Affreightment with Classic under which it was obliged to provide cargoes for shipping by Classic from Brazil. In November 2015, the Fundao Dam burst, causing a local disaster and putting iron production to an end in that area. Limbungan could not make a number of shipments and relied on the contract to excuse its non-performance.

Clause 32 was headed “Exceptions” and provided that

“Neither the vessel, her master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God,…floods….accidents at the mine or Production facility….or any other causes beyond the Owners’ Charterers’ Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party…” [emphasis added]

It was not disputed that the dam burst was fell within the description of “accidents at the mine” as specifically mentioned in the clause.

Attention focused on the expressions, “resulting from” and “directly affect“. Classic argued that the clause did not apply because Limbungan would not have made any shipments anyway, as it had no shipments to make.

Teare J (the same judge as in the first case considered above) made a subtle distinction when considering the construction of these sorts of clauses: he drew a distinction between a “contractual frustration” clause and an “exceptions” clause:

  • a contractual frustration clause operates like the doctrine of frustration at common law – once you show that a frustrating event has occurred, the clause will operate to cancel the contract; however
  • an exceptions clause operates differently – the wording does not operate like common law frustration but rather provides a defence to a claim for damages for breach

The distinction is crucial: if you are construing an exceptions clause like the one in this contract, then the wording meant that Limbungan had to show not only an “accident at the mine” (which was indisputable) but it had to go on to show that, “but for” the dam burst, it would have performed the contract.

After an extensive consideration of the evidence, Teare J concluded that Limbungan would not have performed the contract anyway – it just could not find the iron to ship and had no means of getting cargoes together to comply with its obligations under the contract. In other words, its failure did not result from the dam burst, but from prevailing economic and operational circumstances preventing it from getting enough iron together to constitute cargoes to be shipped.

Thoughts

As stated above, at least since Buncefield, force majeure clauses have been receiving close attention. Their efficacy all comes down to the precise wording – they do not provide a general let out just because things have got difficult for one or other of the parties.

In Seadrill v Tullow, the wording just did not cover what had happened. Tullow needed to show that a specifically defined force majeure event had prevented or delayed it from fulfilling a term of the contract – there was no moratorium as such, it was more a case that Tullow could not deploy West Leo where it wanted to. What had happened is that its need for the expensive rig had diminished, but it could not point to a particular provision in the contract that it could not fulfil. In particular, it could still keep paying, even though it had little, if any, use for the rig.

Classic Maritime v Limbungan introduces a subtle distinction into drafting which it is worth bearing in mind: when drafting a force majeure clause, are you trying to draft a clause which mimics common law frustration such that a defined event brings the contract to a complete end instanteously, or are you drafting a clause which provides a defence for non-performance after a particular event? If the latter, then you need to show that you would have been able to perform if it had not been for the particular event, as the point of the clause is to excuse non-performance for the defined event, not to provide a general excuse for non-performance.

Of course, it all comes down to the wording and these two cases neatly illustrate the advantages of having a force majeure clause in your contract, as well as the disadvantages of one that is too tightly drafted and inapplicable to the facts that have occurred.

Caveat: this is a general update on legal developments and, as always, you should take specific advice on your particular problem before proceeding.