COVID-19 PANDEMIC AND THE EFFECTS OF ANTICIPATORY REPUDIATION ON CONTRACTS IN THE OIL AND GAS INDUSTRY

The effect of the new novel coronavirus (COVID-19) of a pandemic proportion on contractual obligations of players in the oil and gas industry has attracted great attention in recent times, with discussions particularly centered on the effects of force majeure clauses and/or frustration doctrine on contracts in the industry. Whilst these literatures have advanced our knowledge on possible post-COVID-19 facts scenario and their attendant legal consequences, they have been largely written on two assumptions: the species of contracts analyzed are not executory contracts and the contracts intended in the analyses are in various performance stages. This article, therefore, seeks to devote attention to the margin of contracts whose performance are yet to substantially commence (executory contracts) but that may be affected by the pandemic-induced economic recession. To put it in context, can a party to a contract meant to be performed at a future date, say January 2022, initiate a substantial variation or repudiation of the contract on the ground of non-performance due to the effect of the current pandemic?

The uncertainties that coronavirus has unleashed on the world is no longer news. The oil and gas industry globally is one of the worst hit by the rippling effects of the pandemic after the aviation and tourism sectors. With a barrel of oil, including Nigeria’s Bonny light crude, nosediving into all-time selling price,?it has been estimated that exploration and production companies (E&P companies) may lose up to a trillion dollars in revenue. Expectations are that the nosedive of income of companies in the industry will adversely affect their abilities to meet their contractual obligations.?It is expected that the potential loss of revenue will compel oil companies to adopt cost-saving measure which may affect contracts of direct contractors and consequentially, subcontractors.

As typical practice in the oil and gas industry in Nigeria and other jurisdictions, contracts are largely made on anticipated needs and based on the stability of market forces. Consequently, demand and supply of products and services in the industry are made with long-term projections, assumptions and anticipations. To ensure that contractual expectations are met with some level of certainty, international oil companies put in place some “safety nets” in their contractual dealings: contracting with industry players with proven records of delivery over relatively long period of time and blacklisting defaulters; subcontracting with relatively unknown companies through known contractors; demanding for insolvency and performance bonds in some high-risk contracts; benchmarking future contracts in relatively stable currencies; or paying the contractors after substantial performance or part-delivery usually within forty five days.

Anticipatory repudiation of contract occurs where a party decides to cancel a contract prior to the performance of the contract, or where a party to a contract performs an act or fails to do an act which makes the performance of the corresponding obligation of the other party impossible. Depending on the facts of a case, an anticipatory repudiation of a contract may lead to an anticipatory breach of the contract.?According to Justice Benjamin Cardozo in New York Life Ins. Co. v. Viglas[1], anticipatory breach is “one committed before the time has come when there is a present duty of performance. It is the outcome of words or acts evincing an intention to refuse to perform in the future.”

The principle of anticipatory breach of contract has evolved over time. The decisions of the Court appear to have laid in more practical terms what would be considered an anticipatory repudiation or breach of a contract in law. In the case of Mersey Steel and Iron Co. v. Naylor Benzon & Co. (1884) 9 App Cas 434 Lord Blackburn gave insight into what would be considered an anticipatory breach: “Where there is a contract to be performed in the future, if one of the parties has said to the other in effect: 'If you go on and perform your side of the contract, I will not perform mine' that in effect amounts to saying 'I will not perform the contract.' In that case, the other party may say 'you have given me distinct notice that you will not perform the contract, I will not wait until you broken it, but I will treat you as having put an end to the contract and if necessary I will sue you in damages, but at all events, I will not go on with the contract.”

From the foregoing, it appears that the Court will consider the following factors in determining whether there has been an anticipatory breach of a contract:

a.??????existence of ?a subsisting executory contract which must be due for performance in a future date;

b.??????unequivocal communication by correspondence or conduct from a party that for any reason clearly suggest to the other party?it will not perform its obligation under the contract

c.??????the communication must be accepted by the recipient ?as putting an abrupt end to the contract before performance.

The coexistence of these sets of facts will ultimately create a litigable cause of action for the aggrieved party.

Determination of Anticipatory Breach

What will constitute anticipatory breach of a contract is largely dependent on facts. The sets of facts that may give right to the breach will be considered in its entirety before the Court can come to the conclusion that there has been a breach. An anticipatory breach will be deemed to occur where;

???????i.???????????a party initiates another contract or attempt to substantially vary the current contract, the aggrieved party can treat this event as an anticipatory breach;

?????ii.???????????the contract is also terminated for any reason than as provided in the contract?between the parties;

???iii.???????????where the performance of a party is a prerequisite for the performance of the other party and the former indicates its unwillingness to perform; or

???iv.???????????there that the bankruptcy of a party to a contract may amount to anticipatory breach of the contract.

?Whilst most contracts in the oil and gas industry will make provision for the right of a party to terminate the contract whenever there is the likelihood of insolvency of a party to the contract, it is imperative to state that such insolvency may be a ground to institute an action against the receiver manager of the party for anticipatory breach.

?In determining whether the termination of a future contract that may be affected by COVID-19 will constitute an anticipatory breach, will be largely dependent on the terms of the contract between the parties. Where, for instance, the contract provides that request for performance of contract by the other party is need-based, it may be a formidable argument for a party to state that the need has not arisen or may not arise as a justification for the termination of the contract. The performance of ?such a need-based contract that gives a party may become a condition precedent for which a right of action for a claim in repudiatory breach. Also, where the contract is such that is predicated upon the occurrence of an event, such as where a party is bound to obtain a permit and COVID-19 directly or indirectly affects the grant of that permit, it would appear that the right of action for repudiatory breach may not crystallize.

?It is not uncommon to find in standard IOCs contract provisions termed ‘termination for convenience clauses.’ This clause usually provides that the IOC reserves the right to terminate any or part of the contract for convenience by giving a notice of termination of the contract to the contractor. The clauses usually comes with a cap on the remedies available to the contractor which is typically pegged at the quantum of service rendered or goods supplied at the point of termination. It would appear that clauses like this envisages termination of the contract upon part or substantial performance and that the rights of the contractor will be in quantum meruit. Whether or not the contractor will have a claim against the IOC employer, and relief in damages for the anticipatory breach of such contract may still be manifestly arguable.

Consequence of Repudiatory Breach

The effect of repudiatory breach of a contract is largely dependent on the contract between the parties and, in some cases, other collateral contracts. The age-long principle in Hadley v Baxendale(1854) 9 Ex. 341[2] is to the effect that where there is a breach of contract, damages must be such that will place the aggrieved party in the position, would have been if the breach had not occurred. Thus, damages that would be granted to the aggrieved party should be such that are reasonable, just and exemplary, given the facts and size of the contract breached.

It is still a hotly debated issue in law, whether what should be considered a damage should also include anticipated income over a period of the lifespan of the contract. The panel of arbitrators in the infamous P&ID v The Ministry of Petroleum Resources of Federal Republic of Nigeria relied on a number of authorities to hold that anticipated income from the contract if performed, when sufficiently proved, entitles the aggrieved party to equivalent damages. It was held that “an estimation of future income requires a calculation of (a) the yield of NGLs which the plant would have recovered from the incoming gas and (b) the prices at which they could have been sold. The resulting figure must then be discounted to allow for the award being for an immediate lump sum rather than income spread over 20 years.” This was the sole reason Nigeria became indebted to P&ID for anticipatory breach of a contract to the tune of US$6.5 billion and rising default fees. The allegation of fraud now raised by government is a different issue altogether.

Non-performance of a contract may however trigger a right in another collateral contract. For instance, where there is a performance bond executed in favour of?a party, notice of failure to perform the contract may create the right of the aggrieved party (typically called the employer in construction contracts) to make a call on the bond from the surety. Therefore, rather than sue for anticipatory breach of the contract, the party may elect to make a call on the bond as soon as there are factual basis to treat the contract as repudiated. There is no law that estoppes the counterparty to call for performance bond and still sue for repudiatory breach of the contract where it forms the view that the performance bond will not suffice to assuage its losses.

Conclusion

As the world continues to battle COVID-19 pandemic and its aftermaths, it is necessary that there is a review of executory contracts to determine the extent of impact of COVID-19 on such contracts. A viable option available to a party that discovers that terminating or varying the terms of its contract is to reach a negotiable settlement of the contract. In other words, a party that is at the risk of anticipatory breach should open talks with the other party and reach a negotiated settlement of the contract. A negotiated settlement will amount to accord and satisfaction in law which may dispense with any liability that may arise therefrom. The suggestion for a ‘soft landing’ for contractors whose contract is backed up by bond is also advisable as the right to make a call for a performance bond may inure to the counter party where it is manifest that the contractor is unable to perform its contract. A careful examination of the terms of the contract and the management of the realities that the pandemic has brought upon the industry is necessary to forestall possibility of actions on the ground of anticipatory breach. Prevention is always cheaper than cure.

[1] 297 U.S. 672, 681, 56 S. Ct. 615, 618, 80 L. Ed. 971, 977 (1936)?

[2] (1854) 9 Ex. 341