What Constitutes Force Majeure in Gas Agreements

Introduction

The law holds contract terms and the performance of the promises within it strictly. Understanding agreements can be extremely complex for all parties involved including lawyers who are tasked with drawing out those agreements. In gas agreements, it is more herculean as there are industry practices to consider and in our book, “Understanding Natural Gas A Nigerian Perspective”, David and I discussed the various types of gas agreements relied upon in practice and the significance attached to the clauses and competing interests that need to be balanced often[1].

Inevitably, disputes often arise between companies, governments, and other stakeholders in an agreement and the need to define and agree on the meanings of the terms, the implications for the parties and if the contract is going to be performed still has become paramount conversations with considerations of circumstances that may lead to the performance of a contract being suspended temporarily or permanently.

A force majeure or Act of God clause is often viewed as a generic clause in agreements with no universally accepted meaning to account for unforeseen and unimaginable circumstances that may prevent a party from fulfilling their contractual obligations hence termed Acts of God. This inevitably leads to difficulty on agreeing on what a force majeure is since it cannot be imagined as a potential hindrance to fulfillment of terms in practice and in principle[2]. Authors however agree that force majeure is a contractual clause that allows parties to an agreement to mutually agree to be released from specific obligations or performance of some duties necessitated by unforeseen circumstances which are atypical, significant, and occur in a way that is reasonably beyond the realm of human imagination[3].

Arbitration has found acceptance in gas transactions as an alternate dispute resolution mechanism in Nigeria and internationally as a result of its potential offerings and advantages over conventional litigation to parties[4].

What Constitutes Force Majeure:

One of the most debatable points between authors has been the constitution of force majeure and what qualifies as force majeure. If a god has to literally descend in the arena and act in a way that distorts human understanding, or if some human action such as a government policy which hinders the performance of the obligation also count as force majeure and not the common law doctrine of frustration[5].

There is a well-established doctrine in contract law that unforeseeability, externality, and impossibility of performance are the hallmarks of a force majeure event. However, a debate persists regarding the applicability of this doctrine to situations where seemingly unforeseeable events recur with some frequency in specific geographical regions. While historical precedent offers valuable guidance, the unique nature of each event necessitates a nuanced analysis to determine whether it truly constitutes force majeure[6].

The scope of force majeure clauses has been extensive to try to cover for some known factors that could be considered as force majeure for purposes of a contract such as: fire, flooding, hurricanes, acts of war, riots, armed hostilities, terrorism, global supply chain disruptions and unforeseen government action or decree are common encapsulation of a force majeure clause. Since after the covid 19 pandemic that led to global shutdowns, it has become prudent to include epidemics and natural disasters[7].

Scholars have however also questioned whether where some natural occurrences such as tropical cyclones and other disasters occur frequently such as in the Philippines or India, could be considered an anticipated part of life? Could such foreseeable events be considered as force majeure[8]?

While force majeure is often considered from the perspective of only one party’s inability to meet their own contractual obligations, it has equally being considered that introducing force majeure clauses within contracts serves the purpose of alleviating liability for both parties in instances where uncontrollable circumstances impede the parties ability to fulfill contractual obligations[9].

Force majeure clauses have been a common fixture in common law jurisdictions, the Covid 19 pandemic in 2020 also raised serious questions as to whether the pandemic counts as a mitigating factor to warrant the suspension of an agreement, if it is covered by the usually generic clauses that provide for any cause that is beyond the reasonable control of the defaulting party, and the possibility of the court holding the term too ambiguous to be enforced by a court. Arguments have also been propounded in this regard as to whether Covid-19 on its own was not foreseeable considering past occurrences of SARS and the H1N1 Swine Flu pandemics which make it reasonable to conclude that COVID-19 could be deemed foreseeable[10].

In the case of Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors, an Indian High Court had dismissed a Commercial Arbitration petition, and holding that the arguments of a lockdown cannot be used by the Petitioners as a legal basis of force majeure to not fulfill their obligations. While this is rather interesting especially considering judgments from other common law jurisdictions, the Courts reasoning in this case was to the effect that performance must be objectively impossible, merely difficult or uneconomical performance is not sufficient and holding that “The lockdown was temporary and only for a limited period, making it a bad excuse for the Petitioners so as to resile from their contractual obligations with Respondent No.1 of making payments for their supply.”[11].

The most contentious arguments in the encapsulation of force majeure clauses have been acts of the government. While it is now common place to anticipate that some government action or policy may hinder the performance of some obligations under an agreement, scholars have argued that it is reasonably to be anticipated that the government may have an interest in the activities of a certain sector. In the gas industry in particular which is known for its volatility and active participation of national governments in the sector, it leaves room to question whether government policies should not be considered as a foreseeable part and occupational hazard of the business and not constituting force majeure as to suspend the operation of an agreement[12].

In the case of MUR Shipping BV v RTI Ltd [2022], the court was confronted with the task of determining what a party should do in the context of a force majeure clause which stipulates that the affected party must use its “reasonable endeavours” to overcome the relevant force majeure event[13]. In this case, an Act of government sanctioning one of the parties from trading in the US dollar as a result of the affiliations of their parent government trading with the Russian government which in this case implied having to accept performance of a contractual obligation in a manner which differed from that contemplated by the contact.

Force Majeure Clauses in Gas Contracts

Force majeure clauses often include specific examples of events that might excuse performance. However, drafters also want these clauses to cover unforeseen circumstances. This creates a tension. If a specific scenario is envisioned during drafting, can it still be considered unforeseeable, which is typically a requirement for invoking force majeure[14]?

While not often invoked, frustration a common law principle as well is considered as a defence that can be used by a party who would otherwise be found guilty of a breach of contract for failing to fulfil contractual commitments due to the occurrence of a significant event that renders fulfilling the terms of the contract difficult or impossible. Its major difference with a force majeure being that, a force majeure is provided for in the contract agreement while a frustration is raised as a defence in court without its proviso in an agreement[15].

The gas sector is riddled with fluctuations and risks, the inherent challenge in long-term gas contracts lies in their exposure to unforeseen circumstances.? While parties may try to envision the possibilities and even take active steps like insurance, enforcement of safety protocols and practices, the reality is that not all circumstances can be adequately accounted for. Courts and scholars have often found that for an event to constitute force majeure, it must constitute three elements which include unpredictability, uncontrollability and externality[16].

It is generally agreed that financial difficulty does not excuse non performance, however some parties have tried arguing that an economic recession also constitutes a force majeure scenario as it wasn’t anticipated, though courts have refused these arguments[17]. In Mints -v- PJSC National Bank Trust & another [2023], the issue of sanctions constituting a force majeure event, and if it did hinder the performance of the contract especially as regards payment of the considerations due. The court however found that the buyer was unable to make the outstanding payments due to a lack of foreign currency in its account, rather than any difficulties in making payments through the international banking system which was their argument. The court further held that lack of foreign currency was not a force majeure event and could not have been said to have hindered performance from a party who simply lacked the financial resources to meet their obligations[18].

Courts have held that a party relying on force majeure must prove their case on the facts. In Point Energy Partners Permian, LLC v. MRC Permian Company, the Texas Supreme Court held that force majeure could not be invoked to save its oil and gas leases when they mistakenly scheduled their operations to begin after the deadline on when they ought to have delivered their project[19].

The reality of the impact of climate change on the economic sustainability of businesses has been felt more acutely especially in the gas sector as the price volatility, weather conditions for drilling and transportation of products cold weather which surges demand for gas, heat waves which disrupt supply, damage of infrastructure as a result of cyclones and other weather conditions which will invariably lead to delays and disruptions[20].

Force majeure clauses are important for gas agreements, as they act as a safety net for both the buyer and seller in unforeseen circumstances which are prevalent in gas agreements. The susceptibility of disruptions from conflicts, climatic conditions and other risks identified in the force majeure clause need to be managed to ensure fairness, flexibility and room for reasonable doubt where performance of an agreement becomes impossible[21]. Considering also that a lot of gas agreements are bilateral or multilateral with many countries who have international treaties and agreements with each other, the need to have force majeure clauses is extremely important and equally knowing that a lot of gas agreements are made on a long term basis, there is a need to anticipate challenges that are outside the control of parties[22].

Conclusion

This study tackles the problem by considering actions that could constitute force majeure in gas agreements.

It is evident that there are situations that arise beyond the imaginations of parties which will undoubtedly lead to hardships from unanticipated circumstances and through no fault of theirs. Certain force majeure events have become more or less relevant as time changes and the contract evolves to incorporate new factors that affect the gas industry. COVID-19 and other epidemics, pandemics and government restrictions amongst others have become factors.

Even though the specific wordings and interpretation of each clause might vary from agreement to agreement, courts generally tend to find that a force majeure clause applies only if the event that happened is mentioned specifically in the clause or is very similar to something that is mentioned. This study highlights circumstances that could mitigate the performance of a gas agreement while considering the volatility of the sector. The consideration of recent factors such as conflict, and how certain natural occurrences may be considered as a norm in certain regions that encounter it more than others was discussed.

The imagination of parties in a force majeure clause is non exhaustive though with good reason as the courts or arbitration panel may consider it from their own perspective. This indicates a proactive approach by parties to agreements and acts which are often considered as acts of God. This approach represents a sense of humanity in understanding that agreed obligations can be frustrated by circumstances unprepared for by either of the parties with a dynamic approach to addressing the challenge ensuring that the relationship is maintained.

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[1] Daivd O Ige, Dapo Akinosun, Understanding Natural Gas a Nigerian Pepective, Harmony Publishing (2023) < https://understandingnaturalgas.com/shop/ > Accessed on 12/06/2024

[2] Cosmos N. Nwedu, The Rise of Force Majeure amid Coronavirus Pandemic: Legitimacy and Implications for Energy Laws and Contracts, 61 Nat. Resources J. 1 (2021). < https://digitalrepository.unm.edu/nrj/vol61/iss1/ > Accessed on 12/06/2024

[3] Baleroni, Rafael. “Force Majeure in Oil & Gas Contracts.” Nordic Light (2020): n. pag. Print.

[4] Bello, Temitayo, Enforcement of Energy Arbitral Awards: A Judicial Practice in the United States of America and Nigeria (July 21, 2017). <: https://ssrn.com/abstract=3006509 or < https://dx.doi.org/10.2139/ssrn.3006509 > Accessed on 17/06/2024

[5] Cosmos, “1”

[6] PWC, Force Majeure,< https://www.pwc.com.au/legal/assets/investing-in-infrastructure/iif-30-force-majeure-clauses-feb16-3.pdf > Accessed on 17/06/2024

[7] Shmatenko, Leonid & Christie, Konstantin & Han, Mino. (2020). LNG Contract Adjustments in Difficult Times: The Interplay between Force Majeure, Change of Circumstances, Hardship, and Price Review Clauses. < https://www.researchgate.net/publication/340298877_LNG_Contract_Adjustments_in_Difficult_Times_The_Interplay_between_Force_Majeure_Change_of_Circumstances_Hardship_and_Price_Review_Clauses/citation/download > Accessed on 14/06/2024

[8] Ibid

[9] Bryce Riccitelli and Jung Hyun Lee, Adapting to Unforeseen Challenges: Changes in Force Majeure Clauses in State DOTs over a span of Five Years, (2024), EPiC Series in Built Environment Volume 5, < https://easychair.org/publications/download/GH8D > Accessed on 12/06/2024

[10] Velez-Calle, Andres and Aydinliyim, Lauren and Sosa, Santiago and Large, Joshua, Expecting the Unexpected: Force Majeure Clauses and the COVID-19 Pandemic (November 2020). Rutgers Business Review, Vol. 5, No. 3, 2020, pp.416-433. < https://ssrn.com/abstract=3831683 > Accessed on 12/06/2024

[11] Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors

[12] Piper Hampton, Finding Our New Normal: Reevaluating Force Majeure Within Oil and Gas Contracts in the

Wake of COVID-19, 7 OIL & GAS, NAT. RESOURCES & ENERGY J. 149 (2021),

https://digitalcommons.law.ou.edu/onej/vol7/iss1/7 > Accessed on 17/06/2024

[13] MUR Shipping BV v RTI Ltd [2022] EWHC 467

[14] Ibid

[15] Giwa Osagie & Co, COVID-19 Pandemic and the Doctrines of Force Majeure and Frustration of Contract; Impact on Commercial Contracts < https://www.giwa-osagie.com/covid-19-pandemic-and-the-doctrines-of-force-majeure-and-frustration-of-contract-impact-on-commercial-contracts/ > Accessed on 17/06/2024

[16] Azfar, Fareya. “The Force Majeure ‘Excuse.’” Arab Law Quarterly, vol. 26, no. 2, 2012, pp. 249–53. JSTOR, https://www.jstor.org/stable/23234657. Accessed 17/06/2024

[17] Encinas, Carlos A. “‘Clause Majeure?’: Can A Borrower Use An Economic Downturn Or Economic Downturn-Related Event To Invoke The Force Majeure Clause In Its Commercial Real Estate Loan Documents?” Real Property, Trust and Estate Law Journal, vol. 45, no. 4, 2011, pp. 731–76. JSTOR, https://www.jstor.org/stable/23058673. Accessed 20/06/2024.

[18] Mints -v- PJSC National Bank Trust & another [2023] EWCA Civ 1132

[19] Point Energy Partners Permian, LLC v. MRC Permian Company, — S.W.3d —, No. 21-0461, 2023 WL 3028100 (Tex. 2023),

[20] Dellinger, Myanna. “Acts of God or Acts of Man? Rethinking Contractual Impracticability in Times of Climate Change.” Natural Resources & Environment, vol. 30, no. 3, 2016, pp. 31–35. JSTOR, https://www.jstor.org/stable/44134108. Accessed on 20/06/2024

[21] Aubrey, Michael D. “Frustration Reconsidered: Some Comparative Aspects.” The International and Comparative Law Quarterly, vol. 12, no. 4, 1963, pp. 1165–88. JSTOR, https://www.jstor.org/stable/756562. Accessed 26 June 2024.

[22] Kurtz, Jürgen. “Adjudging The Exceptional At International Investment Law: Security, Public Order And Financial Crisis.” The International and Comparative Law Quarterly, vol. 59, no. 2, 2010, pp. 325–71. JSTOR, https://www.jstor.org/stable/40835393. Accessed 26 June 2024.