The Covid pandemic had many companies scrambling to review the force majeure provisions in their contracts. Indeed, a company’s survival may depend on whether the force majeure clause contains a particular event enabling relief to be granted. But how many have made New Year resolutions to review their force majeure clauses?
Key Issues on Force Majeure
One aspect of force majeure provisions in energy projects that is always surprising is how much such clauses vary between different types of energy contracts. In addition, until recently, it was noticeable in negotiations how relatively little attention was paid to force majeure provisions even in long-term contracts.
In English common law, the term ‘force majeure’ has no recognised meaning, so the effect of force majeure provisions depends upon the specific wording of the relevant clause. Whilst force majeure clauses in energy contracts vary, broadly they are generally drafted to relieve parties from their contractual obligations when the performance of such obligations is prevented, hindered or delayed by events beyond their control. There are some ubiquitous questions that arise in drafting force majeure clauses such as:
- What circumstances are intended to be covered by force majeure?
- What, if any, specific events should be referenced as events of force majeure and are they exhaustive?
- What are the consequences of a force majeure event?
- To what extent are mitigation steps required by the party relying on the provision?
- What are the immediate and ongoing notice requirements?
- Does the contract terminate if the force majeure event lasts beyond a certain period and what are the financial consequences of termination in these circumstances?
There are many others but the above provide an indication of the many issues to be negotiated and agreed in a typical force majeure clause.
A Spider’s Web of Contracts
Whilst for certain energy projects there are industry precedents and established market practice to assist with drafting, the nature of energy projects often makes such clauses bespoke to an individual project. With so many interlinked contracts in a typical energy project, a project sponsor will often need to ensure that an event triggers the force majeure provisions under multiple contracts so cannot simply consider a force majeure clause in the context of one contract (so called “back to back” provisions). For example, a power plant owner would not want to have continuing power supply obligations under a power purchase agreement if its fuel supply contract has suffered a force majeure event so it cannot generate electricity.
Bespoke Energy Contracts
Some industry standard contracts such as the Association of Energy Negotiators (“AIEN”) international joint operating agreement (“JOA”) precedent contract are very helpful starting points for negotiation and the AIEN JOA is used extensively in the oil and gas industry. The current 2012 AIEN precedent JOA references various options so one has to choose the appropriate option and then consider the relevant risks. For example, one option references using the force majeure definition in the underlying production sharing contract. Whilst this provides symmetry, it may need some modification for the JOA. In addition, using the same provision can be problematic where the underlying contract is governed by a different law (very often, the laws of the country in which the project is taking place and also if a civil law country, the law may already include jurisprudence on force majeure) and the law of the JOA is governed by another law (often English law). Bespoke drafting will therefore often be needed for the definition of force majeure in the JOA.
The question of force majeure events and relief granted can be further complicated by the use of other provisions and concepts within contracts to deal with issues and provide alternative relief for those events. For example, in many of the traditional PFI/PPP energy-related projects, force majeure was often narrowly defined with other clauses dealing with “relief events” and “compensation events” or even “material adverse change” clauses covering events that might be considered events often subject to force majeure and providing different relief regimes dealing with these events. One should therefore not just review the force majeure clause in an energy contract in isolation.
Some energy industry precedents such as the AIEN Master Liquified Natural Gas (“LNG”) Sale and Purchase Agreement have detailed force majeure provisions. As LNG arrangements are generally complex, it is not surprising the provisions are lengthy. However, what is interesting is that there is as part of the force majeure clause a list of matters which expressly fall outside the definition of an event of force majeure. This is unusual in most force majeure provisions in the energy sector (these usually focus on what is rather than what is not a force majeure event) but is often standard practice for LNG sale and purchase contracts. As well as an understanding of the individual project risks, familiarity with any relevant standard forms in the energy industry and market practice is another helpful prerequisite to drafting force majeure clauses.
Force majeure provisions in energy contracts are likely to be subject to increasing scrutiny and focus going forward given the experience of recent years and the ongoing Covid issues worldwide. In the light of the importance and bespoke issues with force majeure clauses in energy projects highlighted above, it may be prudent for many companies to make a New Year resolution to review such clauses in existing and new contracts in 2023. To the extent existing contracts cannot be amended, insurance should be considered to fill any gaps. Indeed, it is just possible that the wording of force majeure clauses in some energy contracts may even achieve “dealbreaker” status in 2023!
If you have any questions on force majeure clauses in energy contracts, please contact Richard Temple.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.