The High Court tells defendant to bear the consequences of market risk as lawyers question interpretation of 'reasonable endeavours.'
A West African offshore drilling dispute has been resolved after the High Court in London handed down guidance on the interpretation of force majeure clauses. Plaintiff Seadrill Ghana Operations won a London High Court judgment for USD 273 million, plus interest and expenses.
Bear the consequences
In October 2016, Tullow Ghana sought to invoke a force majeure clause in a five-year drilling contract for Seadrill’s semi-submersible drilling rig ‘West Leo,’ claiming that a border dispute between Ghana and Ivory Coast, which led to an arbitral ruling restricting drilling in the planned area, constituted a force majeure event. Seadrill countered that there was no force majeure event, contending Tullow terminated in part due to declining oil prices in 2014, resulting in a significantly higher rig payment than the then-current market rate, terminated for Tullow’s convenience. The court agreed. In his judgment, Judge Nigel Teare said, ‘in the business of drilling for oil there are many risks,’ and ‘if the risk which materialises is not a force majeure then Tullow has to bear the consequences.’ The ruling upholds the principle that a party cannot escape a bargain because the market turned against them.
Partner Simon Blows, of HFW acting for Tullow Ghana, commenting in a firm briefing, wrote that the judgment ‘to some extent arose out of ambiguities in the force majeure clause. It shows that it is worth spending time dealing with causation and defining what is captured by reasonable endeavours at the drafting stage.’ He added it isn’t clear from the judgment ‘where the line is to be drawn’ and ‘oil companies will therefore have a difficult decision to make in a force majeure situation when faced with a reasonable endeavours obligation.’ Mr Blows concluded, ‘It might, as in Tullow’s case, be significantly better for them financially not to do work that would fall within the reasonable endeavours obligation, and, if they have the option, as Tullow did, cancel the contract for convenience or pay a standby rate, than to do the work and be entitled to cancel for force majeure. It is difficult to see how this could be what was intended by the words ‘reasonable endeavours.’