North Sea Strikes and Force Majeure

The latest in a series of strikes by oil & gas workers in the North Sea continues to test the operation and efficacy of force majeure (“FM”) provisions in oil and gas industry contracts.

There is no single “industry standard” FM clause, and so each contractual FM clause must be carefully considered in its contractual context to determine how it operates.

With many North Sea oil and gas industry contracts based on industry model forms, such as LOGIC and OEUK (formerly OGUK), we consider below the impact of the recent (and proposed) North Sea strike actions.  A review of such provisions will also have relevance for the wider energy sector.

Basis of Force Majeure – a reminder

The energy sector has had cause to consider FM clauses in the recent past with the Covid-19 Pandemic. 

As a refresher: in English law there is no principle of “force majeure” (rather, it is a principle of “frustration”). As such, whether a contract caters for “force majeure”, what constitutes “force majeure” and its consequences is a matter to be freely negotiated and agreed between the parties.

As a matter of usual drafting practice and contractual interpretation “force majeure” refers to an event beyond the (reasonable) control of the parties which prevents or delays the performance of a contractual obligation to the extent that that obligation is prevented from being performed or is subject to a delay. There are four key aspects to look out for in considering a specific FM provision:

1. What particular event(s) have the parties agreed will comprise FM under their contract? For example, are FM events specifically described (and limited) in the contract or has a wider “catch-all” provision been used?
    
2. What has been agreed is the consequence if an FM event occurs? Does it entirely excuse parties from their obligations under the contract, or cause such obligations to be suspended until the force majeure event subsides, or perhaps give rise to a right to terminate after the passage of a certain period of time?
    
3. What is the necessary causal link between the FM event and the impact on a party’s ability to perform? Must the “but for” test be met, so that the party seeking to rely on the FM provision must show it would otherwise have performed its obligations?
    
4. What are the procedural steps, in particular notification, which must be followed?

LOGIC

LOGIC standard form contracts all employ an “exhaustive list” approach i.e. they list all of the events/types of events that comprise FM for their purposes. This includes “strikes and national or regional level or industrial disputes at a national or regional level”, or strikes or industrial disputes by “labour not employed by the affected party its subcontractors or its suppliers and which affect a substantial or essential portion of the work”.

There could be debate around whether the express inclusion of national or industrial events can be read independently from (and so not be curtailed by) the exclusion for “labour employed” by the affected party and its supply chain.

Even if that requirement can be met, LOGIC general terms also contain a number of other requirements which must be met before a party can claim relief on the basis of the FM provisions. Those include a requirement for a causal link between the claimed FM event and the failure to perform in respect of which relief is sought. 

OEUK / OGUK

The OGUK Model Form JOA contains a broader definition of force majeure, which is defined as “any cause beyond the reasonable control of” the Parties which prevents or hinders them from complying with their obligations (except obligations subject to certain other requirements that the party concerned has acted reasonably and/or could not have prevented the FM event). This is a far less prescriptive approach than that adopted in LOGIC contracts and may provide more flexibility in arguing that various events, such as strike action, fall within the scope of the provision. 

That said, parties should pay attention to the requirements as to the necessary “reasonable” behaviour of the relevant party as well as the “beyond the reasonable control” test (see the “Strikes and Force Majeure - Examples” section below for some examples in English case law interpreting what is “reasonable” in the context of a strike).

Sales Terms

BP Oil International Limited General Terms and Conditions for Sales and Purchases of Crude Oil and Petroleum Products (2015) provides a broad standard for FM that “neither the Seller nor the Buyer shall be liable for a failure to perform any of its obligations under the Agreement insofar as that party proves that the failure was due to an  impediment beyond its control”.  It goes on to include examples (which would still need to meet that general standard), including: “… strikes, lock-outs, labour disputes of all kinds…”.

Transportation (and Processing) Agreements

While there is no standard form TPA in general use in the North Sea, many agreements follow a similar structure and format.  A number TPAs, including those for key North Sea infrastructure, provide that FM includes “strikes, lockouts or other industrial disturbances”.  The OEUK standard Construction and Tie-in Agreement contains similar language. 

Some TPAs go on to expressly include strikes, lockouts or other industrial disturbances “involving only the staff or business of the Party seeking to rely on the Force Majeure event”.  Such language, which expressly includes strikers within a party’s own workforce, would avoid the potential debate to be had under the LOGIC provisions.

“Sole cause”

If there is more than one cause to a party’s inability to perform (i.e. where one cause is FM, another is not), there is some debate about whether a “but for” test applies (i.e. but for the FM, the obligations would have been fulfilled).  The Court of Appeal has more recently given guidance that: “It is simply a matter of construing the words of the clause.” (See page 65, 2019 Edition, CMS Annual Review on Developments in English Oil and Gas Law).

For example, the use of the phrases such as “resulting from” and “directly affect the performance of either party” were likely to be supportive of the “but for” test, as they were indicative of exclusionary wording where the “but for” test applies.

In practice, some contracts based on the industry standard forms described above could lend themselves towards a “but for” test.

If a potential force majeure event (for example strike action) is not the sole cause it is important to consider issues of how the FM clause deals with causation before taking drastic steps (such as termination). In Seadrill Ghana Operations Limited v. Tullow Ghana Limited [2018] EWHC 1640 (Comm) seeking to terminate a rig contract for force majeure, in a falling oil market, cost Tullow USD 254 million in damages when the court decided that termination for force majeure was not permissible. (See page 63, 2018 Edition, CMS Annual Review on Developments in English Oil and Gas Law.)

Nuance in the Effect of FM

Care should be taken to understand precisely the effect of the FM clause.  Whilst some FM clauses discharge the obligation to perform, other exclude liability for the consequences. In many instances the difference will be academic, but there is a drafting difference.

Procedural Requirements / Notification

Most FM provisions will require prompt notification.  There have been disputes around whether the prompt and updated notification requirements are a condition precedent to the right to rely on the FM clause (see, for example, Scottish Power UK Plc v BP Exploration Operating Company Ltd and others [2015] EWHC 2658 (Comm), where the notification time requirements were held not to be conditions precedent (the remedy for the party being notified “late” was in damages)).  Such provisions should be examined carefully in order to ensure an FM claim proceeds on a firm, contractually-compliant footing.

Strikes and Force Majeure – Examples

As the above may reveal, much depends on the precise wording of the FM clause in question.

That said, the case law does provide some examples of arguments which have been run (and failed) in seeking to rely on FM clauses.  For example:

1. The reasonable apprehension of a strike did not in itself amount to force majeure. (Hackney Borough Council v. Doré [1922] 1 K.B. 431).  It applied to strikes actually proceeding, it did not apply to fear, however reasonable, of the consequences of threatened action.
    
2. There is authority for the proposition that contractors cannot rely on a force majeure clause purporting to exclude liability under the contract owing to strike action if they have not taken reasonable steps to avoid the strike (B&S Contracts and Design v. Victor Green Publications [1983] C.L.Y. 425).  In that case, although the party seeking to rely on the FM clause had sought to rely on it to exclude liability under the contract for, inter alia, strikes, they had not taken reasonable steps as between themselves and the other party to prevent the strike, in that they had entered into the contract knowing that there was unrest among their workforce over a pay dispute and, given the effect of failure to carry out the contract on the other party and the small additional amount of money involved to placate the strikers, they had been unreasonable in not paying the money necessary to reach a settlement and, therefore, they could not rely on the force majeure clause.

Conclusion

Events such as the North Sea strike actions are a reminder that FM provisions should be considered carefully in the drafting and negotiation of contracts; thought must be given to what the contract should expressly exclude or include as FM in the circumstances of the parties’ relationship.  In “live” contracts, care must be taken to understand the scope, causation and procedural requirements of the FM clause, in order to invoke the protections it can afford.

The wave of strike action will continue to require oil & gas companies and contractors to consider the wider steps they should be taking to protect their position.  See this takeaway document from our recent “Striking Times” webinar: striking-times-the-shifting-sands-of-industrial-relations-key-takeaways (cms.law), and our series of articles on: (1) preparing for industrial action (https://cms-lawnow.com/en/ealerts/2022/06/striking-times-preparing-for-industrial-action); (2) managing it (https://cms-lawnow.com/en/ealerts/2022/07/striking-times-2-managing-industrial-action); and (3) an overview of the industrial landscape in the UK https://cms-lawnow.com/en/ealerts/2022/08/striking-times-3-the-current-industrial-relations-landscape-in-the-uk.