Anyone who has ever studied or taught contract law recalls the process of learning about the law of frustration – which usually ends with the mantra that a truly frustrating event is almost impossible to establish. Indeed, it is for this reason that force majeure clauses were invented by the common law: the parties could agree that in a certain limited set of circumstances, the obligations to perform and to pay for performance could be suspended.
Relying on force majeure clauses is itself not without difficulty. Not only does there have to be a force majeure clause, there must be a force majeure event within the terms of the contract.2 That force majeure event must cause the suspension of performance.3 Where alternate performance is possible, even if it is commercially unwise,4 there may well be no force majeure.5
There are two sets of ongoing events relevant6 to this article. Neither is fanciful; they are drawn from the oil embargo and Petro-Dollar crisis of 1972/3 and events in Iran 1978/9 onwards and their worldwide consequences.7 The first and immediate is the blockade of the Straits of Hormuz. The second is the longer term impact on the energy sector: damage to infrastructure – rigs, pipes, hulls; delays to the provision and siting of infrastructure; and general disruption to the sector, the supply of hydrocarbons and to energy contracts generally.8
As to the first, again there are two factual scenarios: ships and cargoes now caught north and west of the Straits (ie caught by the blockade) and those east and south which are able to move away but not into the Straits.
As to those caught, it would be a rare charterparty that did not have a war,9 hostilities10 or blockade provision – particularly for ships transporting through the Straits. Similarly, it will be hard to argue that ships so caught could deliver their cargoes at another port11 (other than redelivery to the port of origin and then transport by some other means. This is possible, at the time of writing, in Saudi Arabia, and large cargoes are leaving Yanbu on the Red Sea. That option is not open to others and will not be permanently open to Saudi Arabia). Therefore, at present, one can see how the some 140 ships caught may have force majeure claims – subject to arguments over causation and there being some form of waiver or estoppel – discussed in detail in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (‘The Kanchenjunga’).12 In terms of the future, there will need to be added the caveats that mere regulatory action (eg permits, sanctions or fees) may not suffice to establish a claim for force majeure13 and alternate means of performance may well become feasible.
Turning to those ships not physically caught by the blockade, the risk here is not to the physical ship itself but to its cargo (moving away from the area) or lack of it (seeking to load from ports caught by the blockade). In both cases, it is reasonable to assume that the cargo at issue is hydrocarbons.14 There is an active market in the trading of hydrocarbon cargoes afloat. In crude15 terms, hydrocarbons afloat can come in differing forms.16 Those forms will be attractive to differing markets at differing times dependent on capacity (refinery and pipelines), supply and demand. Those differences may arise whilst the cargo is afloat. Thus, the owner of the cargo, A, will know that it has a cargo of so many thousand barrels due to be delivered at a particular port. A may sell that cargo or a portion of it to B who will then sell to C and there can be onsales to D etc. Where D sells back to A, the series of transactions becomes a “circle”. Where D sells to E and so on, the series is a string. Backed on the sales of physical cargo there will then be futures (the notional value of so many barrels at such a port on such a date) and hedges and then futures on futures. Where A is a large trader or multinational oil company, A may have a considerable volume of such trades on its books.
In such cases, force majeure may not assist. Assuming a liquid market, any party in the string or circle can buy elsewhere. This may be more expensive and less convenient but is not force majeure. In an illiquid market, parties in the string or circle may not be able to find a replacement. They will therefore face the possibility of, say, fulfilling one contract but not others. Again that is not force majeure; the party has chosen to perform a contract at the expense of the others.17 This would mean, on a traditional contract analysis, whilst one contract would be performed, that party would be in numerous breaches of the other contracts. The position becomes more acute in global supply chain contracts – where there can be a ripple through the supply chain. Is there therefore a possible answer other than force majeure?
The courts addressed this question in a series of extremely difficult cases18 that arose from the Mississippi floods in 1973 and the subsequent ban imposed by the US Government on exports of American soya bean meal. At the time, the market in soya beans was extremely volatile.19 As a result, trading in soya bean futures could be very profitable and a specific pattern of trading emerged. The purchaser, B, would enter into a sales contract with the seller, A, for delivery of a consignment of soya beans in, say, seven months’ time. In that time, the cargo could be the subject of strings and circles as described above.
In mid-1973, the Mississippi flooded destroying the US soya bean crop. The US Department of Commerce therefore embargoed any shipment of soya bean from the US except for those goods afloat or in the course of being loaded. The embargo was then followed by the introduction of a licensing system. Soya bean exports were limited to a fraction of that which they had been with little or no prospect of the restrictions being relaxed. The only readily available source of soya bean comprised the cargoes afloat: the loophole cargoes. The loophole cargoes represented a fraction of the total amount of soya bean cargoes which had already been sold by forward delivery. Therefore, the seller was caught in the difficult position described above. The seller had to find a loophole cargo to meet its obligation to the next purchaser. Then, the seller could sell to one party but would be in breach of all the other contracts – as a matter of choice. Further, the seller could not argue that the contract had been frustrated or there was force majeure as there was as choice not to perform even though the choice had arguably arisen from force majeure or a frustrating event.
In two cases20 the Courts held that the seller could properly perform his obligation to the buyer if it delivered less than the contractual amount, if the seller had:
contractual commitments to more than one buyer under contracts in identical terms save as to price and quantity, and where without actionable fault on his part he has insufficient goods available to supply all his buyers
and the seller distributed his goods pro rata among all the buyers.21 Mr Justice Goff rationalised the ability to prorate as follows:
[I]n the absence of any term to the contrary, the buyer under a contract containing such a clause must contemplate that the seller has other customers besides himself, and must also contemplate that the seller will take reasonable steps to fulfil the needs of other customers22
In Bremer Handelsgesellschaft mbH v Vanden Avenne Izegem PVBA,23 however, the House of Lords appeared to suggest that prorating was one form of performance but it might also be possible for the seller to perform in any reasonable way and still not be in breach.24 The House of Lords left the question open by stating that, on the facts of that case, prorating did not arise.25 A small shipment of 90 tonnes was at issue and to require prorating would have left each buyer with a de minimis quantity of soya bean meal and was ‘destructive of commercial reality’.26 By way of contrast, in Pancommerce v Veecheema27 Lord Donaldson MR stated:
There is no English authority justifying the proposition that where a seller has a legal commitment to A and a non-legal moral commitment to B and he can honour his obligation to A or B but not to both, he is justified in law in potentially honouring both obligations.28
From those conclusions, it is relatively strongly arguable that the parties’ obligations were altered by reason of the circumstances. The seller could supply fewer goods than it had contracted to supply and the other parties to the contract were, it appears, obliged to accept that lesser performance as proper performance. Put another way, where commercial circumstance dictated, the contracts were of necessity varied.29
Why does this matter in construction?
Although a critical case on frustration is a construction case - Davis Contractors Ltd. v Fareham Urban District Council,30 in the past standard form construction contracts had little to say about frustration and force majeure. The JCT Contract at clauses 2.29.14 and 8.11, FIDIC at clause 19 and NEC at clause 19 all now do. The JCT Contract allows for time but not money whereas FIDIC and NEC are more forgiving. Further, after SARS-CoV-19, many contracts contain bespoke amendments to tackle such points. Thus, there may well be the requisite clause.
There is a possibility that materials and elements necessary for projects outside the combat zones may be manufactured or supplied within the combat zones. In those cases there could well be direct force majeure claims if the contract contains the requisite wording.31
More likely is that the knock-on transportation disruption,32 fuel shortages, increased fuel costs, worldwide economic shocks and even other force majeure claims33 will affect the supplies to projects outside the combat zones. Thus, a contractor may have a global supply chain for a particular element in a project. Due to the nature of that element or its specific specification, the element can only be sourced from a limited range of suppliers outwith the UK. If transportation is disrupted, then the element may be unavailable or severely delayed.34 The alternate possibility is that due to restrictions, it becomes exceptionally expensive to transport goods. Patries to supply chains will therefore suffer and seek to pass on claims and increased costs affecting all elements in the supply chain.35
In those circumstances, the contractor may seek relief or recovery. Similarly, the Employer may be affected by an inability to provide materials or may seek to mitigate delay claims caused by disruption.
Where the problem has arisen from fuel shortages or fuel becoming prohibitively expensive and the supply chain becoming affected, force majeure may not apply as set out above. Therefore, claims36 will have to be presented in a different fashion, perhaps arguing that obligations in relation to the project have changed by force of circumstance.
The second broad factual scenario would be disruption to energy infrastructure itself – damage or embargo spring to mind.37 Again there will obviously be direct claims for the physical loss. There may well, however, be knock on claims as above. In both scenarios, Tullow could well apply.
In Tullow, three events coincided. First, there was a maritime border dispute between Ghana and the Cote d’Ivoire. The Cote d’Ivoire alleged that areas offshore were in fact in Cote d’Ivoire’s Exclusive Economic Zone and not Ghana’s. Ghana had, however, issued licences for hydrocarbon exploration, exploitation and production in the disputed areas, to Tullow. These licences, it turned out, covered what became the TEN Field – a lucrative source of hydrocarbons. The Cote d’Ivoire took the dispute to the International Tribunal on the Law of the Sea (“ITLOS”) and applied for preliminary measures that work on TEN cease.38 Although Cote d’Ivoire did not obtain the preliminary measures, Ghana instructed Tullow to cease activity in TEN.39 Second, unrelated to that, Ghana was undertaking a review of how Ghana wished to develop hydrocarbons. Ghana therefore issued a moratorium on all exploration, exploitation and production of hydrocarbons. Third, again unrelated to the first and second, there was considerable price volatility in the energy market. This made the exploration, exploitation and production of hydrocarbons by turns more and less profitable. This had a knock-on effect on the availability and the hire and/or construction costs of the hulls and rigs necessary to the process..
The border dispute and moratorium combined meant that Tullow had to cease work in TEN. Tullow had a semi-submersible drilling rig, the West Leo, on charter from Seadrill to work in TEN. There was therefore nothing for the West Leo to do. Tullow argued that Tullow was relieved from paying for the West Leo as a result of force majeure caused by the border dispute.
Breaking here, there are obvious parallels with the current situation. Although far less serious and peaceful, there was a public international law dispute. That dispute had direct effect on private law obligations. Multiple causes were at work. There was also price volatility.
The Court rejected the force majeure claim. The Court held that because the border dispute was not the sole cause of the West Leo being idle, there was no force majeure and Tullow was required to pay the charterparty rates.
Tullow is therefore authority that claiming force majeure will be difficult where there are multiple causes of that which has happened. If one of those causes is not force majeure – either because it does not fall within the force majeure clause or because it simply is not force majeure, then no claim can be made.
Factually, Tullow will obviously apply to charterparties. It will also apply, in the marine energy/construction sphere, to the construction and supply of rigs and hulls where time and place of delivery and the specification may alter. In the broader energy/construction sphere, cost, delay and disruption to projects can arise from multiple events – late or non-supply of materials; changed date and time of delivery; changed specification due to unavailability of specified elements; increased expense; lack of fuel; rationing; sanctions; embargoes and so on. All of those could have multiple causes. To take two examples: parts are delivered very late or a project cannot be tested due to lack of ships and/or lack of fuel and/or changed transportation routes and/or a licensing system over shipping, embargoed parts and use of fuel. Some of those are force majeure but a changed licensing system or the imposition of fees may not be.40 Tullow could then be relied on to contend that there is no force majeure.
As can be seen from the above, it is an unfortunate but inescapable fact that the extent, use and application of public and private international law, force majeure and frustration in both the energy and construction sectors will have to be reappraised – both internationally and domestically.
1 Sean has acted and advised in disputes (both as Counsel and as expert), lectured and written on all the topics discussed in this article historically and from 2020 (SARS-CoV-19)/2022 (Ukraine) onwards. Sean also was leading counsel in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) (“Tullow”) discussed below which deals with force majeure; border disputes; and supply and price volatility in the energy sector.
2 See eg Tandrin v Aero [2010] 2 Lloyd’s Rep 668 [48].
3 See eg Tullow.
4 Thames Valley Power Ltd v Total Gas & Power Ltd – [2005] EWHC 2208 (Comm).
5 Brauer & Co v James Clark & Co. [1952] 2 Lloyd’s Rep 147; P J van der Zijden Wildhandel N V v Tucker & Cross Ltd [1975] 2 Lloyd’s Rep 240; Triple Point v PTT [2017] EWHC 2178 (TCC) at [221].
6 This article only considers the position away from combat zones. Issues over oil supplies have had and have worldwide consequences. In combat zones, there are obviously other live issues as to safety and then legal issues as to frustration, force majeure, the law of war, embargo and sanctions. The position within combat zones is, however, changing very rapidly. Parties will be reacting to the immediate position as it now is and evolves. Further, that reaction is likely at present to be primarily addressing safety responses to the conflict. It is therefore difficult for an article to address at this time the issues in combat zones.
7 See Daniel Yergin’s The Prize Simon & Shuster 1988 Chapter 27 ff. In the first week of current events, two state owned Gulf Oil majors – Qatar and Kuwait declared force majeure over their supply obligations. Market commentators (eg Bloomberg) are now saying there is an “energy shock” which is “unparalleled”.
8 There is a third – the impact of companies invoking force majeure to relieve them of their contractual obligations (eg to supply hydrocarbons or construction materials). This has a knock-on effect – see discussion of force majeure in The Prize at p 669 ff.
9 War being a well-recognised cause of force majeure - see Lebeaupin v Richard Crispin & Co [1920] 2 K.B. 714. There will, of course, be a lively debate here as to whether there is in fact a war. Further, as none of the active combatants have sought any form of legislative approval for the current and ongoing situation, none of the arguments as to legislative action, its compliance with international law and its justiciability such as arose in Gulf War 1 can arise – see Kuwait Airways Corp v Iraqi Airways Co & Anor [2002] UKHL 19 for these debates.
10 The difficulty here will be the breadth of the term “hostilities”.
11 Warinco AG v Mauthner [1978] 1 Lloyd’s Rep 151 (CA).
12 [1990] 1 Lloyd’s Rep 391. See Wilken & Ghaly The law of Waiver, Variation and Estoppel OUP 3rd Ed at 21.29 ff.
13 Great Elephant Corp v Trafigura Beheer BV & Ors [2013] EWCA Civ 905, reversing [2012] EWHC 1745 (Comm).
14 25% of the global market passes through the Straits.
15 Both literally and figuratively.
16 In the case of crude oil, Brent crude is not the same as WTI crude or Saudi crude.
17 The same as a contractor who is overstretched and choses to perform a contract properly but may then be in breach of others.
18 That difficulty was recognised by the Courts at the time, the litigation being described as an ‘unattractive piece of forensic history’ (Andre & Cie SA v Tradax Export SA [1983] 1 Lloyd’s Rep 254 at 258 cols 1–2 per Kerr LJ) with those involved being the ‘cognoscenti in this recondite field’ (Tradax Export SA v Cook Industries Inc [1982] 1 Lloyd’s Rep 385 at 387 col 2 per Kerr LJ).
19 For a more detailed consideration of the cases, see Wilken supra Ch 2.
20 Westfaliscbe Central Genossenschaft GmbH v Seabright per Goff J (as he then was), unrep but cited in Bremer Handelsgessellschaft mbH v Continental Grain [1983] 1 Lloyd’s Rep 269.
21 See Bremer, ibid at 280 col 2 per Mustill J as he then was.
22 Seabright, supra in Bremer at 292.
23 [1978] 2 Lloyd’s Rep 109.
24 See Lord Wilberforce at 115 col 1. See also Intertradex SA v Lesieur-Torteaux SARL [1978] 2 Lloyd’s Rep 509 at 513; Bremer Handelsgesellschaft mbH v C Mackprang Jr (No 1) [1979] 1 Lloyd’s Rep 221 at 224, 228; Continental Grain Export Corp v STM Grain Ltd [1979] 2 Lloyd’s Rep 378 at 473.
25 See Lord Wilberforce at 115 col 1; Lord Salmon at 128 col 2.
26 See Lord Russell at 131.
27 [1983] 2 Lloyd’s Rep 304.
28 At 307 col 1.
29 See Sainsbury Ltd v Street [1972] 1 WLR 834; and also Tennants (Lancashire) Limited v CS Wilson & Co [1917] AC 495 at 511–12 where Viscount Haldane suggested that there might be lawful pro rata performance of a supply contract.
30 [1956] A.C. 696.
31 See above as to construction contracts which now do contain the requisite wording. Whether there is a legitimate claim under those contracts will manifestly be a question of fact – as it is and was with SARS-CoV-19.
32 See eg the latest aircraft disruption.
33 See The Prize supra for a discussion of similar, past events. As mentioned above, there is currently a significant increase in fuel costs which is already having repercussions.
34 For an early example of the increased costs of construction materials triggering debates over frustration, see Davis supra.
35 This would be a re-run of the Petro-Dollar crisis of the early 1970s.
36 These claims could be both contractor and employer claims – albeit for differing reasons in each case.
37 In terms of disruption to transport, the above analysis would apply.
38 In essence an injunction.
39 The Cote d’Ivoire in essence and eventually failed in the dispute before ITLOS, the TEN Field remained in Ghanian waters and work resumed.
40 Great Elephant Corp v Trafigura Beheer BV & Ors [2013] EWCA Civ 905, reversing [2012] EWHC 1745 (Comm).
