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The importance of War Clauses in the Oil and Gas industry: Friend (not Foe) of Force Majeure

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Oilfield Technology,


Markus Burianski and Christian M. Theissen, partners at White & Case LLP, explain the significance of war clauses, examine their benefits and propose useful drafting considerations that anyone working in the upstream oil and gas industry should be aware of.

The Great Financial Crisis, natural disasters and political turmoil in various regions around the world have recently highlighted the significant importance of force majeure clauses. As a standard in petroleum-industry contracts, force majeure protects parties from unforeseeable phenomena that ultimately prevent the fulfilment of contractual obligations. These can be what are known as “Acts of God”, for example floods, fires, earthquakes, etc.

With regard to political turmoil, often leading to a deteriorating security situation, “war clauses” – a subset of force majeure – can be an important tool to include in international agreements used for upstream oil and gas projects. They may excuse a party's non-performance of its contractual obligations, justify early termination of a contract in the event of war, and regulate the economic consequences of a war affecting the parties’ performance. War clauses are useful in a variety of contracts entered into in upstream oil and gas projects, such as exploration and production sharing agreements, joint operating agreements, drilling contracts, and data collection agreements.

This article explains the significance of war clauses, examines their benefits and proposes useful drafting considerations that anyone working in the upstream oil and gas industry should be aware of.

Force majeure vs war clauses: why include war clauses?

Typical war clauses require that a "war" "materially affects the performance of the debtor. War clause is an umbrella term, which includes clauses titled, for example, "war risks", "outbreak of war" and "armed conflict". While these scenarios usually also fall within the ambit of force majeure clauses, three distinctive features separate a war clause from a force majeure clause:

  1. Elimination of ambiguity

  2. Force majeure clauses often list events that are defined by abstract parameters. Issues can later arise as to what actually constitutes force majeure1 if war ensues, whether the force majeure clause and the interpretation of events is consistent with the applicable law governing the contract2 and if the events need to additionally satisfy abstract criteria, such as “unforseeability”.

    These issues are exacerbated if standard, boilerplate ”Acts of God” terminology is used, listing floods, fires, earthquakes and other analogous events as force majeure. If war ensues, does this mean the debtor is not entitled to invoke force majeure because it is a man-made event or because a war may have been foreseeable in that region of the world? A war clause removes this ambiguity and facilitates legal certainty in times of war.

  3. Lower causation requirements

  4. War clauses usually involve a lower causation threshold in comparison to force majeure clauses. Typically, whilst force majeure clauses require that the event “prevents performance”, war clauses only require that the war merely “materially affects” performance. In other words, while war clauses apply only to a subset of force majeure events, once they apply, they facilitate access to the legal consequences.

  5. No notification requirement

  6. Typical force majeure clauses require an aggrieved party to notify the other of the occurrence of a force majeure event preventing its performance. War clauses usually do not contain a notification requirement, because it is assumed that the other party cannot be unaware of the relevant warlike developments.

Drafting recommendations

If a war clause is potentially relevant, the following recommendations may be useful for considering whether to negotiate and draft a war clause into a future international agreement:

  • Define war: Given the new forms of asymmetric warfare, to prevent any ambiguity, it is useful to clarify that it does not matter whether a state of war is officially declared or not and that a "war" may also be a civil war, invasion or military action by irregular fighters.
  • Clarify that there is no need for the war to occur in the country of contractual performance. It may very well be that a war in neighbouring countries A and B materially affects performance in country C.
  • Avoid including negotiation attempts as a requirement to satisfy the war clause – such prerequisites are vague and hard to meet in war situations.
  • Consider adding a provision regarding the economic consequence of relying on a war clause. What kind of compensation should a party that has partially performed the contract and then terminates it because of war be entitled to?
  • In the next decade(s), projects that affect national security directly (e.g. nuclear power plants) or indirectly (e.g. basic supply of drinking water or electricity) may be increasingly targeted by hackers. Therefore, if the project at issue could be materially affected by such acts of "cyberwarfare", these should be explicitly included to avoid ambiguity.

Force majeure clauses are of great utility to the upstream oil and gas industry. In the context of war, however, their benefit is limited by the often unforeseeable nature of conflict and the contractual ambiguities that may arise from this. War clauses are a more comprehensive addition to cross-border upstream contracts, providing clarity that should help to preclude further legal challenges.

Authors: Markus Burianski and Christian M. Theissen, partners at White & Case LLP
References

1 See, for example, National Oil Corporation ν Libyan Sun Oil Company, ICC Case No. 4462, First Award on Force Majeure, dated 31 May 1985, p. 58 (para. 3) extract available at: www.trans-lex.org/204462, where both parties agreed that the force majeure clause was the correct starting point to determine their common intent, but completely disagreed on the meaning and the consequences arising from the clause.

2 See, for example, Gujarat State Petroleum Corp. et al v Republic of Yemen et al, ICC Case No. 19299, Final Award, dated 10 July 2015, pp. 59 and 60 (paras. 153 and 154), available at: https://www.italaw.com/cases/4209, where the tribunal had to decide if the interpretation of the force majeure clause conflicted with the applicable Yemeni law.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/24092019/the-importance-of-war-clauses-in-the-oil-and-gas-industry-friend-not-foe-of-force-majeure/

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