In late-June, 2008, gunmen from the Movement for the Emancipation of the Niger Delta (MEND) used powerboats to speed across more than 100km of open sea to attack Shell’s giant Bonga oil production vessel off Nigeria.
This forced Shell to shut down production from one of Africa’s biggest oilfields and claim force majeure.
The Bonga field produces about 225,000 barrels of oil per day. The declaration of force majeure temporarily suspended Shell’s contractual obligations to make shipments from the facility.
Over past months, there have been a series of similar attacks.
In late-July, Nigerian soldiers protecting the Brass Island site were attacked by militants, leaving several wounded and four civilians dead. Also in July, an attack on a key oil pipeline carrying Bonny light crude caused a further force majeure claim.
A tanker was also recently hijacked in the nearby Bonny River. On August 2, more than a dozen gunmen ambushed a local bar near Nigeria’s oil industry hub, Port Harcourt, with the resulting exchange of fire with navy personnel leaving at least three dead and two French expatriates taken hostage.
More than 200 foreign workers have been seized in the Niger Delta since early-2006, and MEND has demanded that energy companies evacuate all expatriate staff from Nigeria until its grievances are addressed.
Force majeure clauses have long been included in commercial contracts to govern and identify the specific circumstances in which a party can avoid compliance with its obligations under a contract without incurring any liability.
Such circumstances normally include events such as war, riots and acts of God, and have, over time, been strictly interpreted by various courts and tribunals.
In very broad terms, force majeure permits a party to escape liability during a period where an event occurs which is outside of its control and which it cannot prevent. As that party cannot prepare for such an event, it would be inequitable to force it to perform its obligations during the occurrence of the force majeure event.
The practical applicability of force majeure clauses to terrorism have been extensively debated, and the increase in terrorist activities in certain parts of the world has only served to increase the debate.
Force majeure clauses must be the subject of careful consideration, negotiation and detailed drafting in order to ensure that the risks inherent in operating in “at risk” territories are correctly allocated between the parties. For example:
When drafting force majeure provisions, the definition of what constitutes “terrorism” for the purposes of triggering a force majeure event obviously needs careful thought. Should events such as kidnappings release a party from its contractual obligations? What about violent attacks, intimidation, riots and blockades?
It might be that a contractor wishing to retain force majeure protection will wish to avoid setting out what will and will not constitute force majeure, favouring broad definitions such as “terrorism” or “acts of terror” which may otherwise be widely interpreted.
Conversely, an operator may want a contractor to accept the risks of working in such a region from the outset and to narrow the circumstances in which force majeure can be declared by listing in the clause specific events and circumstances that would constitute a valid force majeure event. This will be a matter of risk allocation between the parties in their negotiations.
Some, but not all, force majeure provisions require that the intervening event must be unforeseeable. Even where not a strict requirement, foreseeability plays a key role, as force majeure provisions generally stipulate that the event must not have been avoidable by taking reasonable precautions.
The more foreseeable an event is, the more reasonable it will have been to take precautionary steps to avoid it. Although onshore infrastructure attacks by MEND in the Niger Delta have been commonplace, the attack on the Bonga facility was the first to be made on the region’s deepwater production infrastructure and so was likely to be unforeseeable.
As MEND has since threatened to launch further assaults on Bonga, or the oil tankers that use it, are future attacks there now foreseeable and therefore a normal risk that should be guarded against?
A contractor wishing to retain force majeure protection will wish to avoid provisions requiring force majeure events to be unforeseeable. It will also want the clause to apply a low standard for the steps to take to avoid the event. For example, “an event that could not reasonably be avoided”, rather than “an event which could not be avoided”. An operator may want the opposite.
Where an event is foreseeable and can be guarded against, but only at the cost of significant additional security precautions, where do the cost of those precautions fall?
A contractor can often face a dilemma: either accepting significant increased costs which are not recoverable under the contract, or accepting that, by not taking such precautions, it may make a claim for force majeure relief uncertain.
An operator will wish to have some limit on any additional costs which are to be payable as this is, arguably, a risk of doing business in the region which the contractor should have factored into its pricing.
A final issue will be whether any other party operating in the area that fears similar attacks can suspend operations for a period until the likelihood of a further attack declines.
This is likely where parties not directly affected by an act of terrorism become either unable or unwilling to continue operations due to deteriorating circumstances. Again, this will depend on the scope of the force majeure clause and whether it extends beyond impossibility and the “prevention” of performance to viability and the “hindering” of performance.
A contractor wishing to retain force majeure protection will wish to include wording such as “acts of terror, whether actual, threatened or reasonably perceived”. Conversely, an operator may want a contractor to accept the risks of working in such a region, limiting force majeure only to actual intervention at the facility.
So although an act of terrorism such as the attack on the Bonga production vessel is very likely to fall within the scope of force majeure relief under most contracts, this might not be the case if such an event were foreseeable or avoidable.
Further issues arise where the increased prospect of a similar event prevents operators of nearby facilities from performing their own obligations.
Nor are these concerns limited to companies operating in Nigeria. It is worth reviewing the wording of force majeure provisions wherever circumstances at the place of performance are uncertain.
Penelope Warne is a partner and practice group manager for energy projects and construction at CMS Cameron McKenna