Turbulent waters: Covid-19 and offshore construction
- Business developments & projects
The following article is a guest post by Andreas Dracoulis, Partner, and Jonathan Morton, Associate, at the London office of Haynes and Boone, an international commercial law firm
The article delves into legal intricacies of declaring force majeure events on existing offshore construction contracts in case of delays caused by the coronavirus pandemic as well as key points to consider when entering new contracts.
As the offshore industry begins to acclimatise itself to the coronavirus pandemic, the initial flurry of issues relating to force majeure have begun to lessen, revealing several more complex legal and practical problems that require careful consideration.
Projects are being delayed or postponed indefinitely and companies along the supply chain are facing substantial difficulties in performance. Companies are beginning to report offshore workers with confirmed cases of Covid-19 and supply bottlenecks are already becoming apparent. This situation is compounded by the existing problems being faced by the industry, not least the collapse in the price of oil and its impact on the global economy.
However, this does not mean things are in lockdown. Work is continuing on many fronts, adapting as necessary to the rapidly changing situation, and new projects are being negotiated and agreed. Following discussions with a number of individuals currently working in the sector, we investigate some of their main practical and legal concerns and provide our commentary upon them.
As the recent tidal wave of legal notes and briefings relating to Force Majeure (FM) under English Law have all made clear, there is no set definition of FM in this legal system. Things will therefore turn, as they often do, on the precise wording of the relevant contract.
It is, in our experience, relatively rare for them to explicitly refer to “pandemics” or “epidemics” in a list of relevant events, though we have advised clients for many years to add such wording, particularly following the SARS outbreak. The key issue will therefore be whether or not the existing wording is wide enough to cover the current crisis.
The most recent significant ruling on the issue under English Law was the 2018 decision of the High Court in Seadrill Ghana Operations Limited v Tullow Ghana Limited, in which our firm acted for the successful party.
The dispute in this case arose under a long-term drilling contract between Seadrill and Tullow regarding the use of the semi-submersible drilling rig “West Leo” for operations offshore Ghana. The contract had been signed in 2012, with a term lasting until June 2018. In December 2016, however, Tullow notified Seadrill it was terminating the contract for FM and relied upon a new order from the International Law of the Sea that prevented “new drilling” in one of the relevant fields.
The wording in the FM clause relied upon by Tullow included reference to a “drilling moratorium imposed by the government” and the judge found that this order, coupled with a subsequent letter from the Government of Ghana to Tullow asking it to comply with it, was sufficient to trigger the clause.
Notwithstanding this, the fact that Tullow had also failed to secure permission from the government to drill additional wells amounted to a second “effective cause”, and the judge held that, considering the specific wording of the clause and the relevant previous legal authorities, the fact that this also prevented performance was sufficient to mean that the FM clause could not be relied upon. In essence, therefore, the relevant test was whether “but for” the FM event, would the party have performed?
As this case makes clear, the precise wording of the relevant contract will be determinative. In light of this, it is therefore helpful to review how the standard forms used in the industry deal with this issue. The key differences between the various standard forms relate to whether Covid-19 permits a claim for FM and, if so, if this provides for both an extension of time and a cost claim, or just the former.
LOGIC: The standard form contracts, including the 2004 General Conditions of Contract for Marine Construction and the recent 2018 General Conditions of Contract for Offshore Decommissioning, all contain an exhaustive list of possible FM events which does not include “pandemic” or anything relating to illness and disease. As such, unless the wording has been amended, Covid-19 and its consequences will not be sufficient to trigger this clause (subject, however, to the change in law provision dealt with further below). If changes to the wording have been made, it is important to note that LOGIC also explicitly requires a causal connection between the relevant event and the failure to perform, which must be demonstrated by the party seeking to rely on it. Notice is usually stated to be required “without delay”, the precise nature of which will be highly fact specific.
FIDIC – The 1999 Edition of the Yellow Book is the version most commonly used in offshore wind projects, though it is usually heavily negotiated, so its precise terms must be carefully reviewed. Clause 19.1 defines the term “Force Majeure” as being: (a) an exceptional event or circumstance, (b) beyond a Party’s control, (c) against which such affected Party could not have reasonably provided against before entering into the Contract; (d) which having arisen such affected Party could not reasonably have avoided or overcome; and (e) it must not have been substantially attributable to the other Party.
Although epidemics are not specifically included, the list is non-exhaustive, and it could therefore be argued that COVID-19 meets this broad definition. It is also necessary that the claiming party proves it was “prevented” from performing by the relevant event and notifies the other party within 14 days of becoming aware of it. However, the provision will only give rise to a claim for an extension of time; claims for additional costs are restricted to a limited set of specific events such as war and hostilities.
SupplyTime “Charter Party of Offshore Vessels” (2017): The FM Clause itself makes no specific mention of epidemics and pandemics but does include “government requisition, control, intervention, requirement or interference” as well as “any other similar cause [to those specifically listed] beyond the reasonable control of either party”.
As such, the definition is non-exhaustive and may be broad enough in some cases to cover things like travel restrictions and other governmental intervention arising from the pandemic.
It is important to bear in mind that the notice provision under this clause is a relatively short 5 days. However, more importantly, the 2017 edition of the standard form incorporates BIMCO’s “Infectious or Contagious Diseases Clause” which will allow Owners to refuse to proceed to or remain at a port where there is a risk of exposure to an infectious disease.
Dependant on the circumstances, and whether or not the charter party was concluded prior to the date the loading port was known to be an “Affected Area”, it may permit the Owner to cancel.
Furthermore, the standard termination clause provides that either party may give 14 days’ notice of an intention to cancel should the FM event not be remedied. The knock-on effect of this for the wider project could be significant.
Jumping the gun
Due to the complexity of the legal situation, it is entirely possible that clients, other contractors of clients (for example fabrication yards) or subcontractors within a project may have claimed FM incorrectly.
The effect of a possible FM event on a party’s contractual obligations will depend on several points, all relating to whether or not performance has actually been prevented:
- What is the specific obligation that has been hindered by the FM event? The party seeking to rely upon FM cannot simply speak in general terms of the impact of Covid-19, but must point to a precise contractual duty it is unable to perform.
- The FM event must be the “sole effective cause” of the inability to perform. As explained above, this was confirmed in the recent case of Seadrill Ghana Offshore v Tullow. As such, should, for example, there be an equipment malfunction which also delays performance, it may well not be possible to rely on FM for that delay. It is therefore important to thoroughly investigate the position along supply chains and determine precisely what event or events are causative.
- If there are alternative methods of performance, these must be considered and used wherever possible. It is not open to a party simply to “down tools” during the pandemic without investigating alternatives.
- Furthermore, some contracts may require a party to use reasonable endeavors to overcome a FM event. What is “reasonable” will be fact specific and depend on the wording of the relevant contract. In the Seadrill Ghana case the judge clarified that this meant “all matters which bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure.” It was not either an objective or subjective test, but would “depend upon the contractual context,” and the factual matrix. The burden of proof will be on the party seeking to rely on the clause to demonstrate that it had exercised its reasonable endeavours to avoid or circumvent the force majeure. Recent cases such as Seadrill v Tullow have also made clear that consideration of the impact on the other party to the contract must also be taken into account when considering such steps.
- Has compliant notice been provided in accordance with the terms of the contract? It is important to check the time limits and content requirements carefully as failure to comply with such requirements could prevent a FM claim from succeeding. The wording of the contract will also be important in determining whether or not effective notice is a condition precedent for relying on the clause.
If a party declares FM but is not contractually entitled to do so, it is potentially in breach of contract. Furthermore, should such a declaration amount to evidence that the relevant party does not intend to perform the contract, this could amount to a repudiatory breach and permit the other party to terminate and claim damages. As such, it is vital that any response to a FM notice is carefully worded to ensure that it is not deemed a waiver of the right to challenge its validity.
Finally, should the current crisis continue unabated, the contract may contain provisions which allow for termination where performance is hindered for a certain period. Should such wording exist, the relevant time periods and notification requirements must be carefully considered and observed before any notice of termination is served. Where a party terminates incorrectly in reliance upon an FM event, it could similarly find itself in repudiatory breach of contract and liable to the other party for damages.
Key considerations for new contracts
The current crisis has not only highlighted potential lacunae in existing contracts but will need to be taken carefully into account when entering into new contracts and subcontracts for execution in the following months. There are a number of key points that should be considered:
- Most FM clauses require that the relevant event was unknown, or could not have been predicted, at the date of execution of the contract. Therefore, unless these standard terms are modified, and Covid-19 is handled explicitly, it is unlikely the crisis and its consequences could be claimed as an FM event later. The current and future impact therefore needs to be discussed by the parties and incorporated into the relevant wording. With respect to contracts signed in the first few months of the year, one potential issue is the precise date a party could be said to know of the FM event. Was it after the virus was declared a Public Health Emergency of International Concern on 30 January 2020, or when it was declared a pandemic on 12 March 2020? It is to be expected that disputes will arise turning on precisely when the relevant party knew, or should have known, about the impact of the pandemic.
- Ensure that there are no gaps between the provisions in any subcontracts and those in the main contract. In particular, be careful of any local law definitions of FM and ensure that, should these permit a subcontractor not to perform, this excuse is passed up the chain. This is particularly important because some jurisdictions will imply terms relating to FM into contracts, and the meaning of these may be very widely interpreted.
- Make sure that that contract addresses explicitly the extent to which a party is entitled to recover costs relating to delays incurred, or an inability to perform, arising from either Covid-19 itself or any measures put in place to combat it.
- Make sure to consider all possible “worst-case” scenarios in your thinking and, in light of the uncertain timescale and severity of the ongoing disruption, these should be considered from an extremely pessimistic perspective.
Making the most of a bad situation
One possible point to consider is whether the contract permits a party to argue that new regulations put in place as a result of the pandemic amount to a change in law and thereby permit a FM claim or a claim for payment arising from any extra costs incurred. This will, as always, depend on the precise wording of the contract. Within the standard forms there are a number of different provisions.
LOGIC standard forms include a reference to a change in law “or any regulation or bye-law of any local or duly constituted authority or the introduction of any such Statue, Ordinance, Decree, Law, regulation or bye-law” as a potential FM event. There is also a general provision entitling the contractor to adjustment of the Contract Price in the event of changes in any applicable laws, rules and regulations made after the effective date of the contract.
This will therefore be very factually specific and, as such, it will be important to keep close track of what mandatory regulations are introduced by relevant local or national authorities. It is possible, for example, that strict social distancing regulations may prevent work and be sufficient to trigger the operation of these provisions. If such changes prevent a party’s performance, notice must be provided in accordance with the requirements of the contract.
Clause 13.7 of the FIDIC Yellow Book 1999 provides for a potential increase in Contract Price and extension of time where a change in the “laws of the country” directly affect the Contractor’s performance. It is possible, therefore, that any such change to the laws that can be demonstrated to prevent performance could trigger the operation of this clause.
It is to be expected, however, that disputes may arise relating to whether or not a contractor made contingency plans to deal with such changes once the pandemic became public knowledge. Contractual requirements for mitigation and causation could permit an argument that it was a failure to properly prepare that caused the relevant delay and not the actual change in regulation itself. The success of such arguments will, of course, be entirely factually dependent.
While the legal position is of key importance, there are a substantial number of practical issues currently being faced by the industry:
- Is entry of any relevant vessel or other equipment permitted to the area? Many countries have introduced lockdowns and restricted entry, but there may be exemptions for oil and gas or wind projects. The position may change rapidly and will need to be carefully monitored.
- The problems relating to the crew or other personnel themselves are substantial. In particular:
Are there travel restrictions on specific nationals to the relevant jurisdiction? Are there exemptions in place for specific types of workers? How will this impact on your ability to respond quickly to, for example, breakdown?
What are the checks necessary during crew/personnel changes? For example, in many locations offshore oil and gas workers are subject to temperature checks and questionnaires before they board helicopters, which will delay changeovers. Industry guidelines and requirements are being published and updated regularly and must therefore be continually reviewed.
Are there quarantine provisions in place on-board/on-site? Are there rules in place to safeguard the crew/personnel which include cleaning and personal distancing rules? Recent WHO guidelines require that there is an outbreak management plan on board that is implemented even when infection is only suspected.
How will you maintain safe minimum staffing levels in the event of an outbreak? What happens if this requires crew/personnel to stay on board/on-site for longer than contractually required? Are there employment regulations in the relevant jurisdiction that set a maximum number of days individuals can remain onboard?
What about catering and cleaning staff? The latter is likely to be considered more essential than the former, and fewer catering staff may be needed if crew/personnel levels are lower.
Are crew members or other personnel trapped in locations overseas? How can they be returned home safely and efficiently?
If additional crew/personnel must be sourced at short notice via agents, can this be compensated under the contract with the client? What provisions are in place to expedite this process in order to mitigate any delay?
- Will such issues end up leaving a contractor liable for liquidated damages due to delay, despite exercising due diligence and acting prudently? This will all depend on the wording of the contract itself and whether reasonable practical steps were taken to mitigate the impact.
Communication is key
In any complex and fast-moving situation such as the current pandemic, it is vital to ensure that you have a Covid-19 taskforce set up to monitor the situation and respond quickly to changes.
Communication with employees, governments, subcontractors and contractors is key. Relevant industry associations may also provide assistance to facilitate the safe continuance of operations, particularly where the wellbeing of workers is at stake.
It is essential that detailed records are kept which are sufficient to prove the impact of these events on performance as well as any mitigation steps taken. Careful review of existing contracts should be undertaken, including those of subcontractors, and a risk analysis should be undertaken to identify those areas where the risk of impact is highest.
Thinking outside of the box may well prove to be a highly beneficial strategy at a time of an unprecedented global catastrophe and inventive solutions may turn out to be the only ones available. Each situation, and each contract, will be unique and should be carefully reviewed before any steps are taken.