he downturn is increasing pressure on petrochemical and refining projects as businesses face decreasing demand and low margins. With rising exposure to the risk of non-performance of contractual obligations, attention is turning to force majeure clauses as a way of suspending obligations under an onerous contract.

Force majeure clauses
A force majeure clause under contracts governed by English law seeks to relieve a party from the performance of its obligations under the contract as long as the force majeure event that is both unforeseeable and unavoidable still subsists, and performance of the contract continues to be rendered impossible. The parties in petrochemical and refining projects often spend a considerable amount of time and effort negotiating force majeure clauses in order to agree the events which allow them to suspend their contractual obligations. The clause typically defines a force majeure event as an event or act that:

• is beyond the reasonable control of the affected party;
• was not reasonably foreseeable or, if foreseeable, could not have been avoided; and
• prevents the affected party from performing its obligations under the contract.

Certain force majeure clauses may also specify an illustrative list of events such as acts of God, terrorism, war and severe adverse weather conditions which will be deemed to be force majeure events if they also comply with the conditions above; others may not have any illustrative examples and may be restricted to the general conditions. Depending on the circumstances, parties may seek to exclude particular events from the ambit of force majeure in order to allocate liability in advance for such events, for example commercial impracticability due to increased funding costs or the acts of certain regulatory authorities.

Agreeing the definition of force majeure events, and exclusions from them, can be a substantial task given the extensive number of inter-related agreements and parties in petrochemical and refining projects. The definition and exceptions will depend on the risks that the investors are willing to take in the country where the project is based and any other country in which obligations are performed. This often results in parties agreeing different force majeure events across the project agreements, depending upon the jurisdiction in which the contractual obligations arise. In addition, the various project agreements are often governed by different laws (typically, a combination of the local law and English law where, for example, the offtake agreement may be governed by English law, while the feedstock agreement and the services agreement may be governed by local law). This could lead to a potential inconsistency in the interpretation of force majeure provisions, even where the actual wording of the force majeure provisions is identical.

The absence of a consistent force majeure approach across all the project agreements could have serious consequences for the project. A force majeure event under a feedstock supply agreement, which subsequently results in the suspension of the feedstock supply to the petrochemical plant or refinery, may result in the project company being unable to make the product and therefore being in breach of its obligations to the purchaser under the offtake agreement. Such a breach, where the project company is unable to claim force majeure, could result in the offtaker having a claim for liquidated damages under the offtake agreement which the project company would not be able to pass back to the feedstock provider.

Another issue to bear in mind is that a force majeure event entitling one party to have certain of its contractual obligations suspended will not necessarily relieve the other party from the non-performance of its corresponding contractual obligations. For example, under an offtake agreement containing annual take-or-pay commitments, while the supplier may be permitted to suspend its supply obligation for a certain period of time as a result of the occurrence of a force majeure event, the purchaser who will be unable to offtake any product during this period, may need to accelerate its monthly offtake quantities after the resumption of supply (or build in corresponding relief), in order to be able to meet its annual take-or-pay quantities. Consequently, the parties should consider obligations of this nature under the different project agreements and reflect their intentions through express provisions.

Market collapse and force majeure
The global recession has brought to the surface the question of whether an economic downturn constitute force majeure events which are unforeseeable and beyond the reasonable control of the parties, thereby excusing the parties from the performance of their obligations as long as such events persist. This issue becomes particularly pertinent where the clause is not narrowly defined, leaving the door open for such a question to be raised.

This is not the first time that the question of changing economic circumstances has turned people’s attention to such clauses. The 2005 case of Thames Valley Power considered whether the obligation of Total to supply gas to Thames Valley Power under a long-term gas supply contract could be suspended on the grounds that the then unprecedented increase in gas prices amounted to a force majeure event. The contract in question defined it as “any event or circumstances beyond the control of the party concerned” which results in that party failing to comply with its obligations. It included a specific provision that “in assessing the circumstances of force majeure affecting the customer, the price of gas under this agreement shall be excluded”. The judge considered the facts of the case and held that for high gas prices to constitute a force majeure event, the contract needed to specifically incorporate such an eventuality as a force majeure event. The fact that the contract was no longer profitable for Total did not excuse them from performance. The wording dealing specifically with gas prices affecting the customer was not sufficient to alter the meaning of the rest of the force majeure clause.

An argument may be made that the credit crunch and the collapse in demand for petrochemical and refined products are each different from gas price fluctuations on the basis that the latter is a market reality, whereas the former were to a certain extent unpredictable, and not within the scope of the parties’ normal contemplation at the time of entry into the contract. However, given the Thames Valley case, in the absence of express wording, it seems unlikely that the courts will recognise a force majeure event where the performance of the contract could still be made, albeit with commercial difficulty or with increased cost.

In the Middle East
Some civil jurisdictions such as Egypt, Kuwait and the UAE have adopted as part of their civil code the doctrine of unforeseen circumstances. In the UAE, for example, Article 249 of the civil code provides that:

“If exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of a contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge, in accordance with the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.”

The concept of change of circumstances is different from force majeure as it does not require impossibility of performance for it to apply and a mere threat of grave loss may suffice. Accordingly, a lower burden of proof than that required under typical force majeure clauses will apply to this doctrine. The courts are required to examine each case based on its own merits and circumstances in order to decide whether or not to grant relief from performance.
It is unclear whether this doctrine could impact on contracts governed by English law with heavily negotiated force majeure clauses. It is a complex area, depending on many factors, including the specifics of the case, the jurisdiction, and conflict of law issues. Parties involved in jurisdictions in which the doctrine applies should be aware of the risk (or benefit) associated with this doctrine.

Conclusion
Generally, when negotiating force majeure clauses, the safest route is to draft express provisions dealing with the precise circumstances which will constitute a force majeure event. A general non-specific force majeure event may also be included but the parties should consider in this case whether any particular exclusions are required specifically to deal with any foreseeable risk which can be identified at the outset. Additionally, the inter-related nature of the agreements as well as any relevant local law issues should be carefully considered by the draftsperson.

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