Factual and Procedural Background
This case concerns a contract for the hire of an ultra deepwater oil rig ("West Leo") between Plaintiff, an oil company operating offshore petroleum concessions off the coast of The State, and Defendant, the rig owner. The contract included a force majeure clause. During a territorial sea dispute between The State and a neighbouring country, an arbitration tribunal issued a Provisional Measures Order (PMO) requiring drilling to cease in the disputed area. Subsequently, technical problems with a related marine structure (an FPSO), denial of government approval for drilling in a particular location, and a fall in oil prices affected the economic viability of drilling operations. Plaintiff ceased paying hire and terminated the contract, relying on the force majeure clause. Defendant disputed this, claiming substantial sums due under the contract. The court was tasked with determining whether Plaintiff was entitled to rely on force majeure to terminate the contract and whether Plaintiff exercised reasonable endeavours to mitigate the effects of the force majeure.
Legal Issues Presented
- Whether the drilling moratorium imposed by the Government of The State constituted a force majeure event excusing Plaintiff's failure to perform contractual obligations.
- Whether Plaintiff failed to exercise reasonable endeavours to avoid or mitigate the effects of the force majeure.
- Whether Plaintiff gave proper notice of the force majeure occurrence as required by the contract.
- Whether Plaintiff was entitled to terminate the contract pursuant to the force majeure clause after 60 days of the force majeure condition.
- Issues relating to the applicability of VAT and withholding tax on invoices submitted by Defendant.
Arguments of the Parties
Plaintiff's Arguments
- Plaintiff argued that the drilling moratorium imposed by the Government, communicated via letters following the PMO, constituted a force majeure event under the contract.
- Plaintiff claimed it was prevented from issuing drilling programmes due to the moratorium and government rejection of the Greater Jubilee Plan, justifying termination under the force majeure clause.
- Plaintiff contended it exercised reasonable endeavours to mitigate the force majeure by planning to use the rig in alternative locations and seeking government approval for drilling plans.
- Plaintiff argued that commercial considerations, including the lack of a business case and economic unviability, justified not directing the rig to certain wells during the moratorium.
- Plaintiff submitted that notice of force majeure was properly given in March 2016, after the FPSO technical problem.
- Regarding VAT and withholding tax, Plaintiff contended that some invoices were not "true and correct" due to incorrect VAT charges and failure to deduct withholding tax, thus affecting payment obligations.
Defendant's Arguments
- Defendant denied that the drilling moratorium constituted a force majeure event excusing Plaintiff's non-performance.
- Defendant maintained that Plaintiff needed to pay sums due under the contract, including standby rates and termination for convenience amounts.
- Defendant argued that Plaintiff failed to exercise reasonable endeavours to mitigate the force majeure by not directing the rig to work on available wells not subject to the moratorium.
- Defendant submitted that the moratorium was imposed in May 2015 and was effective immediately, not only in October 2016 as Plaintiff claimed.
- Defendant disputed Plaintiff's commercial justifications for not using the rig on certain wells, pointing to contemporaneous documents showing opportunities were available.
- On tax issues, Defendant contended that VAT was chargeable on services supplied in The State, and that withholding tax obligations rested with Plaintiff as the payer.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| ENE Kos v Petroleo Brasileiro [2012] 2 AC 164 |
Legal principles on causation in contractual contexts, emphasizing a broad common sense approach. |
The court applied the principle that causation must be assessed by common sense, concluding that both the drilling moratorium and failure of government approval were causative of Plaintiff's inability to perform. |
| Wayne Tank v Employers Liability [1974] QB 74 |
Insurance exceptions clauses: if an insured event is caused by two causes, one excepted and one not, insurer is exempted. |
Used to illustrate that where multiple causes exist, the force majeure event must be the sole or effective cause to excuse performance. |
| The Torenia [1983] 2 Lloyd's Reports 210 |
Carrier liability when loss caused by concurrent causes, one excepted peril and one not. |
Distinguished from the present case to highlight different treatment of concurrent causes in different contexts. |
| Intertradex v Lesieur [1978] 2 Lloyd's Reports 509 |
Force majeure notice must be given for each cause preventing performance; force majeure event must be sole cause. |
Supported the court's conclusion that Plaintiff could not rely on force majeure where non-performance was caused by both force majeure and non-force majeure events. |
| Ross T Smyth & Co. Ltd. v W N Lindsay Limited [1953] 2 Lloyd's Reports 378 |
Force majeure requires impossibility, not mere difficulty or restriction of performance period. |
Referenced to emphasize that force majeure requires more than increased difficulty or expense. |
| B&S Contracts v VG Publications [1984] ICR 419 |
Force majeure requires that situation and consequences be beyond reasonable control. |
Applied to affirm that commercial inconvenience or expense does not suffice to establish force majeure. |
| Brauer & Co. v James Clark [1952] 2 AER 497 |
Distinction between unprofitability and prohibitive cost in force majeure context. |
Used to explain that mere expense does not excuse performance unless it is prohibitive or outside parties' contemplation. |
| Reardon Smith Line v Ministry of Agriculture, Fisheries and Food [1963] AC 691 |
Obligation to perform contractual duties in alternative ways when one method is barred by force majeure. |
Guided the court’s analysis of Plaintiff’s duty to use reasonable endeavours to avoid force majeure effects. |
| Croydon Hotel & Leisure v Commissioners of Customs and Excise [1997] Decision Number 14920 |
VAT liability for supply of services including making available of facilities or advantages. |
Considered in relation to whether termination for convenience constituted a taxable supply. |
| Lubbock Fine & Co. v Commissioners of Customs and Excise [1993] Case C-63/92 |
Right to terminate confers a taxable supply of service. |
Referenced in VAT analysis regarding the nature of services supplied under contract termination rights. |
Court's Reasoning and Analysis
The court began by establishing that the drilling moratorium imposed by the Government of The State via the letter dated 4 May 2015, following the PMO, constituted a force majeure event under the contract’s force majeure clause, which explicitly included a drilling moratorium imposed by the government. The moratorium was effective from May 2015 and prevented new drilling in the disputed area, though completion of already spudded wells was permitted.
However, the court found that Plaintiff’s failure to perform its contractual obligations in October 2016 was caused by two concurrent factors: the drilling moratorium (a force majeure) and the Government’s failure to approve the Greater Jubilee Plan (not a force majeure). The failure of approval was linked to a technical problem with the FPSO, which limited production capacity and affected government willingness to approve further drilling plans.
Under the contract, the force majeure clause only excuses non-performance to the extent that it is caused by a force majeure event. The court held that because Plaintiff’s failure to provide drilling instructions was partly caused by a non-force majeure event (the government’s failure to approve the plan), Plaintiff could not rely on the force majeure clause to excuse its non-performance or to terminate the contract.
The court also addressed the reasonable endeavours obligation under the force majeure clause, requiring Plaintiff to mitigate or circumvent the force majeure. It found that Plaintiff failed to exercise reasonable endeavours by not providing drilling instructions for certain wells (not subject to the moratorium) where drilling was technically feasible and did not require government approval. The court rejected Plaintiff’s argument that commercial considerations or lack of a business case justified this failure, emphasizing that in the force majeure context, the interests of the other party (Defendant) must also be considered.
Regarding notice, the court held that proper notice of the force majeure occurrence was given in March 2016, when it became a realistic possibility that drilling would be prevented, and that notice by email was acceptable under the contract.
On VAT and withholding tax issues, the court concluded that VAT was not chargeable on services physically carried out outside The State (such as standby services after the rig left The State’s waters), but was chargeable on the termination for convenience service, which was deemed supplied at Defendant’s place of business in The State. Withholding tax was payable on services performed in The State but not on those performed outside The State.
Holding and Implications
The court held that Plaintiff is not entitled to rely on the force majeure clause to excuse its failure to perform contractual obligations or to terminate the contract. This was because the failure to perform was caused by both a force majeure event and a non-force majeure event, and the contract requires the force majeure to be the cause of non-performance.
Further, Plaintiff failed to exercise its reasonable endeavours to mitigate or circumvent the force majeure by not providing drilling instructions for available wells, breaching its contractual obligations.
Consequently, Defendant is entitled to recover the sums claimed under the contract, including standby and termination for convenience payments, subject to adjustments for VAT and withholding tax as determined.
No new legal precedent was established; the decision applies established principles of contract construction, force majeure, and reasonable endeavours in the context of offshore drilling contracts.