Contracts

Force Majeure: A Gulf Spill Ripple Effect?

An unanticipated ripple from the 2010 Gulf oil disaster may affect oil and energy companies across the globe. Second-thoughts on deepwater drilling have energy companies moving to other wells. But, such moves aren't always easy and are prompting claims of force majeure.

Can't Move?

In the wake of the oil spill, the US government tried to temporarily stop to all deepwater drilling (called a moratorium) until safety concerns could be addressed. It was unsuccessful, and drilling was allowed to continue. The government, however, continues to push for a halt.

In response, some oil and energy companies started looking at drilling closer to shore ("shallow water" drilling) not covered by the moratorium. They are, however, subject to new and tighter safety rules. This combination of events is leaving some companies in a tough spot.

Force Majeure

"Force majeure" is a clause or provision commonly used in commercial and business contracts. It frees one or both sides from doing what's required by the contract when something extraordinary or beyond their control makes it impossible to fill the contract, such as war or an "act of God" or natural disaster.

A freeze on deepwater drilling most likely would trigger a force majeure clause. A good example is a contract where an oil company hires a drilling company to start or run a new deepwater well. The moratorium makes it impossible for the drilling company to honor the contract.

When It Doesn't Work

However, there are reports some companies are claiming force majeure when canceling contracts is connected to shallow water wells, claiming the new federal rules make it impossible to perform the contract.

For instance, Chevron recently cancelled contracts with a drilling company claiming it was having difficulty getting the necessary permits because of the new rules on shallow water wells. It soon withdrew its force majeure claim and honored the contracts after it got the permits, though.

Its claim likely wouldn't have saved it from a breach of contract suit anyway. As pointed out by one legal expert, Chevron's "difficulty" in getting the permits doesn't rise to the level "impossibility" required by these clauses.

Impact

A ripple effect is forming. BP isn't the only oil company or energy-related business impacted by the spill. The effects are nationwide, and perhaps even global. Companies all over the world are engaged in activities in and around the Gulf. In the wake of the spill, they're scrambling to find new and safer wells; companies face cancelled contracts for drilling services or oil itself; workers face layoffs; and consumers face rising gas and oil prices.

Oil and energy companies aren't the only businesses affected, either. Commercial contracts for residential and retail construction, fish and seafood, and manufactured and agricultural goods in the Gulf region may contain force majeure clauses. Cancellation of these contracts also means higher consumer prices, job losses, and other economic woes.

The ill-effects of the Gulf oil spill are already widespread, and it looks like the effects will continue to spread.

Questions for Your Attorney

  • Absent a force majeure clause, how can my company protect itself in a contract for oil drilling services if the appropriate permits are denied?
  • Is there any reason why one or both parties wouldn't want a force majeure clause in a contract?
  • Can my company file a claim against the BP escrow fund if contracts are canceled because of the spill or cleanup efforts?

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