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Gujarat State Petroleum Corporation Limited & Ors v Republic of Yemen & Anor: Perspectives on the Issue of Force Majeure

11 October 2016 Features
By Sabina Adascalitei LLB, LLM, MCIArb, Research and Academic Affairs Coordinator

The seat of arbitration was Paris and the proceedings were conducted in English. The tribunal, consisting of Sir Bernard Rix, Mr Philippe Pinsolle and chaired by Dr. Lauren Lévy, issued its award under the 2012 ICC Rules of Arbitration.

 In December 2006, the Claimants won bids to engage in petroleum exploration and production activities in Yemen. In April 2008, they concluded with the Respondents three substantially similar “Production Sharing Agreements” (“PSAs”), which commenced in March 2009 upon their ratification by the President of Yemen. Furthermore, the Claimants have guaranteed their obligations by issuing irrevocable standby letters of credit in the Respondents’ favour.

Unfortunately, from the beginning of 2011, the security situation in Yemen started to deteriorate due to cumulative incidences of sectarian and tribal unrest, terrorist attacks, kidnappings and other crimes, which in the following couple of months culminated in a state of emergency that lasted forty-one days. In light of these events, the Claimants invoked Articles 22 of the PSAs to terminate their obligations due to the occurrence of a force majeure event.

Furthermore, they asked the tribunal to find in favour of a force majeure event, which led to the rightful and valid termination of the PSAs. In turn, the Respondents contested the validity of the force majeure claim and asked the tribunal to find that they are entitled to rely on the letters of credit as well as award damages for non-performance.

English Law Perspective

Force majeure is not an English law concept, but parties can choose to incorporate such provisions in their contracts. A force majeure clause would allow the parties to be exonerated from either all or part of their obligations under the contract. In terms of the meaning of force majeure, case law provides different perspectives to be taken into consideration.

For instance, in Matsoukis v Priestman[1], Bailhache J held that force majeure covered dislocation of business due to a universal coal strike and access to machinery. In Lebeaupin v Crispin[2], it was held that force majeure can encompass all circumstances beyond the will of man, which are not in his power to control. In this sense, war, strikes, floods and epidemics are all construed under force majeure. Essentially, there are three core elements to force majeure

  • It should be beyond the parties’ control and they could not have prevented its consequences;
  • It should make performance impossible for the party relying on it;
  • There should be a direct link between the unforeseeable event and the impossibility to perform.

Depending on the wording of the clause, force majeure may only suspend the performance of the contract while the effects of the events that were beyond the parties’ control are still in place. Furthermore, it is also relevant to take into account whether the force majeure clause requires the event to utterly prevent performance or only hinder or delay performance.

This is particularly important, because where the clause requires for performance to be prevented before a party is exonerated from their obligations, the risk of delay and its consequences will fall on the party who had the obligation to perform.

The ICC Tribunal Approach

The tribunal in the present case found in favour of the Claimants, considering the following issues:

  • Whether a force majeure event, as defined by the PSAs, occurred;
  • Where such event has occurred, how does one determine whether the non-performance of the PSA obligations was due to the event; and
  • Whether the party seeking to excuse its non-performance needed to demonstrate willingness to perform its obligations in order to invoke force majeure

With regards to the first point, the tribunal turned to the wording of Article 22.2 of the PSAs, which provided that “‘Force Majeure’... shall be any order, regulation or direction of the [Yemeni government]... or any acts of God, insurrection, riot, war, strike (or other labor disturbances), fires, floods or any cause not due to the fault or the negligence of the Party invoking Force Majeure, whether or not similar to the foregoing, provided that any such cause is beyond the reasonable control of the party invoking Force Majeure”. The tribunal decided that, based on the definition contained in the PSAs, the security situation in Yemen qualified as a force majeure event, given that none of the individual incidents relied upon by the Claimants had been caused by their fault or negligence, nor were they within their reasonable control.

In relation to the second point, the tribunal looked at Article 22.1 of the PSAs, which did not provide for a causation test. However, as with the first point, the tribunal relied on the wording of the article and concluded that the party wishing to rely on the force majeure provision does not need to show that it was the only cause of non-performance.

In what concerns the third point, the arbitrators made reference to their findings on Articles 22.1 and 22.2 of the PSAs, reasoning that additional criteria, including a party demonstrating willingness to perform, had the force majeure event not occurred, should not be implied into the PSAs’ self-contained definition.

It noted that willingness to perform might be relevant in similar circumstances only if it can be demonstrated that the party seeking to rely on it “had already determined that they would not perform before the Force Majeure events occurred”. In this case, however, there was no evidence that the Claimants had any intention of not performing their PSA Obligations prior to March 2011, when the force majeure event occurred.

Conclusion

The main point to be taken from this award is that parties should pay great attention when drafting force majeure clauses for international businesses in potentially unstable or risky states. As in the present case, where there is no specific provision to the contrary, tribunals will tend to allow parties to successfully invoke force majeure clauses even if performance has not yet become impossible.

This is not the position under English law and therefore, commercial parties should bear in mind that the lack of elements defining the causation link between the event and non-performance might allow their counter-parties to rely on force majeure when they wish to be exonerated from contractual obligations, which they are, nevertheless, unwilling to perform.

To avoid these scenarios, parties are encouraged to clearly define the meaning and the consequences of force majeure events in their contracts.


[1]  Matsoukis v Priestman & Co [1915] 1 KB 681.

[2] Lebeaupin v Crispin [1920] 2 KB 714.