Oil & Gas

Lawyers warn of majeure impact to firms from North Sea strikes

With further strikes by offshore workers set to begin this week, legal experts have warned of the potential ‘force majeure’ impact on energy sector contracts.

Lawyers from CMS said the proliferation of strikes in recent weeks have continued to test the “operation and efficacy” of force majeure provisions within oil and gas industry contracts.

These clauses usually relate to unforeseeable occurrences and excuse all parties from the obligations of their contracts. COVID-19 measures in 2020 offered a prime example of their application, though whether these measures can be applied successfully amid a backdrop of growing industrial action is up for debate.

CMS’ warning comes as around 1,650 contractors across five companies are poised to participate in further strike action this week, with the first of two 48-hour actions beginning on the morning of 1 June as part of an escalating dispute over pay and conditions.

The prospective action includes electrical, production and mechanical technicians in addition to deck crew, scaffolders, crane operators, pipefitters, platers, and riggers working for Bilfinger UK, Stork Technical Services, and Sparrows Offshore Services.

What counts as force majeure?

The first complexity lies in definitions. CMS energy partners Philip Ashley and Paula Kidd explained to Energy Voice that the term ‘force majeure’ has no recognised meaning under English or Scots law and is therefore defined within a contract itself.

This could include a narrow or wide set of circumstances as stipulated by the parties, but notably there is no default protection in English law beyond the narrow principle of “frustration”.

Standard industry contracts provided by LOGIC and Offshore Energies UK (OEUK) are drafted in English law, though other offshore contracts may use Scots law. However, in a blog post CMS notes that each use slightly different criteria.

LOGIC standard form contracts use an “exhaustive list” which sets out all the events that could enable force majeure provisions – including national or regional strikes and industrial disputes.

The OGUK Model Form JOA contains a broader definition, of “any cause beyond the reasonable control of” the parties which prevents or hinders them from complying with their contractual obligations.

“This is a far less prescriptive approach than that adopted in LOGIC contracts and may provide more flexibility in arguing that various events, such as strike action, fall within the scope of the provision” CMS authors said.

Other standard paperwork, such as many transportation and processing agreements (TPAs), tend to use a similar format with many also expressly including force majeure provisions as a result of strikes.

However there may also be debate over “sole cause” if strikes are not the only reason a firm is unable to meet its commitments.

“Thought must be given to what the contract should expressly exclude or include as FM in the circumstances of the parties’ relationship. In ‘live’ contracts, care must be taken to understand the scope, causation and procedural requirements of the FM clause, in order to invoke the protections it can afford,” the authors add.

‘The more strikes there are, the more they spread’

So far, Mr Ashley and Ms Kidd said they had not yet seen an uptick in cases as a result of North Sea strike action.

“But the more strikes there are, the more they spread – particularly to key infrastructure or with knock on effects – and the longer they last will increase the likelihood that the ‘causation’ test is met and the strikes do in fact prevent or delay obligations from being performed,” they added.

Crucially, they also note in their blog that there is precedent for a company’s failure to settle a workforce dispute rendering a force majeure defence inadequate.

In one instance they cite a company which entered into a contract knowing that there was unrest among its workforce over a pay dispute and later attempted to seek provisions when unable to deliver.

Given the effect of failure to carry out the contract on the other party and the small additional amount of money involved to placate the strikers, a court ruled the company had been “unreasonable” in not reaching a settlement with its workers and could not rely on a force majeure clause.

Given the industrial unrest across many sectors of the UK economy, this could be a consideration for energy firms.

Asked whether situations like this could apply in the energy sector, Mr Ashley and Ms Kidd said: “This will entirely depend on the facts surrounding the claim and the definition of force majeure in the relevant contract, so we cannot really comment on likelihood of any such claim being upheld.

“Although the courts will take care to note the wording of the clause in question, the general approach is that the event must be outside of the party’s control – normally by seeking to avoid the event by taking reasonable steps.

“The facts of the case referred to involved knowledge by the party seeking to rely on FM that its workforce specifically had unrest – i.e. there was no wider industry unrest.”

Unite says this week’s action will represent the largest number of participating workers so far. As yet they shows no signs of stopping, with further actions running from 8 June to 10 June.

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