The Law Of War - Force Majeure In Time Of War (And Peace)

1. Background:

The events in the Gulf region have affected the supply of gas and natural gas and petroleum, but also aluminum (together the “products”) considering the number of refineries in the region. In this context, announcements have been made about force majeure (FM) affecting supply.

Whether events in the Gulf (and their effect) will give rise to a claim for FM under a supply or offtake contract will depend on the answers to the following sequential questions:

• Is any contractual obligation to deliver or to take the products affected by the events?
• If so, does the contract include FM provisions? ¹
• If so, do FM provisions excuse non-delivery or non-take of petroleum?
• If so, does the party affected by FM want to claim FM to excuse non-delivery or non-take?
• If so, how does the party affected claim FM and what obligations arise on claiming FM? ²

A party claiming FM must prove the FM provisions apply ³ (burden of proof). If a party proves the provisions apply, that party will get “the benefit of the safe harbor of force majeure” (safe harbor), i.e., to the extent that, and for the period of time during which, performance of an obligation of the party is affected by FM, that party will not be liable for breach of contract.

If a contract does not include FM provisions and is not governed by the laws of a jurisdiction that has legislative provisions on FM or if it does include FM provisions but they do not apply, the benefit of the safe harbor will not be available, and a party affected by events beyond its control or its reasonable control will be exposed to a breach of contract claim, including for damages and, possibly (if not a long-term contract), contract termination.

2. Purpose of this paper:

Against this background, this article provides a framework to understand (at a high-level):

• announcements relating to FM;
• the anatomy of FM provisions; and
• when they are likely to apply and when they are not in the context of the Iran War.

3. Iran War:

3.1 Finding a safe harbor:

Typically, FM provisions comprise the following three elements:

• a definition of Force Majeure (often misunderstood); and
• any obligation affected (often misapplied); and
• the extent to which the obligation is affected (often overlooked).

Definition of Force Majeure: Force Majeure must be defined: it is not sufficient to use the phrase “force majeure” because in most jurisdictions it is not a legal term of art. In jurisdictions that legislate for FM, it is possible for the parties to adapt the definition.

Typically, definitions of Force Majeure are open-ended, i.e., any event beyond the control or the reasonable control ⁴ of a party that materially affects the ability of that party to perform any obligation, with illustrative examples of events listed, including war (declared or undeclared), and blockades.

Less typically, definitions of Force Majeure are closed, i.e., specific circumstances are listed, including war (declared and undeclared), and blockades. If a closed definition is used, only if the event that has occurred is listed and has affected a party, may that party seek safe harbor.

Historically, disputes have arisen in the context of closed lists, including in the context of whether any conflict (or the impact of any conflict) is a war, whether a war that is not declared formally or not declared lawfully is a war for the purpose of that closed list.

Obligation affected: Consistent with the burden of proof, a party seeking safe harbor must prove that Force Majeure (as defined) affects the ability of that party to perform an obligation. In the context of a petroleum supply contract, the question will be: Did the Force Majeure affect the ability of the supplier to make delivery or, as the case may be, the ability of the purchaser to take delivery?

Extent to which obligation affected: In many instances, FM provisions will allow safe harbor if the party is affected to any extent by Force Majeure (as defined). However, some contracts delineate the extent to which the party must be affected ⁵. For example, some FM provisions provide that a party affected must be “prevented” from performing the obligation. Because the burden of proof requires a party seeking safe harbor to prove that the FM provisions apply, that party must prove that Force Majeure (as defined) affected performance of the obligation as delineated.

3.2 Impact: In the context of the Iran War, there are many ways in which a party with an obligation to make delivery or to take delivery under a petroleum supply contract may be affected, most obviously:

• On FOB terms of carriage ⁶: purchaser is not able to access loading facilities to take delivery of any cargo, and subsequently purchaser is not able to make delivery of that cargo under any contract for the sale of that cargo by it; 
• On DAP / DES terms of carriage: the supplier is not able to load any cargo at, or depart from, loading facilities and as a result the supplier is not able to make delivery under any contract for the sale of that cargo by it;
• Damage to or destruction of production facilities: the supplier is not able to produce petroleum products, and, therefore, not able to deliver them, and any purchaser from the supplier is not able to take delivery of any cargo and, therefore, is not able to make delivery under any contract for the sale of that cargo by it;
• Damage to or destruction of vessel to transport: on FOB terms of carriage, purchaser is not able to take delivery of cargo at loading facilities because the vessel is damaged or destroyed before it reaches the loading facilities; and
• Damage to or destruction of vessel transporting petroleum having loaded any cargo: if FOB terms of carriage, purchaser is not able to make delivery of that cargo under any contract for the sale of that cargo by it, and if DAP / DES terms of carriage, supplier is not able to make delivery of that cargo under any contract for the sale of that cargo by it.

Less obviously, the terms of charterparties and insurances may affect movements of vessels.

3.3 Possible application of FM provisions in the context of the Iran War

Here are some theoretical scenarios in which FM provisions may apply:

• production facility within the Persian Gulf, at which products are produced and to be made available for delivery by the supplier to the purchaser (on FOB terms), if that production facility is damaged as a result of an event beyond the control or reasonable control of the supplier, the supplier will not be able to make delivery and is likely to be able to claim safe harbor;
• production complex within the Persian Gulf producing different products within the Persian Gulf, part of the complex is damaged, but production of some products continues, and can be made available for delivery by supplier to purchaser (on FOB terms), if the purchaser’s vessel is within the Persian Gulf and is able to load, it is less likely to be able to claim safe harbor unless it is not lawful for it to load. If the purchaser was not in the Persian Gulf, it is likely that the purchaser will be able to claim safe harbor;
• production complex within the Persian Gulf continuing to produce products to be made available for delivery by supplier to a purchaser (on FOB terms) and the purchaser will then make available to a purchaser from it on (on DAP / DES terms) under which the source of production is named in the sale contract, but purchaser in the Gulf of Oman and not able to access the Strait of Hormuz to transit through the Persian Gulf, it is likely that the purchaser will be able to claim safe harbor under the supply contract with the supplier, under its sale contract (on DAP / DES terms). If the source of production is not named in the sale contract, it is less likely to be able to claim safe harbor.

Footnotes

1 If a contract does not include FM provisions and is not governed by the laws of a jurisdiction that has legislative provisions on FM, it is possible that a party affected by events may be able to claim that the contract has been frustrated if those events were not contemplated when contracting and thereby frustrate the contract. Frustration is beyond the scope of this article. However, certain legislations (such as French law or the UAE civil code) have legislated provisions on FM which will apply to all contracts governed by their laws.

2 Typically, a process must be followed, and the ability to rely on the FM provisions may be expressed to be conditional on following that process. Also, a reasonable efforts or endeavors obligation will be imposed to overcome the FM / the effect of it. If the supplier has multiple contracts to supply from the same source, a reasonable efforts / endeavors obligation must be applied on a contract-by-contract basis

3 This reflects rules applied in construing contracts.

4 Most open-ended definitions of Force Majeure use reasonable control but some use control: reasonable control is more favorable to the party seeking safe harbor. As we will consider in Section 3.3 below, what is reasonable in the context of the Iran War is a live issue.

5 This is why many petroleum supply contracts define Affected (for example, means delayed, hindered, or prevented, in whole or in part, and to whatever extent (material or substantial) or otherwise affected”) and use the definition in the operative FM provisions.

6 Terms of Carriage: Free on Board and DAP/DES terms of carriage refer to Delivered at Place and Delivered Ex Ship as those terms are commonly understood. So as to limit the length of this article we have not addressed C terms of carriage.