The consequences of the COVID-19 pandemic have been wide reaching, especially for the energy sector. It has, and continues to, experience unforeseen challenges to its daily operations. For example, closures, employees quarantining or self-isolating, and disrupted supply chains. These difficulties have only been exacerbated by unprecedented declines in oil prices. As a result, it’s reasonable to assume that many oil and gas companies may seek legal counsel regarding force majeure clauses. These companies are essentially facing the reality that is potentially being unable to fulfill their contractual obligations. Thus, the first step is to review their contracts to determine whether a force majeure clause is present and more importantly, if COVID-19 triggers its application.
What is a Force Majeure Clause?
In general, force majeure clauses excuse the performing party of its contractual obligations in the event that unforeseen, uncontrollable circumstances arise that make said obligations impossible to perform.
Does it Apply to COVID-19?
Determining whether events related to the COVID-19 outbreak trigger a force majeure clause depends on the wording of the clause. For example, the clause applies if it defines force majeure to include the following events:
- Public health emergency
- Communicable disease outbreak
- Pandemics or epidemics
- Quarantines
- Government regulation or administrative action
In addition, the performing party needs to also prove:
- The triggering event is beyond its control.
- The event has made it impossible to perform the contractual obligations.
For a more detailed explanation of force majeure clauses, its requirements to be implemented, and its application, see a previous post here.
How does this Apply to the Energy Sector?
Many may assume that given the above-mentioned reasons, oil and gas companies in Western Canada would resort to their force majeure clauses. However, on the contrary, the energy sector is doing the opposite. Some are saying that this is because these energy companies recognize the broad network of stakeholders. Therefore, every delayed, partial, or non-performance by one party will inevitably have detrimental ramifications on at least one other party in the energy value chain. In other words, these oil and gas companies are acting based on the long-term and taking a more collaborative and pragmatic stance. Avoiding the implementation of a force majeure clause will reduce the “ripple effect” that may occur otherwise. Some infer that this will make it easier and faster to get over this issue caused by COVID-19.
Important Considerations
Moving forward, parties drafting contracts should be wary of the wording and specificity of their force majeure clauses.
Those considering asserting force majeure clauses should analyze and act on potential alternatives that would let them perform their obligations. They are responsible for mitigating the event to the best of their abilities. For more information or help with reviewing contracts, the team at Sodagar & Co. has the expertise to help you.
