UNEXPECTED, ACCIDENTAL, AND CATASTROPHIC EVENTS - DISRUPTION TO INTERNATIONAL SUPPLY CHAINS - CONTRACTUAL FORCE MAJEURE - LAYTIME AND DEMURRAGE – PART 2
SALE AND PURCHASE CONTRACTS
Parties in the oil and gas industry invariably apply a set of General Terms and Conditions (GTCs) to their trading activities. Well known terms include those from TOTAL ENERGIES, SHELL, BP and EQUINOR amongst others. Like charterparties, sale and purchase contracts have force majeure clauses which apply to events which affect the performance of the entire contract. They have specific exceptions to laytime and demurrage for accidental and unexpected force majeure type events. Exceptions to laytime and demurrage and force majeure clauses are types of exception clauses to which principles of causation and strict construction applies.
FORCE MAJEURE CLAUSES IN SALE AND PURCHASE CONTRACTS
One notable difference between oil industry charterparties and sale and purchase general terms and conditions is their length and complexity. Great care has gone into drafting them. Another difference is that these GTCsclauses covering unexpected, accidental and catastrophic events are labelled ‘Force Majure’. In general charterparties, they are called ‘General Exceptions’ or ‘Exceptions’ clauses. Both types of clauses do not appear in the specific exceptions to laytime and demurrage. As such they can be categorised as a ‘general class’ of exception not a specific one.
GTCs are divided into sections according to the terms of the trade –the principal sections in the oil trade being FOB, CIF/CFR, and DES/Ex Ship/DAP. Within each section is the laytime and demurrage regime that applies to the applicable trade term. There are notable differences from one set of GTCs to another and from one trade term to another and in the specific exceptions that can apply to either laytime or demurrage. Equinor ASA General Terms and Conditions have force majeure type events that apply to demurrage only. For example, the FOB Demurrage provisions found at CL 2.6.3.5. BP GTCs apply exceptions to both laytime and demurrage but not always. Ignore the fine print at your own risk!
It is a feature of charterparty negotiations that the entire contract is carefully reviewed including all its clauses by both owners and charterers. When drafting or reviewing an agreement for the sale and purchase of oil or gas, parties often concentrate on the commercial and operative terms and conditions set out in the deal recap. They pay less, or perhaps no attention, to the General Terms and Conditions and particularly those found in the final part– the section containing general provisions which apply to all the trade terms covered by the contract. These general provisions include Definitions, Quality, Payment, Time Bar Notices, Taxes, Entire Agreement clauses, Law, and Jurisdiction amongst others. Parties know that such clauses serve a very important function, setting out how certain obligations are to be performed or what is to happen in certain circumstances without having to be read every time a trade is concluded. It is in this section that the force majeure clause will be found.
These general force majeure clauses in the GTCs apply to the performance of the entire contract. See for example EQUINOR ASA GENERAL TERMS AND CONDITIONS SECTION III GENERAL TERMS. The force majeure provisions are found at ARTICLE 14 of the EQUINOR terms. The FM provisions of ART 14 in the Equinor terms cover one and a half pages of text and exhibit many of the features found in modern oil industry sale and purchase terms. The scope and range of sale and purchase force majeure provisions are notably greater than those found in voyage charters. They are also much more detailed with notice and other provisions which can bar access to the relief provided by the clause if not applied correctly.
HOW THE GENERAL FORCE MAJEURE EXCEPTIONS APPLY TO LAYTIME AND DEMURRAGE IN SALE AND PURCHASE CONTRACTS
1. DELIVERY DATES
The seller or buyer or both parties may be entitled to suspend delivery orextend the time for delivery or even cancel the whole or part of the contract upon the happening of a specified event or events beyond its control as defined in the force majeure clause. This can have a significant impact on laytime and demurrage. For example, a contract Shipment Date or a Delivery Date Range may be extended by the duration of the force majeure event. This will change the start of laytime under the sale and purchase contract.
In contrast when time starts under a voyage charterparty will depend on the tender of the ship’s NOR. This will not be affected by the delayed start of time under the sale and purchase contract. Time can start under the charterparty even though it has not yet started under the sale and purchase contract. How laytime or time on demurrage counts will then depend on the exceptions within the charter laytime and demurrage regime.
2. FORCE MAJEURE CLAUSES WHICH CREATE EXCEPTIONS TO LAYTIME AND DEMURRAGE
The starting point for any laytime and demurrage analysis is to look at the specific exceptions to laytime or time on demurrage and identifying whether they apply. This will involve analysis of the facts and the effect of the event on the running of time.
Because exceptions clauses are strictly construed, a general exceptions force majeure type clause in a charterparty will not apply to the running of laytime or the obligation to pay demurrage, unless sufficiently clearly worded to have this effect. THE KALLIOPI A [1988] and THE LEFTHERO [1992]. Acharterparty general exceptionsclause which is expressed in general termswill not apply to laytime or time on demurrage. See THE JOS STOVE (1984) a decision on the ASBANTANKVOY form charter. This decision is explained on the basis that there is a specific set of exceptions to time. The general exceptions clause is not worded in the same specific way and (generally) it can be said as a matter of construction does not apply.
The question which arises in relation to the force majeure provisions in sale and purchase GTCs with their extensive and detailed clauses is whether they create an exception to laytime or time on demurrage without expressly stating this. For example,BPGTCs CL 65.4.3 states that
‘…in respect of an [force majeure event] that delays, hinders, reduces or interferes with the performance of an obligation other than the delivery obligation(s), immediate postponement of those obligations without liability for damages, penalties and other contractual remedies until such time as the impediment is removed.’
The decision of the English High Court in THE SOLON (2000) would suggest this clause does not create an exception to laytime and demurrage. However, THE SOLON does not provide a complete and definitive answer to the question. A general exceptions clause will not be held to apply to the running of laytime or the obligation to pay demurrage, unless sufficiently clearly worded to have this effect. Therefore,whether a Force Majeure clause applies to provide an exception to laytime and demurrage is a question of construction of each. There appear to be no cases which have considered this question under the modern era GTCs. In principle, appropriately worded force majeure clauses might apply. In addition, whether a party could rely on a force majeure exception will depend in turn on issues of causation, mitigation, foreseeability, timing, and notification issues required by the complex force majeure clauses seen in sale and purchase contracts.
As always, the contract must be carefully consulted when considering such issues. Certain GTCs make clear that the requirement to discharge within laytime and the obligation to pay demurrage is ‘absolute’ and force majeure provisions do not apply. Other terms are less clear. They may state that for certain specified events such as strikes, demurrage must be paid at half rate and the force majeure provisions do not apply. Other force majeure events are not mentioned. Whether such events which are not expressly mentioned would create an exception to laytime and demurrage is then a matter of construction of the contract as a whole.
STASCO recently released FOB/CIF GENERAL TERMS AND CONDITIONS put the matter beyond argument. These terms define what force majeure is for the purposes of these terms and use it to create exceptions to laytime and demurrage. The STASCO approach contrasts with most other GTCsand is notable for the certainty they create.
In the final part of this newsletter, we shall consider issues of causation as they apply to Force Majeure clauses and what steps a party relying on a clause must take to avoid the effects of force majeure impediments.
ENJOYING THE ASDEM NEWSLETTER?
CLICK HERE TO SUBSCRIBE
The ASDEM newsletter is a complimentary publication enabling its readers to stay up to date with legal developments in the oil and gas industry. The information contained in this newsletter is for informational guidance only and does not constitute legal advice. If you would like to discuss any of the information covered in this newsletter or need any professional advice or assistance with any of the matters covered in this or any previous ASDEM newsletter, please contact us at info@asdem.com.
The ASDEM newsletter and its content (data) is the property of ASDEM Limited. ALL RIGHTS ARE RESERVED. No part of this newsletter may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of ASDEM Limited.
UPCOMING EVENTS
LONDON
05 September 2024
LAYTIME AND DEMURRAGE IN THE CARRIAGE OF GOODS BY SEA IN THE OIL AND GAS INDUSTRY – A ONE DAY FOUNDATION COURSE
ATTEND ONLINE OR ATTEND THE CLASS
Download Brochure
LONDON
18/19 September 2024
LAYTIME AND DEMURRAGE UNDER OIL AND GAS TANKER VOYAGE CHARTERPARTIES: BEYOND THE BASICS
Download Brochure
LONDON
25/26 September 2024
LAYTIME AND DEMURRAGE UNDER OIL AND GAS INDUSTRY SALE AND PURCHASE CONTRACTS: BEYOND THE BASICS
Download Brochure
If you require any further information on any of our courses or conference, please do not hesitate to get into contact with us at info@asdem.com or by phone at +44 20 8133 8844.