Performing contracts during unrest in Iraq

Performing contracts during unrest in Iraq
Published: 14 October 2018 - 5 a.m.

Unfortunately, force majeure is back in the spotlight for companies doing business in the south of Iraq. The recent violent protests in Basra involving thousands of people threatened to paralyse the operations of international oil companies (IOCs) and their contractors. Torching of facilities, mortar shelling and a mandatory curfew have all been reported.

With security and safety of personnel taking the forefront of operational considerations, the contractual considerations relevant to such events may sometimes be a secondary thought. However, force majeure is an important aspect of the contractual arrangements between IOCs and their counterparties and cannot be ignored.

In its most basic form, force majeure relief is an entitlement to suspend a company’s performance of obligations, either in whole or in part, as a result of circumstances beyond its control. This is especially relevant during the construction phases of major oil and gas infrastructure, as any delay could result in losses and/or liability to liquidated damages.

In this article, we touch upon a number of force majeure considerations during the performance of contracts governed by English law or the Iraqi Civil Code. However, we do not examine all considerations that may be relevant when agreeing a force majeure clause in a contract, as these may be too varied to cover succinctly in this article.

Contractual remedies

In our experience, English law governs a large number of contracts in the Iraqi oil and gas sector. As such, it is important to clarify that the term ‘force majeure’ is a civil law concept, and does not actually have any clear definition as a matter of English (or common) law. Instead, under English law, force majeure is a creature of contract and can be as wide or as narrow as agreed by the parties.

Unsurprisingly, in volatile jurisdictions such as Iraq, almost all contracts tend to address force majeure and its impact on the parties’ obligations. While force majeure clauses tend to vary, they typically encompass:

• the definition of relevant events which trigger relief;
• any conditions precedent to relief becoming available; and
• any steps which the parties are required to take after an event takes place.

Definition of relevant events

Due to the contractual nature of force majeure, the definition of relevant events is of critical importance. Unless an event falls within the definition of a force majeure event, the relief may not be available.
There are two general approaches to providing for relevant events: an exhaustive or non-exhaustive list. While an exhaustive list of relevant events improves clarity as to what is (and what is not) a relevant force majeure event, it may be difficult to provide for every single eventuality. In this regard, principles of interpretation of contracts under English law may apply to include an event into an otherwise exhaustive list (however, we do not consider these principles for the purposes of this article).
The other approach taken in a number of contracts is to refer generally to an event beyond the reasonable control of a party seeking force majeure relief. These clauses also tend to enumerate a non-exhaustive list of relevant events.

Another aspect of the definition of force majeure that is often overlooked is the presence or lack thereof of any of the following terms: “prevented”; “hindered”; and “delayed”. While the words appear to be synonymous, their legal meaning is not. For example, if force majeure relief is only available where a party is “prevented”, it would likely mean that a party has to be physically or legally unable to carry out its obligations. However, if the relevant wording is “hindered”, it may be sufficient to demonstrate that it was not prudent (albeit, not impossible) for a party to break or breach other contracts in order to perform its obligations.

Further, the burden of proving that a force majeure event arose and that a party is prevented, hindered or delayed (as applicable) will rest with the party claiming force majeure relief. This would typically mean that a party must prove that the event was:
• beyond its control; or
• falls within the list of agreed relevant events; and
• that there were no reasonable steps (or that all reasonable steps were taken) to mitigate the event or its consequences.

Unfortunately, there is no universal approach to considering whether the recent events in Iraq are likely to be considered a force majeure event or not. Each force majeure clause is unique and must be interpreted according to the ordinary and natural meaning of its terms. Therefore, a party should be cautious to assume that it is entitled to force majeure relief simply because of the happening of certain events, such as those experienced recently.

Conditions precedent

There is a general assumption that force majeure relief is available whenever a relevant event arises. However, clauses used in the oil and gas and construction sectors may provide that relief is subject to certain conditions precedent.

These may include time limits within which the condition precedent must be satisfied. A contract may also provide that a party is prevented from benefiting from relief if the relevant condition precedent is not met within the time limit. By way of example, a force majeure clause may require written notice (setting out specific matters) to be given within a certain amount of days from the date that the force majeure event arises. Failure to give such notice may preclude a party from any relief.

While the immediate concern of all parties during events, such as those in Basra, is the safety of their personnel, notification of force majeure events should be kept in mind. Failure to abide by the contractual conditions may prove fatal to a claim for relief.

Subsequent steps

Once force majeure is triggered, certain contracts impose specific obligations on one or more parties. These could include obligations to hold meetings, provide recovery schedules, secure and preserve materials or equipment, remain on stand-by, etc.
It is important to ensure that such obligations are satisfied notwithstanding the ongoing force majeure circumstances. For example, the obligations to secure and preserve facilities under construction may be particularly relevant during the unrest in Basra. A party who must comply with such obligation to avoid liability in the event the facility is damaged by the force majeure event.

Iraqi Civil Code

Unlike English law, the Iraqi Civil Code prescribes a remedy for the types of events associated with force majeure. For example, Article 168 of the Iraqi Civil Code provides “if it is impossible for the obligee of a contract to perform his obligation specifically he will be adjudged to pay damages for non-performance of his obligation unless he establishes that the impossibility of the performance was due to a cause beyond his control…” (Emphasis added.)

Further, Article 425 of the Iraqi Civil Code provides “an obligation is extinguished if the debtor has established that its performance has become impossible due to a cause beyond his control.”
It follows that, under a contract governed by Iraqi law, a party seeking relief from force majeure may rely on the Iraqi Civil Code.

However, there are two issues which must be considered in addition to any specific requirements set out in the relevant contract:

• the Iraqi Civil Code refers to an obligation becoming “impossible” to perform. Therefore, an obligation which is merely difficult or commercially unreasonable is not sufficient to trigger relief; and
• the burden of proof is on the party seeking to benefit from the force majeure relief. Therefore, a careful record of all of the circumstances making the performance impossible must be kept. For example, this could include records of unsuccessfully seeking alternative sources of labour, goods or materials to perform the obligations.

Overall, the oil and gas industry in Iraq is familiar with force majeure events, which are sadly becoming a frequent occurrence in Iraq. Despite this, it is useful to consider the contractual and other practical issues to insulate a party from further impact than the force majeure event itself.

The issues outlined above all form part of contract administration and management. It is appreciated that, during acute force majeure events, contractual compliance may be far down the list of immediate priorities. However, templates for notifications, a specific contract administration procedure for force majeure events and training could be a useful tool to minimise any business disruption even during the most critical times.

It would also be of benefit for parties to revisit their standard contracts. Ideally, any new contracts should adequately capture the practical difficulties associated with force majeure events, evacuation and repatriation of personnel.

Practical Steps

Due to violent protests encountered in Basra, a number of companies were forced to evacuate some or all of their personnel. When dealing with evacuation, it is important to consider the preservation of equipment, goods, work products and records from a practical perspective, in addition to any contractual obligations.

Status quo

If circumstances allow, all parties to a contract should conduct an inspection and note the conditions of the site, goods, any equipment or other tangible objects relevant to their contract. Parties should note any items goods delivered or the percentage completion of any construction works, or the state of preservation and subsurface conditions of a well being drilled. This would be a prudent protocol even if no damage was sustained during the force majeure event prior to evacuation.

To the extent that any theft, damage or destruction occurs after the evacuation, the parties should have sufficient evidence of the conditions immediately prior to evacuation. Joint inventories, defects lists, countersigned reports, photographs, video and drone footage (to the extent permitted by law and applicable HSE procedures) will assist the parties to achieve this.

Even if all of the parties are unable to attend such inspection or countersign the documents, any photographs or video evidence may be sufficient proof to demonstrate the state of affairs prior to evacuation.

Documents

Records are critical to resolving disputes and can make a huge difference to the success or value of a claim. Similarly, hard copy documents such as manuals, as built drawings or quality assurance certificates are also important for the operation and maintenance of large oil and gas infrastructure. However, a common difficulty with hard copy records being stored in Iraq is that, even without force majeure events, they are liable to damage or destruction by fire, heat, water or rodents.

The most convenient solution to this problem is to ensure that all hard copy documents are regularly backed up as electronic copies. While this is time-consuming, the investment into an electronic document management system can pay tremendous dividends when data needs to be transported or retrieved quickly. It also makes the records less prone to damage and far easier to back-up than hard copy documents.

Overall, force majeure is an issue for anyone operating in the oil and gas industry in Iraq. With the right steps and procedures being in place in advance, business interruption could be kept to a minimum.

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