Suspension Agreements as an Alternative to Force Majeure [Gaille Energy Blog Issue 82]
- Posted by scottgaille
- On March 31, 2020
- 0 Comments
Lawyers often gain valuable experience by accident. This was the case with me and force majeure. A couple of weeks after 9/11, I joined Occidental Petroleum’s business development office in Dubai. As the youngest person on the team, I received the most troubled assignments during an extraordinary time. I went to those places no one else wanted to visit. I became a near permanent resident of the world’s most unsettled corners, ferried to meetings by private security details in scenes reminiscent of a Homeland episode. Much of my job entailed dealing with force majeure—that is, circumstances affecting a project that were beyond the control of either party. There were tribes attacking drilling sites, terrorist bombings of residential compounds, rebels shooting at seismic crews, oil pipelines being blown up, expropriations, kidnappings, coups, wars, sanctions, crazy weather, and yes, the occasional viral outbreak. When I now read a force majeure clause’s parade of horribles, it’s like a walk down memory lane for me.
The extent of force majeure experience for most North America- and Europe-focused lawyers has been the occasional hurricane or flood, which typically has impacts of both limited geography and short duration. But COVID-19 is a completely different kind of force majeure event. COVID-19’s impact is widespread (global), of an indeterminate duration (likely several months), and carries with it considerable uncertainty: (i) reductions to workforces due to infections and quarantines; (ii) government shelter-in-place restrictions that ban certain types of work altogether; (iii) government requisitions of supplies such as masks and other protective equipment; (iv) travel restrictions; (v) safety precautions at work sites designed to prevent the spread of infection (such as smaller crew sizes and social distancing); (vi) lower commodity prices rendering projects uneconomic; (vii) less access to capital markets and liquidity; (viii) deteriorating balance sheets; (ix) defaults and declarations of force majeure by counter-parties and suppliers; and (x) the inability to comply with debt covenants. Yet these are exactly the kinds of uncertainties that energy companies doing business in conflict zones have previously (and routinely) navigated.
One of the tools used by energy companies in conflict zones is the Suspension Agreement. Suspension Agreements are a mutually agreed standstill pursuant to which all of the parties’ rights and obligations are suspended until such time as the circumstances affecting the area have sufficiently been resolved. Neither party is allowed to terminate the contract during the suspension period. Neither party (usually) gets paid anything during the suspension period. Of course, the parties can mutually agree to do some work during a suspension, including work in preparation for the end of the suspension period. When the suspension period is over, the old contract comes back to life and both parties again have the same rights and obligations that they did beforehand.
Let’s consider how a Suspension Agreement approach to a crisis compares with a force majeure clause approach. Under a force majeure approach, the default rule is to keep on performing everything under the contract except to the extent the crisis actually prevents a party from performing. Under a Suspension Agreement approach, the default rule is to stop all performance except to the extent the parties mutually agree. This represents a flipping of the assumptions about performance from a world in which performance is assumed to be possible—to one in which it is presumed impossible (or at least inadvisable). In a widespread crisis, the Suspension Agreement enables the parties to get ahead of an anticipated impact—rather than waiting for one party to run smack into the force majeure wall.
The typical situation where a Suspension Agreement would be utilized is the outbreak of a civil war that creates uncertainty about whether ongoing work can be safely continued. Even if the violence has not yet directly affected the work, civil wars spawn a range of impediments and risks. Government agencies either stop issuing required permits or such permits are greatly delayed. Governments impose curfews, road blocks, travel restrictions, and/or martial law. Personnel are fearful for their safety and that of their families. Logistics are disrupted, and it is harder to obtain basic supplies, materials, and food. The government may even requisition certain items. Does any of this sound familiar?
In the absence of a Suspension Agreement, such a crisis leads to a barrage of force majeure declarations. Assume the energy company has 100 or more different contracts governing its operations in the country. With each force majeure declaration, a piece of that contractual framework falls away, thereby diminishing the ability of the overall enterprise to carry on. Eventually, just processing and tracking the patchwork of force majeure notices can become a nightmare. Lawyers have to analyze each contract’s force majeure clause and the facts being alleged—and then determine whether those facts satisfy the clause’s standard. The resources required to undertake this task across hundreds of impacted agreements can be overwhelming, even for a larger company.
Suspension Agreements provide an orderly mechanism for getting ahead of the risk of force majeure declarations. When there are many agreements potentially impacted at one time by a crisis, it is likely inefficient to have to work through all of the individual rights and obligations associated with force majeure. It is usually better to enter into voluntary suspensions that preserve everyone’s rights and obligations.
Another rationale for Suspension Agreements is the preservation of good relationships with counter-parties. Energy companies often have longstanding, valued relationships with their partners. When the crisis ends, what will those relationships look like? Force majeure declarations can be adversarial. Parties may disagree about what constitutes force majeure and what contractual obligations can be excused by force majeure. This may even lead to arbitrations and lawsuits. In contrast, Suspension Agreements are inherently cooperative. They mutually protect both parties’ investments in the contractual relationship, shielding it from termination. If the parties can advance work during the crisis, they can always mutually agree to do so. The result is less damage to relationships than exercising force majeure rights.
When I was a young lawyer, I was charged with babysitting my client’s assets in an African country that was subject to sanctions. During the original crisis (many years before I became involved), Suspension Agreements were put in place for all of the company’s contracts, including more than 50 with the local government. All of the rights and obligations of my client were put on hold until such time as the sanctions were lifted. The Suspension Agreements provided that as soon as the sanctions were lifted, everyone’s rights and obligations would immediately be restored.
At the time of the crisis, the expectation was that sanctions might last a year or two. They ended up lasting longer than a decade. My task was to read all of the material contracts and be aware of what those obligations were. When the sanctions were surprisingly and quickly ended on my watch, I was the only person still working for the company who had any idea what those agreements said.
In a matter of days, I was on the ground meeting with counter-parties. My client was warmly welcomed back, and the underlying contracts (for the most part) were restored to life and honored. Sure, there was a transition period during which certain terms and conditions were mutually renegotiated to reflect the new world that existed so many years later. In hindsight, though, the Suspension Agreement had been a great success. While science is telling us that the COVID-19 crisis is likely measured in months rather than years, parties facing force majeure should consider the alternative of Suspension Agreements.
About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 126,182) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development), and the co-author of Strange Tales of World Travel.
Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.