The 2016 Petroleum Agreement Compared – Force Majeure and Arbitration

Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 35

Government inaction now constitutes force majeure!

Today we take up from Article 24 which deals with force majeure, the definition of which is set out in paragraph 2.6. This definition has been amended in the 2016 Trotman Agreement. Without any significance, words like “act of God”, “earthquakes”, “floods”, “tsunamis”, “quarantines” and “piracy” have been inserted, events that would be considered as warranting “force majeure” under any jurisprudence but what is astounding is that “governmental inaction” now constitutes force majeure. I have scoured a range of sources and found no instance in any country or agreement where government inaction constitutes “force majeure”.  The source of the amendment is either Trotman or Esso and since it favours Esso one has to assume that the amendment was at Esso’s request.

Paragraph 24.1 of the 1999 began with the words “Any non-performance or delay in performance” has now been qualified with the words “wholly or in part”, meaning that a force majeure in one part of this massive area over which Esso (Exxon) exercises control may arguably be grounds for “force majeure” in the rest of the Contract area which extends to thousands of square miles!

The term “wholly or in part” has replaced the following words in the 1999 Agreement: “If any Party then determines that on account of the force majeure in a portion of the contract area they are unable to perform their obligations in the remaining portion of the contract area, in a manner consistent with good oil field practices, the force majeure shall apply to the entire contract area.” But there is a difference: in the 1999 Agreement such a determination could only be made after the Parties have “carr[ied] out friendly discussions regarding the impact of the force majeure and possible remedies to the force majeure.”

Paragraph 24.3 now reads as follows: “Where any Party is claiming suspension of its obligations on account of Force Majeure, such Party shall promptly notify the other Parties in writing of the occurrence thereof giving particulars of the Force Majeure and obligations affected” and ends with the words “Each Party shall promptly notify the other Parties as soon as the Force Majeure has been removed or no longer prevents it from carrying out its obligations hereunder.”

Disagreement on whether the event meets the generous threshold of a “force majeure” constitutes a ground for referring the matter to Arbitration under Article 26 which is addressed below.

Before proceeding to Article 25 the sentence in the 1999 and the 2016 that “the Contractor shall have the option of terminating this Agreement without any further obligation if Force Majeure exceeds one (1) year” is quite instructive. For those who have taken the time to read reports in the press about how for eight years Esso had claimed “force majeure” as a result of the CGX boat – Suriname military action, this sentence shows how investors will hold on to large number of blocks where the cost to them is low to negligible. For those who prattle how Esso stuck with us, they need to think of this fact.

The PPP/C should also disclose how its Government treated with Article 24.5 which required them to meet with Esso “to discuss the consequences of the Force Majeure and the course of action to be adopted in the circumstances.”

Article 26

There has been no amendment to Article 25 – Assignment so I move on to Article 26 – Sole Expert and Arbitration. This Article, which continues to contain ten paragraphs, has been subject to several changes. Those start with paragraph 1 which under the 1999 Agreement required the parties to make best efforts to settle disputes but which now only requires the parties to make “reasonable efforts”. This process can last for 60 days after which any party may proceed to have the dispute determined by arbitration.

References in article 26.2 of the 1999 Agreement dealing with “sole expert” has been amended and the new article 26.2 mandatorily requires that “Any claim, demand, cause of action, dispute, or controversy arising out of or in connection with this Agreement, including any question regarding its formation, existence, validity, enforceability, performance, termination, or alleged breach (“Dispute”) which cannot be settled amicably by negotiation shall be resolved by arbitration.”

My interpretation of the amendment is that the role of a sole expert has been downgraded in favour of arbitration. This is certainly a more costly option than sole expert and one must wonder about the reason. This process requires approaching the International Centre for the Settlement of Investment Disputes (ICSID) for arbitration before three (3) arbitrators. The Article requires the Government “to irrevocably waive any claim to immunity for itself, its agencies, its enterprises, and any of its assets”. Again, such a waiver is not taken lightly but here were the PPP/C and the APNU+AFC willing to do exactly that.

Here is another kicker. Under the 1999 Agreement, the fees and expenses of the Sole Expert as well as the charges for the use of the International Centre for the Settlement of Investment Disputes or other facilities, were to be borne equally by the Contractor and the Minister. The role of the Sole Expert under Trotman’s Agreement seems hazy but what is not hazy is the provision of a new Article 26.8 that the “arbitrators shall assess the expenses incurred by the Parties, the fees and expenses of the arbitrators, the charges for the use of the facilities and any other costs related to the arbitration and shall decide by whom such costs shall be paid.”

Given that Trotman would be terrified at the prospect of an arbitration, the potential expenses and at an unfavourable rulings by the Arbitrators, makes one wonder why he would have agreed to some of these changes. The depth of the mystery makes the exploration by Anadarko in ultra-deep water look like a neighbourhood pool.

To be continued

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