Force majeure is new 'abracadabra' amid Covid-19

Singapore

"FORCE majeure" has become a new watchword, with energy supply chain players scrambling to weigh their legal options as Chinese buyers get leery of prior purchase commitments, in the fallout from Covid-19.

Weaker demand for products like oil and liquefied natural gas (LNG) has prompted some buyers to try to back out of what they had planned to purchase under long-term, fixed-volume contracts. China National Offshore Oil Corp declared force majeure on LNG deliveries from multiple suppliers, Reuters reported last month.

Reed Smith partner Dan Perera explained that, under some circumstances, commodities buyers could turn to a force majeure clause, "which excuses the non-performance of contractual obligations where such performance has become impossible through no fault of the parties".

But observers in the shipping and oil trade world warned that Singapore companies may not be able to count on legal recognition of moves like the virus-related force majeure certificates that have been issued in China.

In early February, an executive at French oil major Total said that the group had rejected one such claim from an unnamed Chinese customer.

That has not stopped players in the region from exploring their options: "Force majeure clauses are being looked at in a number of physical commodity contracts currently where supply chain disruptions have come to bear," William Chin, head of commodities at the Singapore Exchange, told The Business Times.

Dentons Rodyk partner Jonathan Guwe, who works on energy and infrastructure projects, said that some engineering, procurement and construction contractors are weighing their options with project owners or, in the case of concessions, governments.

Adam Richardson, a partner in the commodities department of law firm HFW (formerly Holman Fenwick Willan), has also got queries from clients like traders, ship owners and yards.

"Given how quickly the spread and impact of the virus is evolving, parties are finding it very difficult to assess whether they or their counterparty are, or are likely to be, prevented from performing their contracts," he said, noting that other problems will include costs from delays, as cargo gets stuck at ports or re-routed.

Plus, there may be delays in new oilfield developments and project expansions, and some businesses will have trouble servicing debt, said commodities lawyer Dan Marjanovic, a partner at Simmons & Simmons.

But with Covid-19, which began in China's Hubei province, some of the difficulty hinges on the status of force majeure in different legal systems.

"Whether force majeure can be successfully invoked depends on the law governing the contracts between the parties," said Amanda Lees, a dispute resolution partner at Simmons & Simmons, as it is a recognised doctrine in civil-law jurisdictions like China, but not in common law, as in Singapore.

She added: "The law chosen by the parties and then applied by the arbitral tribunal could make a big difference to whether or not force majeure applies, given that it is statutory right under (Chinese) law but will only apply under English, Hong Kong or Singapore law if a force majeure clause is included in the contract."

To protect themselves, companies should have specific contract clauses that spell out what makes for a force majeure event, the lawyers said.

Dentons Rodyk's Mr Guwe also noted that there is usually a duty "to use commercially reasonable efforts to mitigate the effects of force majeure", such as by finding alternative sources of materials and manpower.

"However, if the affected party can show that... there are no feasible alternatives, it can still invoke and rely on the force majeure clauses."

In any case, the ongoing global outbreak may have raised the profile of force majeure within the industry.

BT learnt from the managing director of a local commodities trading group that, although the company has not seen trades affected yet, it will pay "extra attention" to force majeure clauses in its future contracts.

Also, companies here have not escaped the oil gloom unscathed.

Hontop Energy (Singapore), a trading unit of China Wanda that recently went into receivership, halted its trading activities in late January on the back of what TSMP Law Corp partner Kelvin Koh called "muted demand and an industrywide liquidity crunch".

Hontop supplies crude oil to a refinery in Shandong province that is operated by a related company, Tianhong Chemicals. But Mr Koh, on behalf of Hontop, told BT that the epidemic "has heavily impacted Hontop's China-centric oil trading business", as the strict measures taken to contain the outbreak affected logistics and hurt demand for oil products. Tianhong expects to resume its refinery operations in early March.

Meanwhile, fuel logistics company Equatorial Marine Fuel Management Services is not saddled with an inventory build-up, since it buys as it sells.

But executive director Choong Zhen Mao noted that demand for fuel is softer amid a shipping slowdown. While business in February and March is traditionally slower until a pick-up in April, "the situation has further reduced the demand noticeably", he said.

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