Abstract
This article examines whether the collapse of fossil energy markets and the introduction of decarbonisation regulation can trigger force majeure relief from fossil energy contracts. A critique of force majeure clauses from an environmental perspective will help to clarify how energy contracts lock buyers and suppliers into a carbon-intensive path. By not relieving buyers from their purchase obligations, even after respective market meltdowns and the disappearance of demand, force majeure, as defined in most energy contracts, can incentivise irrational energy use and waste, and is thus incompatible with a low-carbon transition. Climate regulation preventing a party from using fossil fuels can excuse performance of the obligation to purchase fossil energy, but the affected party can be required to challenge these decarbonisation measures and thus oppose the low-carbon transition. To avoid these perverse effects and align energy contracts to the reality of decarbonisation, economic hardship and environmental regulation should be explicitly included in force majeure clauses.
Keywords: Force majeure, decarbonisation, energy contracts, economic hardship, peak oil, Covid-19
1. INTRODUCTION
Increasingly ambitious decarbonisation efforts present a major challenge to the fossil fuel industry, and the prospect of ‘peak oil’ looms ever larger.1 The concept no longer refers to the belief that increasing oil scarcity will push prices up, but now reflects the expectation that the low-carbon transition will cause the demand for fossil energies to drop and prices to collapse in a context of surplus production capacity.2 Peak demand does not only concern oil but also natural gas and coal, as renewable energies become an increasingly competitive power source.3 Faced with this existential threat, energy companies can either adjust and actively participate in the low-carbon transition, or seek to enforce the existing carbon-intensive bargains and oppose decarbonisation regulation.4 Arbitration, as a platform for the resolution of contract and investment treaty claims, has been criticised for the role it plays in protecting vested interests and delaying decarbonisation initiatives.5 A question that is overlooked in this debate is whether fossil energy contracts provide sufficient flexibility for the parties to withdraw from their carbon-intensive obligations. By focusing on ‘force majeure’, a key flexibility clause in energy contracts, this article examines whether buyers and suppliers of oil, natural gas and coal can obtain relief from their fossil energy obligations following market collapse and the introduction of low-carbon regulation.
Long-term energy contracts are a fundamental source of stability for investments in the energy sector and are thus an important dimension of energy security.6 Energy contracts perform this function, thanks to the principle of sanctity of contracts, which requires that parties must carry out their contractual obligations, even if events occurring after the conclusion of the contract render their implementation more difficult.7 In the context of the climate emergency, long-term energy contracts are problematic as they require performance of carbon-intensive obligations in a long-term perspective and expose the parties to penalties if they attempt to terminate contracts before the end of the contractual term.8
It is generally accepted that a change of circumstances can excuse the failure of a party to perform its obligations, if the basic assumption that governed the conclusion of the contract ceases to hold.9 A force majeure clause in a commercial contract typically releases a party from liability for any failure in performing its obligations to the extent that, and as long as, this failure results from an external disruption over which that party had no control.10 Given the challenging natural conditions that characterise energy production and transportation, the impact of extreme weather events on complex energy supply chains, and the risk of sudden geopolitical changes, most energy contracts include a force majeure clause.11
The environmental law, energy law and international commercial law literature have examined the application of force majeure to sudden energy market changes12 and climate change-related extreme weather events.13 However, the interaction of force majeure clauses with decarbonisation (ie the transition from fossil to clean energy sources) remains unexplored. Recently, force majeure has been at the centre of the debate on the coronavirus-linked energy market crash.14 It has been argued that this crisis ‘serves as a warning for the industry of what is to come’ in the peak oil era.15 The crisis is said to have accelerated peak oil as crude consumption dropped, with the result that energy producers have abandoned investments16 and post-pandemic recovery plans are now prioritising decarbonisation efforts, at least in some jurisdictions.17 With increasing low-carbon ambitions and the prospect of peak oil, can force majeure clauses contribute to decarbonisation by releasing the parties from their carbon-intensive obligations or does it contribute to locking the parties into their carbon-intensive relations?
To answer this question, this article examines international arbitration awards and, given the limited number of published awards, decisions by USA and English courts concerning force majeure in energy sale–purchase agreements. The analysis focuses on contract-specific force majeure clauses that, within the limits of the freedom of contracts under the applicable law, are usually more detailed than the national law doctrines governing the problem of changed circumstances, eg frustration, impossibility and impracticability.18 Surprisingly, given the limited attention this issue has received in the environmental law literature, a significant number of force majeure disputes concerning environmental regulation and the collapse of fossil energy markets have been brought to the courts. Although each decision depends on the precise terms of the force majeure clause in the applicable contract, the circumstances of each case and the respective national law as regards the interpretation of contracts,19 general conclusions can be drawn on the role of force majeure in the era of decarbonisation and peak oil. As the article will demonstrate, the picture is troubling.
With the rare exception of contracts that specifically include economic hardship in the definition of force majeure, force majeure clauses do not provide relief in cases where energy prices and demand for energy collapse. Instead, oil, gas and coal contracts usually require the parties to continue to perform their obligations, even if this results in wasteful behaviour. Supply of energy at depressed prices, and the obligation to take delivery of energy even when there is no longer sufficient demand, incentivises irrational energy use, and is thus incompatible with decarbonisation. Under most force majeure clauses, only severe regulatory interference (eg a ban on coal or the forced closure of polluting installations) preventing a party from using fossil fuels would excuse that party from its contractual obligations. However, the requirement that the affected party must undertake all reasonable efforts to avoid the force majeure event is problematic, as it can be interpreted as a requirement to challenge environmental regulation and thus oppose decarbonisation efforts.
The following analysis starts by briefly introducing the force majeure defence as commonly defined in energy contracts (Section 2), before examining its application to the collapse of fossil energy markets (Section 3) and low-carbon regulation (Section 4) in the peak oil and decarbonisation era.
2. FORCE MAJEURE IN ENERGY SALE AND PURCHASE AGREEMENTS
To finance large upstream energy projects (mainly gas production) and ensure the downstream availability of fuel (eg coal or gas for power generation), investors typically conclude long-term sale–purchase agreements, although shorter term contracts are increasingly being used in a more liquid market environment.20 With sale–purchase agreements, the seller undertakes to sell and deliver and the buyer agrees to purchase, take delivery of and pay for a certain quantity of energy of a certain quality.21 In long-term gas agreements, prices have historically been indexed to benchmark prices of oil (or a basket of alternative fuels), before shifting more recently to hub-based gas prices. Long-term contracts commonly allocate the price risk to the seller, by envisaging the possibility of revising the price formula if market conditions change and the buyer is no longer able to market the energy economically.22 The volume risk is assumed by the buyer, but most contracts integrate a degree of flexibility into the buyer’s obligation to take delivery of the energy. With ‘take-or-pay’ clauses, by contrast to ‘take-and-pay’, the buyer is allowed not to offtake the full quantity of energy contracted, within certain limits and provided it is paid for.23 Disputes on prices, quantity and other issues arising in connection with the agreements are usually resolved before arbitration.24
The purpose of a force majeure clause is to shift risks otherwise assigned under a contract25 and relieve a party from liability for breach,26 if an external event prevents that party from performing its obligations as specified under the contract. Depending on the applicable law, the parties are free to define the conditions, scope and consequences of force majeure. In the USA, for instance, parties can contract around the impossibility and impracticability doctrine, because ‘it is just a gap filler’.27 Similarly, under English law, which is widely used in energy contracts,28 ‘a force majeure clause must be construed in accordance with its own terms’.29 In each contract, the events which trigger the application of force majeure ‘are specifically and relatively narrowly confined’ and do not necessarily ‘comprehend events which might be treated as force majeure in other contracts’.30 However, given the widespread use and influence of model agreements in the energy industry,31 contracts tend to adopt comparable definitions of force majeure, with key variables available to the parties. As the present analysis focuses on the impact of market collapse and decarbonisation regulation on fossil energy contracts, it is important to know how force majeure clauses regulate economic hardship and government regulation.
Energy contracts commonly define force majeure as any event or circumstance that prevents, or delays, a party’s performance of its obligations under the contract, provided that the event or circumstance in question is beyond the reasonable control of the party, and its effects could not have been avoided by reasonable steps taken by the party acting as a ‘reasonable and prudent operator’.32 As force majeure events must be beyond the control of the affected party, relief will normally be limited to events that were unforeseeable,33 although unforeseeability is rarely explicitly included in the clause.34 Contracts typically list in a non-exclusive way the type of events that can amount to force majeure. These include ‘acts of God’ (eg strikes, epidemics and earthquakes) and ‘acts of government’ (eg new laws and regulations).35
Economic changes, if covered in the contract, are rarely listed as events of force majeure, but are listed instead under a specific ‘hardship’ clause.36 In contrast to force majeure clauses, typical economic hardship clauses do not suspend the contract but require review of the contract to restore its economic balance.37 Many energy contracts explicitly exclude economic hardship, or the ‘loss of buyer’s market’ and the ‘changes in market conditions’, from the definition of force majeure.38 In more exceptional cases, force majeure clauses can excuse performance if it would place an unreasonable economic burden on the affected party,39 thus blurring the difference between force majeure and economic hardship.40
‘Acts of government’ are usually broadly defined in energy contracts.41 However, to avoid the risk of perceived collusion, cross-border energy contracts concluded by state-owned enterprises (SOEs) can limit the right of SOEs to invoke force majeure for acts of their own government.42 Certain energy sale–purchase agreements explicitly include environmental regulation in the definition of acts of government. In particular, certain coal supply agreements concluded by US utilities include ‘environmental law force majeure’ clauses, enabling the latter to adapt to stricter emission limits and requirements on the use of coal.43
The effect of a force majeure clause is to excuse performance for the period of time during which the party was unable to perform its obligation(s). Certain agreements require the parties to use ‘reasonable efforts’ to reschedule delivery if, as a result of force majeure, the buyer is not able to receive or the seller is not able to deliver the energy.44 If these efforts fail, the sale–purchase obligations can be terminated without liability if an event of force majeure prevents the affected party from performing its obligations for a certain number of days or months, as determined in the contract.45
3. PEAK OIL: FORCE MAJEURE AND THE CRUMBLING ECONOMICS OF FOSSIL FUELS
Peak oil demand ‘signals a shift in paradigm from an age of (perceived) scarcity to an age of abundance’.46 In an age of scarcity, low-cost producers had an incentive to preserve their resources in the expectation of higher prices. In an era of peak demand, the prospect of lower prices incentivises them to expand their market share by squeezing out high-cost suppliers.47 Aggressive competition between major producers, aggravated by the Covid-19 crisis and the 2020 energy price war, is already having a major impact on the oil and gas industry: it is ‘experiencing a shock like no other in its history’.48 The natural gas producers in northwest Europe and parts of the US are ‘facing existential questions’.49 At the same time, coal is no longer the cheapest way to generate power. Thanks to technological developments and government support mechanisms, the cost of renewable energy sources has fallen so far that ‘new renewables are now cheaper than new coal plants virtually everywhere’.50 As the economics of fossil energies crumble, it makes financial sense for utilities to retire their uncompetitive thermal installations early.51 The Covid-19 crisis is already accelerating the closure of older coal-fired power plants,52 throwing into doubt the performance of coal sale–purchase agreements. As in previous energy and economic crises, the collapse of prices and demand has encouraged buyers of fossil fuels to seek force majeure relief from their long-term purchase obligations, and producers from their high-cost investment commitments.53 The following analysis examines the possibility of force majeure relief from the obligation to take delivery and pay for energy, and goes on to analyse under what conditions producers can be relieved from their supply obligations.
3.1 Inability to Take
The relevance of a force majeure clause first depends on how strictly the obligation to take delivery of energy is defined in the contract and interpreted by the courts.54 A literal interpretation of this obligation can result in potentially absurd environmental consequences. Within the limits of environmental law, a buyer of gas ‘could never be “unable” to take [the producer’s] gas; [it] could always take the gas and vent it into the air, even if its facilities were completely destroyed’.55 The venting of methane—one of the most potent greenhouse gases—is obviously unjustifiable from a climate change and environmental perspective. To avoid this absurd result, tribunals have accepted that the obligation to take delivery could be voided ‘when made impracticable’.56
However, in Classic Maritime Inc v Lion Diversified Holdings Berhad, a case concerning the sale of iron ore to a steel production facility, the High Court of England and Wales ruled that insufficient storage capacity at the contractually agreed terminals did not excuse the buyer from its obligation to take delivery.57 Although the case does not concern an energy contract, it is highly relevant for the present analysis as it concerns the supply of feedstock to a production facility in the context of a severe economic crisis. The contract defined force majeure as any cause beyond the receiver’s control directly affecting performance. According to the Court, full storage yards, as a result of lower steel production during the 2008 financial crisis, did not relieve the buyer from taking delivery of the shipment of iron ore, as the buyer did not demonstrate that there were no alternative options to taking the cargo out of the vessel ‘for all forms of disposal, however uneconomic’.58 While it was understandable from a commercial perspective that the buyer wanted the cargo to be used for the intended purpose of steel production at its plants, the buyer was required to explore all other ways of disposing of the cargo, ‘albeit doubtless uneconomically and with resultant waste’.59
Force majeure, as interpreted by the High Court, requires the parties to engage in wasteful and irrational behaviour. In the energy sector, uneconomic disposal of fossil energies is incompatible with the pressing need to improve the efficiency and sustainability of energy use.
3.2 Inability to Pay
As a take-or-pay clause implies the buyer’s right not to take delivery of the energy provided the default fee is paid, the buyer in a take-or-pay agreement in principle always has the possibility of paying for the energy, even if it is prevented from taking delivery. Limiting the application of force majeure to the inability of the buyer to both take and pay would thus neutralise the relevance of this clause. According to Peter Roberts, ‘logic would suggest that if the buyer is unable to take delivery of gas because of an event beyond its control then this is a circumstance in which some measure of relief ought properly to apply in favour of the buyer in respect of its take or pay commitment’.60
Yet, most tribunals have rejected force majeure when the buyer faced obstacles to taking the energy but could still pay for it. For instance, in Drummond Coal Sales, Inc v Norfolk Southern Ry Co, a case concerning a long-term ‘ship-or-pay’ transportation agreement between a coal supplier and a railway company, and in International Minerals & Chemical Corp v Llano, a case concerning a 10-year sale-purchase agreement of gas to a fertiliser producer, the US courts refused to recognise that the closure of the coal- and gas-fired facilities supplied constituted force majeure, as the buyer could pay shortfall fees if it could not ship/use the minimum volumes of energy contracted for.61
Exceptionally, it has been accepted that force majeure does not require the buyer to prove that it was both unable to take and pay for the gas. In Sabine Corp v ONG Western, the Western District of Oklahoma Court found that a strict interpretation of the obligation to pay would render the force majeure clause pointless, as it was difficult to ‘conceive of any event or cause within the contemplation of the force majeure clause which would render a party unable to pay’.62 However, in casu, the court refused to accept the collapse of global energy prices, surplus gas production, and increased competition as constituting events of force majeure. The fact that these events resulted in the inability of the buyer to resell gas at a profit did not necessarily render the buyer unable to take the gas.63 The buyer’s inability to perform ‘except at a loss’ did not amount to force majeure, as this interpretation would have negated the market risks assumed by the buyer under the take-or-pay contract.64
A strict interpretation of the obligation to pay in take-or-pay contracts significantly limits the scope for force majeure relief and raises environmental concerns. By requiring the buyer to pay for the fossil energy whether it is taken or not, this interpretation gives energy buyers an incentive to continue to use or resell that energy, thereby undercutting international efforts to improve energy and carbon efficiency in order to reduce greenhouse gas emissions.
3.3 Collapse of Price and Demand
Energy buyers have tried repeatedly, but so far unsuccessfully, to evade the performance of their long-term fossil energy purchase obligations by presenting the sudden collapse of prices and demand as a force majeure event.65 International arbitration tribunals have refused force majeure relief from the obligation to take delivery and pay for oil following a drop in the price of oil, albeit ‘sharp and significant’,66 after the conclusion of the contract.67 As energy market professionals, energy buyers should know that oil prices can be subject to significant fluctuation and therefore have to properly allocate this risk in the contract.68
Similarly, in United States v Panhandle Eastern Corp, a dispute concerning a long-term Liquefied Natural Gas (LNG) agreement concluded at high prices in 1975, the buyer sought to obtain relief from its purchase obligation by presenting the ‘unprecedented reduction in prices’ in 1983 as a force majeure event that threated the company’s financial viability.69 As the agreement did not include economic hardship in the definition of force majeure, the US District of Delaware Court refused to accept market fluctuations as a valid defence.70
In Langham-Hill Petroleum, Inc v Southern Fuels Co, a US oil trader unsuccessfully invoked the ‘dramatic drop in world oil prices’ in 1986 to evade its obligation to purchase significant quantities of oil at a fixed price according to a 1985 contract. As the collapse of the price of oil resulted from Saudi Arabia’s attempt to regain market share, the buyer relied on its ‘helplessness in the face of Saudi Arabian action and its inability to remain in business if it had satisfied the contract’.71 However, the US Fourth Circuit Court of Appeals rejected this force majeure defence by declining to consider Saudi Arabia’s influence on the market as an event that was ‘outside the control’ of the buyer, within the meaning of the applicable force majeure clause.72
In Northern Indiana Public Service Co v Carbon County Coal Co, the US Seventh Circuit Court of Appeals refused to grant force majeure relief to an electricity utility from its long-term coal purchase obligations, following the sudden collapse of the price of coal. According to Judge Posner, ‘A force majeure clause is not intended to buffer a party against the normal risks of a contract. A force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.’73 The utility had gambled that the cost of coal would rise rather than fall over the life of the contract, and the failure of this gamble was not force majeure.
In contrast, in Kodiak 1981 Drilling Partnership v Delhi Gas Pipeline Corp, the US Court of Appeals of Texas accepted that the ‘drastic decline’ in the gas market in 1982, caused by economic recession, a plummeting crude oil price, weather conditions, and a decline of the drilling market, amounted to force majeure, broadly defined in the applicable gas supply agreement as the ‘partial or entire failure to gas supply or market … not reasonably within the control’ of the affected party’.74
The appeal for force majeure relief based on collapse of price and demand is thus only likely to succeed if economic hardship (or performance under unreasonable economic conditions) has been included in the contract’s definition of force majeure.
3.4 Unprofitability of Supply
The crumbling economics of fossil fuels and resulting financial hardship on energy companies, as well as increasing pressure on financial institutions to divest from fossil fuels, can prompt investors to seek to renege on their investment plans, in particular high-cost projects.75 The Covid-19 crisis illustrates how energy companies are cutting back on certain investments in the wake of the collapse of energy prices and demand.76 In previous crises, companies have sought, but failed, to obtain force majeure relief from investment and supply commitments made before major changes to market conditions. Financing difficulties (eg ‘shortage of cash’,77 the ‘inability to secure financing’,78 the failure to open a letter of credit in the context of difficult economic conditions79 and even bankruptcy proceedings)80 are unlikely to be sufficient to trigger force majeure, unless these contingencies are specifically listed in the force majeure clause.81
For instance, in Millers Cove Energy Co v Moore, a case concerning the inability of a lessee to mine a property profitably, it was found that ‘the lack of economic feasibility does not constitute cause to excuse the [lessee] from mining the lease properties with reasonable dispatch’.82 The US Sixth Circuit Court of Appeals took the view that, in the absence of an economic feasibility clause in the lease agreement’s definition of force majeure, the unprofitability of the investment did not excuse the lessee from the performance of his production commitments. In Champlin Petroleum Co v Mingo Oil Producers, the District of Wyoming Court ruled that bankruptcy proceedings of entities involved in an oil production project did not constitute an event of force majeure but were ‘inherently the result of financial problems’.83
In Thames Valley Power v Total, the French energy company Total sought relief from a 15-year gas supply agreement by arguing that, following a significant increase in the price of gas, it suffered losses that were beyond the contemplation of the parties when they concluded the agreement.84 The High Court of England and Wales rejected this defence by ruling that a force majeure clause is not intended to relieve a party from its contractual obligations merely because the contract became economically more burdensome, or ‘even dramatically more expensive’.85
3.5 Economic Hardship in Force Majeure Clauses
The cases discussed above show that, regardless of the economic impact on energy buyers and energy companies, the collapse of fossil energy markets is unlikely to excuse the performance of sale–purchase obligations, unless economic hardship is included in the definition of force majeure.86
Including economic hardship as force majeure would be a radical departure from current drafting approaches which, as seen above, either ignore economic hardship or explicitly exclude the ‘loss of buyer’s market’ or ‘changes in market conditions’ from the definition of force majeure. By transferring the volume risk related to the collapse of energy markets to upstream investors, the adjustment of force majeure clauses could complicate the financial viability of investments in fossil energy production, in particular projects that have traditionally been structured on the basis of long-term agreements.87 However, given the pressing urgency of climate change, it is necessary to align energy contracts to the reality of peak oil and decarbonisation, and in particular weaken the irrational incentive to continue to supply and take delivery of energy even when there is no longer any reasonable demand.
4. DECARBONISATION REGULATION AND FORCE MAJEURE
Regulation, either in the form of command and control (eg performance standards or technology bans) or market-based mechanisms (eg emission trading schemes or taxes), is central to decarbonisation efforts.88 With some exceptions (eg limits to gas flared during oil production), command and control mostly addresses the use of fossil fuels. For instance, compliance with emission limits can require thermal power plants to invest in more efficient turbines, thus reducing the volume of fossil energy used in the production process. More radically, states can force carbon-intensive stations to shut down, and ban the use of certain fuels.89 Although market mechanisms provide more flexibility to regulated entities, their purpose is to gradually replace carbon-intensive fossil sources by internalising the carbon externality in the cost of production and pushing them out of the market.90
To protect their vested interests, energy companies have opposed the introduction of performance standards, technology bans and market mechanisms by suing, or threatening to sue, states before international investment arbitration bodies.91 This has led to severe criticism of the ‘chilling’ effect that arbitration, and international investment agreements, can have on the adoption of ambitious climate regulation.92 A related question is whether these industries (or the intermediary suppliers to these industries) can obtain force majeure relief from long-term fossil fuel contracts based on regulatory interference with their carbon-intensive activities.
Based on the defence of supervening illegality, ‘a contract may be discharged if, after its formation, performance of it becomes illegal’.93 As seen above, energy contracts tend to extend the scope of this defence, by including in the definition of force majeure ‘acts of government’ that prevent performance. With the exception of bans on the use of certain types of fossil fuel, low-carbon regulations do not render the performance of fossil energy contracts illegal. However, can direct regulation and market mechanisms, depending on their impact on the operation of fossil-fuelled installations, be interpreted as events beyond the reasonable control of the parties, which prevent the performance of fossil energy contracts?
4.1 Performance Standards
In International Minerals & Chemical Corp v Llano, the US Tenth Circuit Court of Appeals accepted that new emission limits imposed on the buyer’s facilities excused its obligation to take delivery of gas, but not under the force majeure clause.94 The buyer originally needed the gas for the production of potassium sulphate—a production process characterised by the emission of large amounts of fine particulates. After the gas agreement was concluded, air quality regulations were introduced which inter alia limited particulate emissions. The fertiliser producer complied with these limits by decommissioning its gas-fuelled facilities and replacing them with cleaner technologies. As a result, it was no longer in a position to take its minimum obligation of natural gas for the remaining term of the contract. The court rejected the force majeure defence, as the new emission limits did not prevent the buyer from paying for gas and thus performing its take-or-pay obligation under the contract. However, the contract entitled the buyer to adjust its purchase obligations if unable to receive gas for any reason beyond its reasonable control. As there was no technically suitable way for the fertiliser producer to comply with the new emission limits without shutting down the polluting gas-fuelled equipment, it was considered ‘unable, for reasons beyond its reasonable control, to receive its minimum purchase obligation of natural gas’.95
In Drummond Coal Sales, Inc v Norfolk Southern Ry Co, a coal supplier in the US unsuccessfully invoked new emission regulations for power plants to obtain force majeure relief from a long-term ship-or-pay coal transportation agreement with a railway company.96 The agreement required the coal supplier to ship a minimum volume of coal to destinations served by the railway company. If the coal supplier failed to ship the guaranteed volume in any given year, it was required to pay a shortfall fee. After the agreement was signed, the demand for coal decreased significantly. Half of the destinations identified in the contract stopped burning coal or closed, and the remaining coal-fired plants significantly reduced their volume commitments. The coal supplier argued that the market for coal had essentially ceased to exist in most of the contractually designated destinations. As the collapse in coal demand followed the enactment of stricter emission standards for coal-fired power plants, the supplier invoked force majeure to terminate the transportation agreement. The force majeure clause of the transportation agreement was broadly formulated, covering any event not within the control of the affected party, including ‘interventions or expropriations by government or governmental authorities’. The Western District of Virginia Court accepted that environmental regulations had impacted conditions in the coal market but did not find any evidence that these regulations prevented performance of the transportation obligations. There was still ‘some price at which [the coal supplier] could sell and ship its coal to the remaining Destinations’.97
In United States v Panhandle Eastern Corp, the District of Delaware Court did not accept force majeure relief in case of ‘the enactment of legislation designed to curtail gas usage’.98 Similarly, in Sabine Corp v ONG Western, the US court refused to excuse contractual performance after the implementation of energy conservation and fuel switching measures allegedly caused the ‘substantial disappearance of [the supplier’s] markets for natural gas’.99
The decisions in United States v Panhandle Eastern Corp and Sabine Corp v ONG Western can be explained by the fact that the alleged regulatory interference took place in the context of a broader energy and economic crisis. Energy conservation and fuel switching measures only added to an already difficult market situation. However, the decision in Drummond Coal Sales raises more serious concerns regarding the role of force majeure and fossil energy contracts in the decarbonisation era. Just as the ruling of the High Court of England and Wales in Classic Maritime may have forced the buyer to dump unwanted steel by requiring it to explore ‘all forms of disposal, however uneconomic’,100 the conclusion in Drummond Coal Sales that coal could still be supplied at ‘some price’ to remaining destinations, amounts to subjecting force majeure relief from coal contracts to the dumping of coal.
4.2 Market Mechanisms
The industry has challenged, or threatened to challenge, carbon pricing mechanisms by alleging a breach of investment rights,101 but there is no evidence so far that energy users or suppliers tried to obtain force majeure relief based on the impact of carbon pricing on their operations.102 With the reform of emissions trading schemes and a stronger focus on the role of carbon pricing to decarbonise energy supply,103 the operators of carbon-intensive facilities may have an interest in terminating their long-term energy contracts, if their operations are no longer profitable.104 Decisions on the regulation of energy prices provide useful guidance on the role of force majeure.
In Northern Indiana Public Service Co v Carbon County Coal Co, a US electricity utility invoked a regulatory decision on pricing to excuse the performance of a long-term coal purchase agreement.105 The company committed in 1978 to the purchase of coal for a 20-year period at a price to be increased on a yearly basis according to a fixed formula. This resulted in the near doubling of the contract price of coal by 1985, while world coal prices decreased significantly in the same period. The utility applied for an increase of its regulated electricity tariff so as to recover the higher cost of coal from its consumers. However, the state regulator rejected this request, and instead required the utility to supply electricity to its consumers at the lowest cost of production in the state. The utility sought relief from its high-cost coal purchase obligation by arguing that the tariff decision met the requirements of the force majeure clause, according to which off-take of coal could be stopped for any cause beyond the utility’s control ‘including orders or acts of civil authority, which wholly or partly prevent the utilising of the coal’.106 The US Seventh Circuit Court of Appeals did not accept this interpretation of force majeure and opined that, as the tariff decision of the electricity regulator did not actually prevent the utilisation of the coal, but only the recovery of the cost of buying coal, it could not trigger force majeure.
In Nykomb v Latvia, a foreign investor committed to build a power plant based on a regulatory and contractual promise that the national energy company would buy all energy produced at a guaranteed price. Although the force majeure clause protected both parties against the impact of new laws or regulations, the international arbitration tribunal did not accept that the government’s decision to change the price of energy amounted to force majeure, as this would ‘leave the investor with no protection against a reduction or abolition of this investment incentive’.107
In contrast, in a series of cases concerning the ‘take-or-pay crisis’ in the US gas sector, the US Northern District of Oklahoma Court ruled that new rules relieving gas purchasers from their minimum payment obligation towards suppliers constituted a force majeure event relieving suppliers from their take-or-pay obligations towards gas producers.108 This unusual conclusion was justified based on the broad definition of force majeure under the applicable gas supply agreement, as including ‘any act or omission (including failure to take gas) of a purchaser of gas from Buyer … and any laws, orders, rules, regulations, acts or restraints of any government or governmental body’.
The difficulty in obtaining force majeure relief from energy contracts based on regulatory intervention in energy prices is likely to be extended to the introduction of carbon pricing. Unless economic hardship,109 or government interference with prices or costs, is explicitly included in the contract’s definition of force majeure, force majeure relief is unlikely to be granted in cases where carbon prices reach levels that threaten the profitability of the parties’ operations.110
4.3 Technology and Fuel Bans
Energy companies have resisted the forced closure of their installations by threatening to sue states before investment arbitration bodies, alleging expropriation and the unfair and discriminatory treatment of their investments.111 In response, environmental non-governmental organisations and environmental law scholars have criticised the unacceptable constraint that ‘environmental expropriation’ would impose on states’ regulatory space and sovereign right to adopt ambitious decarbonisation regulations.112 Bans and moratoria on the production, sale and use of energy have also been invoked as force majeure defences in cases concerning the performance of fossil fuel agreements. Tribunals have accepted that regulations that ‘clearly direct or prohibit an act which proximately causes nonperformance’ (eg a ban on energy exports) can amount to force majeure, provided the affected party can establish that the ban was the proximate cause of the failure to perform the energy production or supply obligation.113
In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd, a case concerning the performance of oil exploration services in Ghana, the UK oil company Tullow sought force majeure relief from its obligation to hire ‘ultra-deepwater rigs’ after the government of Ghana imposed a drilling moratorium.114 Although the 3-year contract explicitly included a ‘drilling moratorium imposed by the government’ in the definition of force majeure, the High Court of England and Wales refused to excuse Tullow’s nonperformance, because the moratorium only partly limited Tullow’s drilling operations. Tullow also had interests in another concession area where it could have moved the rig hired under the contract. The Ghanaian government declined to approve Tullow’s drilling program in the other concession, but the tribunal considered that this failure did not amount to force majeure within the meaning of the contract. ‘There were, therefore, two effective causes of Tullow being unable to provide drilling instructions (…), one being a force majeure, and the other not.’115 Following the collapse of the oil price, there was a suspicion that Tullow was manipulating the force majeure clause and taking advantage of the moratorium to terminate the contract because it was no longer economically attractive. The High Court found that Tullow could have provided drilling instructions, eg to do workovers of existing wells, even if this was not profitable. ‘Greater expenses or a greater risk of an unprofitable outcome is not a matter which enables Tullow to say that it has exercised its reasonable endeavours’ to perform the contract, as required by the force majeure clause.116
A ban on the use of coal, forcing the closure of coal fired power plants, is likely to be the proximate cause of a utility being unable to use the coal purchased under a sale–purchase agreement. Utilities can respond to more stringent emission performance standards and carbon pricing by spending more on modernising their operations, but this response is unavailable if the fuel itself is outlawed. In Northern Indiana Public Service Co v Carbon County Coal Co, for instance, Judge Posner did not accept that a regulator preventing the utility from recovering the higher cost of coal amounted to force majeure, but recognised that if the regulator ‘had ordered [the utility] to close a plant because of a safety or pollution hazard, we would have a true case of force majeure’.117 As a regulated firm, the utility was ‘subject to more extensive controls than unregulated firms and it therefore wanted and got a broadly worded force majeure clause that would protect it fully against government actions that impeded its using the coal’.118
However, in Drummond Coal Sales, Inc v Norfolk Southern Ry Co, the court refused to interpret force majeure as encompassing environmental regulation, despite the broad formulation of the clause as ‘interventions or expropriations by government or governmental authorities’. According to the court
Environmental regulations are not ‘act[s] of God’ or the result of wars, strikes, civil unrest, or failure of a third party to perform. Changes in market conditions stemming from environmental regulations do not fall within the protection of the force majeure clause for ‘interventions,’ ‘expropriations.’119
The court’s conclusion is in line with the ‘environmental expropriation’ argument, developed in the environmental and investment law scholarship, according to which states’ regulatory space must be safeguarded, and environmental regulation should in principle not amount to expropriation.120 However, when applied to force majeure in energy contracts, this reasoning may undercut environmental protection efforts, as it prevents companies from relying on new environmental rules to terminate their carbon-intensive transactions. Perversely, the ‘environmental expropriation’ argument in force majeure cases may simply result in locking the parties concerned into their existing fossil energy contracts.
4.4 Resistance to Environmental Regulation
The common requirement in force majeure clauses that the affected party, acting as a reasonable and prudent operator, took all reasonable measures to avoid and remove its inability to perform,121 can raise legitimacy concerns if it is interpreted as requiring opposition to environmental regulation. Professor Böckstiegel, for instance, argues that acts of state cannot be considered as force majeure, if ‘available remedies against the act were not exhausted’.122 Does the unavoidability requirement imply that the industry must resist impediments to its performance of carbon-intensive obligations by challenging the legality of decarbonisation regulation?
In Karaha Bodas Company v Pertamina and PLN, an arbitral dispute concerning regulatory interference with the construction of a power plant in Indonesia, the international arbitral tribunal did not accept that the government’s decision to postpone construction amounted to force majeure. The state-owned energy enterprise committed in 1994 to purchasing the electricity produced from a planned new power plant, but in 1997, against the background of the Asian financial crisis, the government decided to postpone construction of the plant. The arbitral tribunal ruled that the government’s decision did not excuse the SOE from its obligations, as it ‘fail[ed] to do its best efforts to reverse the Governmental decision, although it … [was] in a position to efficiently intervene’ by lobbying the government not to adopt the contested decision.123
In International Minerals & Chemical Corp v Llano, introduced above, the trial court refused to accept that new emission limits constituted an event of force majeure, because the producer of potassium sulphate had voluntarily cooperated with the environmental regulator and complied earlier than required with the obligation to reduce emissions of fine particulates.124 According to the court, the fertiliser company therefore had not done all it could to enable performance. However, the US Tenth Circuit Court of Appeals ruled, under the ‘inability to use gas’ provision, that the company was not required to spin out its negotiations with the environmental regulator and delay compliance until the last minute.125 First, as a matter of policy, compliance with the letter and spirit of environmental regulations was to be encouraged. Secondly, as a matter of law, government policy need not be mandatory to excuse performance. There is a limit to the extent to which a party can claim excuse by cooperating with the government, in particular if the party colluded in inducing the regulation preventing his performance. However, in casu, the emission limits were designed to address local air pollution caused by emissions of fine particulates. The producer’s ‘recognition of the public benefit goal and its willingness to cooperate in eliminating pollution can hardly be termed improper collusion.’126 Similarly, in relation to decarbonisation, it is necessary to recognise the public benefit of closing down carbon-intensive installations to reach emission limits, and not characterise the willingness of the industry to cooperate in reducing emissions as improper collusion.
4.5 The Case of SOEs
In many jurisdictions, including those of major Greenhouse Gas (GHG) emitters, SOEs are tasked with ensuring energy security, often on a monopoly basis.127 Given their monopoly position in carbon-intensive activities (eg coal-fired power generation), SOEs have a key role to play in the low-carbon transition.128 At the same time, with the collapse of prices and demand, SOEs can have a financial interest in withdrawing from their long-term fossil energy contracts. To preserve its financial interest in an SOE, the government can adopt regulations aiming to extract that enterprise from the performance of a contract that is no longer profitable. Taking into account this risk of collusion, ‘can a State corporation rely on its separate personality to plead that an act of State constitutes force majeure, freeing the corporation from a contract with a third party?’129
In Okta Crude Oil Refinery AD v Mamidoil-Jetoil Greek Petroleum Company, a case concerning oil supply to the Former Yugoslav Republic of Macedonia (FYRM), the English Court of Appeal did not accept that the order of the FYRM government to stop performing an expensive oil purchase agreement constituted force majeure.130 Although the oil agreement included ‘acts or compliance with requests of any government authority’ in the definition of force majeure, the tribunal considered that the government’s order was not beyond the control of the oil company, as there was evidence that the government acted at the request of the company.131
According to Professor Böckstiegel’s influential theory on the application of force majeure to state enterprises, administrative acts should in principle not be considered as force majeure for SOEs, as there is a presumption that the government will not act to their detriment.132 SOEs can reverse this presumption by proving that the administrative act was adopted in the pursuit of general considerations not connected with the contract.133 A general law should in principle be recognised as force majeure, unless there is evidence that the law was adopted to enable the SOE to escape from its contractual obligations.134 In the absence of clear evidence that the government acted ‘purely to extricate a State enterprise from contractual liability’, an SOE cannot be denied the right to invoke a law or regulation as an event of force majeure.135
Energy contracts commonly limit the definition of force majeure to acts of government of general application, or exclude regulations ‘affecting solely or primarily the Affected Party and not generally applicable to Persons doing business in the same country’136 or acts ‘which are discriminatory towards’ the other party.137 A more radical option is to prevent the state-owned entity to invoke any act of its home government as force majeure.138
Scholars of environmental and investment law have warned that arbitration tribunals could consider technology-specific regulations as a breach of non-discrimination and national treatment standards under international investment law.139 Decarbonisation regulations target carbon-intensive technologies and, in monopolised energy markets, state-owned energy utilities can be the only parties affected by a government decision to close down carbon-intensive facilities. As the economics of fossil energy crumble, the financial interest of companies to withdraw from fossil energy contracts can coincide with the public policy objective pursued through low-carbon regulation. Interpreting this coincidence in financial and public policy interests as discrimination or collusion would prevent SOEs from relying on low-carbon regulation to obtain force majeure relief, potentially undermining their support for the low-carbon transition.
4.6 Environmental Law Force Majeure Clauses
The strict interpretation by tribunals of the scope of ‘acts of governments’ in force majeure clauses limits the ability of energy buyers to adjust to decarbonisation regulation and participate in the low-carbon transition.140 The cases discussed above show that a specific reference to environmental regulation (or act of government restricting the use of energy) in the definition of force majeure can help to obtain relief from fossil energy contracts.
Given increasing pressure on coal-fired power plants to limit their emissions, some electricity utilities have included an ‘environmental law force majeure’ clause in their coal purchase agreements, enabling them to terminate the contract in case new environmental requirements make it impossible, or uneconomical, to utilise the quality of coal to be delivered under the contract.141 For instance, contracts can recognise the right of the buyer to terminate the contract, in the event that it ‘reasonably determines that it is unable to comply, or that it is economically impractical to comply, with … new … environmental statutes and/or regulations, … without modifying (its) obligations to take coal at the quantities, specifications, and prices provided for in this Agreement’.142 Force majeure events can specifically include ‘any environmentally related … limitation regarding the use of Coal at Plant’, any limitation regarding the ‘amount of emissions from Plant’ or ‘any environmentally related imposition of a cost, fee, tax … related to the production of electricity by means of coal-fired electric generation’ that adversely impacts on the use of coal at the power generation plant.143
The environmental law scholarship advocates the inclusion of environmental carve-outs in international investment protection treaties to avoid interference with states’ sovereign right to combat climate change.144 In a similar vein, including an environmental regulation carve-out in energy sale–purchase agreements could help to prevent energy buyers from being locked into their long-term fossil energy purchase obligations, following the implementation of decarbonisation regulation. By recognising that environmental regulation can excuse non-performance of an energy sale–purchase agreement, an environmental law force majeure clause would also help to disarm undesirable resistance to decarbonisation regulation, and avoid utilities dumping their unwanted supplies onto other fossil-fired installations.145
5. CONCLUSION: AN ENVIRONMENTAL CRITIQUE OF FORCE MAJEURE IN ENERGY CONTRACTS
Traditional energy contracts are a barrier to the accelerated transition away from fossil fuels, as they lock the parties into long-term sale–purchase obligations, regardless of market developments. With the increasing competitiveness of renewable energy technologies and lower demand for fossil fuels, there is growing financial, regulatory and societal pressure on the energy industry to abandon its existing supply commitments, and leave fossil resources unexploited. As one of the few flexibility provisions in energy contracts and grounds for the suspension and termination of supply and off-take commitments, force majeure clauses have in principle a role to play in facilitating the decarbonisation process. Previous crises, including the latest coronavirus-linked energy market crash, illustrate the use that the industry makes of force majeure to seek relief from contractual obligations in response to dramatic market developments of the kind that can be expected in the peak oil and decarbonisation era.
However, in the absence of explicit reference to economic hardship in the definition of force majeure, the collapse of energy markets is unlikely to excuse buyers from taking delivery of energy, or at least paying for it, and investors from developing new fossil energy projects. Given the urgent need to transition away from fossil fuels, requiring buyers to continue to take delivery of fossil fuels in the absence of demand, ‘albeit doubtless uneconomically and with resultant waste’,146 makes little sense from an environmental perspective, as it incentivises irrational energy use. Similarly, refusing force majeure relief from a coal contract, because there is still ‘some price’147 at which the commodity can be sold, encourages suppliers to dump coal and undercuts efforts to internalise carbon externalities and phase out fossil fuel subsidies. Requiring producers to continue to perform their supply commitments, despite the disappearance of the market for which their resources were destined, exacerbates oversupply of resources that must be curbed to address the climate emergency.
Market volatility has been a basic characteristic of energy trade since the early development of the oil and gas industry, and a key motivation for buyers and sellers to enter into long-term agreements.148 Energy contracts allocate the risk of market developments to the parties but do not take into account the broader impact that choices in the allocation of risk imply for decarbonisation, eg incentivising irrational use and oversupply of carbon-intensive resources after demand for these resources disappeared. By refusing to interpret market collapse as part of the illustrative (‘catch-all’) list of force majeure events in energy contracts, courts enforce the allocation of risks decided by the parties, regardless of the environmental implications of their decisions. To enable the parties to withdraw from their fossil energy obligations when these no longer make economic and environmental sense, the drafting of force majeure clauses requires adjustment. From a decarbonisation perspective, economic hardship, and in particular the ‘loss of buyer’s market’, should be part of the definition of force majeure in long-term sale–purchase agreements, and not be excluded from it, as is currently the case.
Stringent decarbonisation regulation (eg a ban on coal or emission limits that leave inefficient installations no other choice but to close) can, in principle, excuse the performance of long-term energy agreements that include ‘acts of government’ in the definition of force majeure. ‘Environmental expropriation’ is criticised in the environmental and investment law literature as an unacceptable limitation of states’ sovereign right to combat climate change. Paradoxically, when applied to force majeure in energy contracts, qualifying environmental regulation as expropriation can contribute to obtaining relief from long-term fossil energy obligations and thus to the decarbonisation of energy supply.
However, the condition that force majeure has to be beyond the control of the affected party can raise legitimacy concerns, if it requires resistance to the adoption and implementation of low-carbon regulations. Given the growing social, political and financial pressure on traditional energy companies to act on climate change, ‘reasonable and prudent energy operators’ in the decarbonisation era should be encouraged to cooperate with ambitious low-carbon regulation and not dig in their heels. Similarly, state-owned energy enterprises, as major buyers and investors in the fossil energy industry, have a crucial role to play in supporting ambitious decarbonisation regulation. It will be difficult for them to play their part if their right to obtain force majeure relief from long-term fossil energy contracts is undermined.
Environmental law force majeure clauses in energy sale–purchase agreements can facilitate the participation of energy buyers in the low-carbon transition by freeing them from their purchase obligations in the event of environmental regulation. At the moment, the inclusion of environmental regulation as force majeure ground for the termination of energy purchase obligations is mainly limited to coal supply to certain electricity utilities (in the USA) and is largely absent in the oil and gas sector. With oil prices depressed, large energy buyers are now in a strong position to include environmental safeguards in their energy agreements, thereby aligning energy agreements with the reality of decarbonisation.
In global energy markets, invoking a force majeure clause would only have a beneficial effect for climate change if it would not have the effect of the energy supplier seeking another buyer or market for its fossil fuel commodities, with alternative buyers benefiting from lower prices.149 Environmental force majeure clauses can contribute to facilitating the energy transition by providing relief from fossil energy transactions, provided other energy buyers do not freeride on states’ efforts to phase out fossil fuels. Thus, the effectiveness of these clauses in reducing greenhouse gas emissions depends not only on ambitious national decarbonisation measures but also on coordinated international climate change mitigation efforts.
FUNDING
The research underlying this article benefitted from financial support from the Research Grants Council of Hong Kong (General Research Fund Grant No CUHK14608118).
ACKNOWLEDGEMENTS
I am grateful to Navraj Ghaleigh for triggering my interest in the topic of this article, to Christian Hübner, Benoit Mayer, Ernst Kuneman, Kim Talus, Hao Zhang and two anonymous reviewers for most useful comments, to Sara Soini for outstanding research assistance and to David Wilmshurst for editing the text. The usual disclaimer applies.
Footnotes
See eg Dieter Helm, Burn Out: The Endgame for Fossil Fuels (Yale University Press 2017) 38. Helm states ‘If fossil fuel producers are challenged by the end of the commodity super-cycle and the resulting falling revenues, this pales into insignificance compared with the existential threat to them posed by decarbonization’.
See eg Spencer Dale and Bassam Fattouh, ‘Peak Oil Demand and Long-Run Oil Prices’ (2018) Oxford Institute for Energy Studies <https://www.oxfordenergy.org/publications/peak-oil-demand-long-run-oil-prices> accessed 14 November 2020. See also John Baffes and others, ‘The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses’（2015）World Bank Group Policy Research Note <http://pubdocs.worldbank.org/en/339801451407117632/PRN01Mar2015OilPrices.pdf> accessed 14 November 2020.
See eg Paul Bodnar and others, ‘How to Retire Early: Making Accelerated Coal Phaseout Feasible and Just’ (2020) Rocky Mountain Institute <https://rmi.org/insight/how-to-retire-early> accessed 14 November 2020.
On opposition to low-carbon regulation based on vested interests of the fossil industry, see eg Geoffroy Dolphin, Michael Pollitt and David Newbery, ‘The Political Economy of Carbon Pricing: A Panel Analysis’ (2020) 72 Oxford Economic Papers 472; Jesse Jenkins, ‘Political Economy Constraints on Carbon Pricing Policies: What Are the Implications for Economic Efficiency, Environmental Efficacy, and Climate Policy Design’ (2014) 69(C) Energy Policy 467.
Kyla Tienhaara, ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement’ (2018) 7 Transnational Environmental Law 229; Kate Miles, The Origins of International Investment Law: Empire, Environment and the Safeguarding of Capital (CUP 2013). See also Jorge Viñuales, ‘Foreign Investment and the Environment in International Law: An Ambiguous Relationship’ (2009) 80 British Yearbook of International Law 244.
See Morgan Stanley Capital Grp Inc v Pub Util Dist No 1 of Snohomish Cty, Wash, 554 US 527, 128 S Ct 2733, 171 L Ed 2d 607 (2008). See also Peter D Cameron, International Energy Investment Law: The Pursuit of Stability (OUP 2010); Loukas Mistelis, ‘Contractual Mechanisms for Stability in Energy Contracts’, in Maxi Scherer (ed), International Arbitration in the Energy Sector (OUP 2018) 153.
In the Final Award in Case 15051 (Extract) (2014) 25 ICC International Court of Arbitration Bulletin, para 349, the arbitral tribunal opined that ‘the general rule on contracts is that a contract is binding and shall be performed as such, regardless of the burden it may impose on the parties’.
On obligations under (long-term) energy contracts, see eg Peter Roberts, Gas and LNG Sales and Transportation Agreements: Principles and Practice (Sweet & Maxwell 2017); Kim Talus, ‘Long-term Natural Gas Contracts and Antitrust Law in the European Union and the United States’ (2011) 4 The Journal of World Energy Law & Business 260. See also Bodnar and others (n 3) 20, where it is stated that ‘A key reason for the slow pace of coal phaseout is that the vast majority of coal plants globally are insulated from competitive forces by legacy contracts.’
Guenter Treitel, Frustration and Force Majeure (Sweet & Maxwell 2014) 1; Klaus Peter Berger and Daniel Behn, ‘Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study’ (2020) 6 McGill Journal of Dispute Resolution 79.
Christoph Brunner, Force Majeure and Hardship under General Contract Principles: Exemption for Non-performance in International Arbitration (Wolters Kluwer 2008) 383; Hubert Konarski, ‘Force Majeure and Hardship Clauses in International Contractual Practice’ (2003) 4 International Business Law Journal 405, 406.
Roberts (n 8) 310; Isabelle Fellrath and Frank Spoorenberg, ‘Energy Agreements – Force Majeure and Hardship Clauses’ in Karen Makuch and Ricardo Pereira (eds), Environmental and Energy Law (Blackwell Publishing 2012) 240; Jennifer Smith and Andrew Behrman, ‘The Importance of a Strong Force Majeure Clause in an Unstable Geopolitical Environment’ (2015) 8 The Journal of World Energy Law & Business 116, 117; Nataliya Barysheva, ‘Force Majeure in Energy Arbitration: Predicting the Unpredictable’ (2018) 2 International Commercial Arbitration Review 70; Guy Block, ‘Arbitration and Changes in Energy Prices: A Review of ICC Awards with Respect to Force Majeure, Indexation, Adaptation, Hardship and Take-or-pay Clauses’ (2009) 20 ICC International Court of Arbitration Bulletin 53. See also Doak Bishop, ‘International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea’ (1998) Yearbook Comm Arb 1131, including force majeure into ‘Lex Petrolea’.
Roberts (n 8) 310; Treitel (n 9) 262.
See eg Myanna Dellinger, ‘Rethinking Force Majeure in Public International Law’ (2017) 37 Pace Law Review 455; Myanna Dellinger, ‘An “Act of God”? Rethinking Contractual Impracticability in an Era of Anthropogenic Climate Change’ (2016) 67 UC Hastings Law Journal 1553.
See eg Agnieszka Ason and Michal Meidan, ‘Force Majeure Notices from Chinese LNG Buyers: Prelude to a Renegotiation?’ (2020) Oxford Institute for Energy Studies <https://www.oxfordenergy.org/publications/force-majeure-notices-from-chinese-lng-buyers-prelude-to-a-renegotiation> accessed 14 November 2020.
David Sheppard, ‘Pandemic Crisis Offers Glimpse into Oil Industry’s Future’ Financial Times (London, 2 May 2020).
Myles McCormick, ‘Coronavirus Will Hasten ‘Peak Oil’ by Three Years’ Financial Times (London, 19 June 2020).
European Commission, ‘Boosting the EU’s Green Recovery: Commission Invests €1 Billion in Innovative Clean Technology Projects’ Press Release (3 July 2020) <https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1250> accessed 14 November 2020.
National law doctrines on changed circumstances, and differences in their scope, criteria of application and legal consequences are not covered in this article. See eg Alfons Puelinckx, ‘Frustration, Hardship, Force Majeure, Imprévision, Wegfall der Geschäftsgrundlage, Unmöglichkeit, Changed Circumstances: A Comparative Study in English, French, German and Japanese Law’ (1986) 3 Journal of International Arbitration 47; Theo Rauh, ‘Legal Consequences of Force Majeure under German, Swiss, English and United States’ Law’ (1996) 25 Denver Journal of International Law and Policy 151; King Fung Tsang, ‘From Coronation to Coronavirus: Covid-19, Force Majeure and Private International Law’ (2020) 44 Fordham International Law Journal 187.
See eg Transocean Drilling UK Ltd v Providence Resources plc (The Arctic III) [2014] EWHC 4260 (Comm), [52]. See also Wisconsin Electric Power Co v Union Pacific Railroad Co, 557 F3d 504 (7th Cir 2009).
See eg Kim Talus, Scott Looper and Luke Burns, ‘Long-Term Take-or-Pay Agreements in Natural Gas Industry: Past, Present and Future’ (2020) 18 Oil, Gas and Energy Law <https://www.ogel.org/article.asp?key=3892> accessed 14 November 2020; Scott Hoffman, The Law and Business of International Project Finance (CUP 2012) 188–197.
See eg Yanal Abul Failat, ‘Petroleum Sales Agreements’ in Greg Gordon, John Paterson, Emre Üșenmez (eds), UK Oil and Gas Law: Commercial and Contract Law Issues (3rd edn, Edinburgh University Press 2018); and the contributions in John LaMaster and Caroline-Lucy Moran (eds), Oil and Gas Sale and Purchase Agreements (2nd edn, Globe Law and Business 2020).
See eg Gas Natural Aprovisionamientos SDG, SA v Atlantic LNG Co of Trinidad and Tobago, 2008 WL 434425 (SDNY 16 September 2008). See also the contributions in James Freeman and Mark Levy (eds), Gas and LNG Price Arbitrations: A Practical Handbook (2nd edn, Globe Law and Business 2020); and Agniezska Ason, ‘Price Reviews and Arbitrations in Asian LNG Markets’ (2019) Oxford Institute for Energy Studies <https://www.oxfordenergy.org/publications/price-reviews-arbitrations-asian-lng-markets/> accessed 14 November 2020. See also Energy Charter Secretariat, Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas (2007) Energy Charter Secretariat, 153 <https://www.energycharter.org/what-we-do/trade-and-transit/trade-and-transit-thematic-reports/putting-a-price-on-energy-international-pricing-mechanisms-for-oil-and-gas-2007/> accessed 14 November 2020 (‘the seller takes the price risk, the buyer the volume risk linked to marketing’).
Talus, Looper and Burns (n 20). See also eg art 8.1.1. Long-term Sale and Purchase Agreement between Pakistan State Oil Company Limited and Qatar Liquified Gas Company Limited, 10 February 2016 <https://psopk.com/files/home/use_full_links/qg_executed_redacted_version.pdf> accessed 14 November 2020 (hereinafter ‘Pakistan LNG SPA’) (‘the Buyer shall … purchase, receive and pay for, or pay for if not taken’).
See the contributions in Ronnie King (ed), Dispute Resolution in the Energy Sector (Globe Law and Business 2012).
See Sabine Corp v ONG Western, Inc, 725 F Supp 1157 (WD Okla 1989).
See SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (The Azur Gaz) [2005] EWHC 2528 (Comm) [25].
Wisconsin Electric Power Co. v Union Pacific Railroad Co (n 19) 506.
Peter Roberts, Petroleum Contracts: English Law and Practice (OUP 2013).
Great Elephant Corporation v Trafigura Beheer BV, The Crudesky [2013] EWCA Civ 905 [25].
Transocean Drilling UK Ltd v Providence Resources plc (The Arctic III) (n 19) [52].
eg Kim Talus, Scott Looper and Steven Otillar, ‘Lex Petrolea and the Internationalization of Petroleum Agreements: Focus on Host Government Contracts’ (2012) 5 The Journal of World Energy Law & Business 181.
art 15.1, BP Master Ex-Ship LNG Sale and Purchase Agreement (2019) <https://www.bp.com/en/global/bp-global-energy-trading/features-and-updates/technical-downloads/lng-master-sales-and-purchase-agreement.html> accessed 14 November 2020 (hereinafter ‘BP Master Ex-Ship LNG SPA’); art 12, Trafigura LNG Master Sale and Purchase Agreement (2017) <https://www.trafigura.com/press-releases/trafigura-presents-standard-master-sales-and-purchase-agreement-mspa-for-the-lng-industry-during-gastech> accessed 14 November 2020 (hereinafter ‘Trafigura Master LNG SPA’).
See Great Elephant Corporation v Trafigura Beheer BV, The Crudesky (n 29) [32], where it was opined ‘It does not seem to me that the word “unforeseeable” adds much to the concept of “within reasonable control”’.
See, however, art 7.1.7 of the UNIDROIT Principles <https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2010/404-chapter-7-non-performance-section-1-non-performance-in-general/1050-article-7-1-7-force-majeure> accessed 14 November 2020.
art 12, Trafigura Master LNG SPA (n 32); art 15, BP Master Ex-Ship LNG SPA (n 32).
See eg art 6.2.2 of the UNIDROIT Principles <https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2010/403-chapter-6-performance-section-2-hardship/1058-article-6-2-2-definition-of-hardship> accessed 14 November 2020.
See eg Block (n 11) 55. See also Cameron (n 6) 88; Fellrath and Spoorenberg (n 11) 245; Michael Polkinghorne, ‘Changes of Circumstances as a Price Modifier’, in Freeman and Levy (eds), Gas and LNG Price Arbitrations: A Practical Handbook (2nd edn, Globe Law & Business 2019) 37, 39.
See eg art 11.2, North American Energy Standards Board, Base Contract for Sale and Purchase of Natural Gas <https://naesb.org/pdf/cs012102w2.pdf> accessed 14 November 2020; s 10.2, Coal Supply Agreement between Armstrong Coal Company and Louisville Gas & Electric Company and Kentucky Utilities Company, 1 January 2012 <https://www.sec.gov/Archives/edgar/data/1532288/000119312513367455/d543373dex1027.htm> accessed 14 November 2020 (hereinafter ‘Armstrong Coal Company Supply Agreement’); Southern Company, Master Coal Purchase and Sale Agreement <https://www.southerncompany.com/content/dam/southern-company/pdf/suppliers/fuelservices/Master-Coal-Purchase-Sale-Agreement.pdf> accessed 14 November 2020 (hereinafter ‘Southern Company Master Coal Agreement’).
See eg art 10 ‘Accord-cadre pour l’accès régulé à l’électricité nucléaire historique’, defining force majeure as a party’s inability to perform its obligations ‘under reasonable economic conditions’ (Arrêté du 12 mars 2019 portant modification de l’arrêté du 28 avril 2011 pris en application du II de l’article 4-1 de la loi n° 2000-108 relative à la modernisation et au développement du service public de l’électricité <https://www.legifrance.gouv.fr/eli/arrete/2019/3/12/TRER1907101A/jo/texte> accessed 14 November 2020).
See Konarski (n 10) 425; Cameron (n 6) 88.
See eg art 20, Crude Oil Sales Agreement between PDVSA-Petroleo S.A. and Nustar Marketing LLC, 1 March 2008 <https://www.sec.gov/Archives/edgar/data/1110805/000119312508064276/dex101.htm> accessed 14 November 2020, referring to ‘any Government measure (“Sovereign Acts”)’.
See eg BP Master LNG SPA (n 32).
See eg s 12.1, Coal Supply Agreement by and between Westmoreland Coal Company and Public Service Company of New Mexico, 1 July 2015 <https://www.sec.gov/Archives/edgar/data/22767/000110842615000116/pnm9302015ex101.htm> accessed 14 November 2020 (hereinafter ‘Westmoreland Coal Company Supply Agreement’); s 10.2, Armstrong Coal Company Supply Agreement (n 38); Clause 17, Model Coal Supply Agreement between Western Coalfields Limited and Purchaser for Supply of Coal from Cost Plus Mine <http://www.westerncoal.in/sites/default/files/userfiles/Model_FSA_Govt_Power_Utility.pdf> accessed 14 November 2020 (hereinafter ‘Western Coalfields Model Supply Agreement’). In contrast, influential model coal agreements do not include environmental regulation in the definition of force majeure. See eg American Coal Council, 2010 Master Coal Purchase and Sale Agreement <https://www.americancoalcouncil.org/page/MCSA> accessed 14 November 2020; and American Electric Power, Master Coal Purchase and Sale Agreement, 26 October 2018 <https://www.aep.com/newsroom/resources/docs/MasterCoalPurchaseAgreement.pdf> accessed 14 November 2020.
See eg art 15.9, BP Ex-Ship SPA (n 32). See also Ason and Meidan (n 14) 3.
art 12(7), GIIGNL Master FOB LNG Sales Agreement 2011 <https://giignl.org/system/files/111231_giignl_fob_msa2011_final_.pdf> accessed 14 November 2020 (hereinafter ‘GIIGNL Master LNG SPA’); s 9, Florida Power & Light Company Fuel Oil Purchase Contract, <https://www.fpl.com/partner/pdf/fuel-oil-purchase-contract.pdf> accessed 14 November 2020; art 15, Petroleum Product Sale Agreement by and between CST Marketing and Supply Company and Valero Marketing and Supply Company, 1 May 2013 <https://www.sec.gov/Archives/edgar/data/1562039/000119312513192119/d529556dex107.htm> accessed 14 November 2020 .
Dale and Fattouh (n 2) 6.
ibid. See also Anjli Raval, ‘Oil Majors Face Up to Plunging Asset Values’ Financial Times (London, 1 July 2020) <https://www.ft.com/content/b7689fd1-5b06-42e9-bc9f-0a912c93924e> accessed 14 November 2020.
International Energy Agency (IEA), ‘The Global Oil Industry Is Experiencing A Shock Like No Other In Its History’ (2020) <https://www.iea.org/articles/the-global-oil-industry-is-experiencing-shock-like-no-other-in-its-history> accessed 14 November 2020. See also James Henderson, ‘Quarterly Gas Review: The Impact of COVID-19 on Global Gas Markets’ (2020) Oxford Institute for Energy Studies <https://www.oxfordenergy.org/publications/quarterly-gas-review-issue-9> accessed 15 November 2020.
International Energy Agency (IEA), ‘World Energy Outlook 2020’ (2020) IEA <https://www.iea.org/reports/world-energy-outlook-2020> accessed 15 November 2020.
Bodnar and others (n 3) 11. See also International Renewable Energy Agency (IRENA), ‘Renewable Power Generation Costs in 2019’ (2020) IRENA <https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Jun/IRENA_Power_Generation_Costs_2019.pdf> accessed 14 November 2020.
Bodnar and others (n 3) 6. See also Christian Shepherd and Stephanie Findlay, ‘Virus Drives Shift Away from Coal Except in China’ Financial Times (Beijing and New Delhi, 2 August 2020) <https://www.ft.com/content/ceef4a42-6a15-4745-b196-74ade49d5f94> accessed 14 November 2020.
See eg IEA, World Energy Investment Report (2020) <https://www.iea.org/reports/world-energy-investment-2020> accessed 14 November 2020.
See eg Ason and Meidan (n 14); Reuters, ‘Wescoal Says Eskom Declares Force Majeure on Coal Supply Agreements’ Reuters (Johannesburg, 21 April 2020) <https://www.reuters.com/article/us-health-coronavirus-safrica-eskom/wescoal-says-eskom-declares-force-majeure-on-coal-supply-agreements-idUSKCN2231WS> accessed 14 November 2020; Reuters, ‘Oil Majors Cut 2020 Spending by 22% After Prices Slump’ Reuters (London, 1 April 2020) <https://www.reuters.com/article/us-global-oil-majors-capex-graphic/oil-majors-slash-2020-spending-by-20-after-prices-slump-idUSKBN21J516> accessed 14 November 2020.
Guy Hardaker, ‘Force Majeure and Take or Pay Contracts for Power Stations: The Buyer's Perspective’ (2000) 7 International Energy Law and Taxation Review 163.
International Minerals and Chemical Corp v Llano, Inc, 770 F2d 879, 886 (10th Cir 1985).
ibid. Buyers have also sought to escape their obligation to take delivery of energy that is no longer needed, by unsuccessfully arguing that it caused waste.
Classic Maritime Inc v Lion Diversified Holdings Berhad [2009] EWHC 1142 (Comm) [62].
ibid.
Classic Maritime Inc v Lion Diversified Holdings Berhad (n 57) [62].
Roberts (n 8) 310.
Drummond Coal Sales, Inc v Norfolk S Ry Co, 2018 US Dist LEXIS 143047 (WD Va August 22, 2018). International Minerals and Chemical Corp v Llano, Inc (n 55) 881.
Sabine Corp v ONG Western, Inc (n 25) 1170.
ibid.
ibid 1172.
Treitel (n 9) 267.
Block (n 11) 53.
ICC Case No 2216 (1974) in Sigvard Jarvin and Yves Derains (eds), Collection of ICC Arbitral Awards 1974-1985 (Kluwer Law & Taxation/ICC Publishing 1990) 224–230; ICC Case No 2508 (1976) in Jarvin and Derains 292–296; ICC Case No 2478 (1974) in Jarvin and Derains 25–27; Hungarian State Enterprise v Jugoslavenski naftovod (6 July 1983) in ICCA Yearbook Commercial Arbitration IX (Kluwer Law International 1984) 69.
Mahmoud Reza Firoozmand and Javad Zamani, ‘Force Majeure in International Contracts: Current Trends and How International Arbitration Practice Is Responding’ (2017) 33 Arbitration International 410.
United States v Panhandle E Corp, 693 F Supp 88, 92 (D Del 1988), aff'd, 868 F2d 1363 (3d Cir 1989).
ibid 96. See also TEC Olmos, LLC v ConocoPhillips Co, 555 SW3d 176 (Tex App 2018), review denied (30 August 2019).
Langham-Hill Petroleum Inc v Southern Fuels, 813 F2d 1327, 1329 (4th Cir 1987).
ibid 1330. Similarly, see Valero Transmission Co v Mitchell Energy Corp, 743 SW2d 658 (Tex App 1988).
N Indiana Pub Serv Co v Carbon Cty Coal Co, 799 F2d 265, 275 (7th Cir 1986).
Kodiak 1981 Drilling P'ship v Delhi Gas Pipeline Corp, 736 SW2d 715, 724 (Tex. App. 1987), writ refused NRE (7 October 1987). See more recently, Total Direct Energie SA and Association Française Indépendente de l’Electricité et du Gaz v Electricité de France SA (2020), Tribunal de commerce de Paris, Ordonnance de référé, 20 May 2020, ruling that the impact of Covid-19 on the French electricity market constituted force majeure for energy buyers, taking into account the inclusion of ‘unreasonable economic conditions’ in the contractual definition of force majeure.
Bodnar and others (n 3) 11; Baffes and others (n 2); Noam Bergman, ‘Impacts of the Fossil Fuel Divestment Movement: Effects on Finance, Policy and Public Discourse’ (2018) 10 Sustainability 2529.
See eg IEA (n 49).
See Wheeling Valley Coal Corporation v Mead, 186 F2d 219 (4th Cir 1950).
See Great Lakes Gas Transmission Ltd Partnership v Essar Steel Minnesota, LLC, 871 F Supp 2d 843 (D Minn 2012). See also TEC Olmos, LLC v ConocoPhillips Co (n 70).
See Final Award in Case 19149 (Extract) (2015) 2 ICC Dispute Resolution Bulletin.
See Champlin Petroleum Co v Mingo Oil Producers, 628 F Supp 557 (D Wyo 1986), aff'd, 841 F2d 1131 (10th Cir 1987).
See In Re Old Carco LLC, 452 B.R. 100 (Bankr S.D.N.Y. 2011).
Millers Cove Energy Co v Moore (In re Millers Cove Energy Co) 62 F.3d 155, 159 (6th Cir 1997).
Champlin Petroleum v Mingo Oil Producers (n 80) 560–61.
Thames Valley Power Ltd v Total Gas & Power Ltd, [2005] EWHC 2208 (Comm).
ibid [50].
TEC Olmos, LLC v ConocoPhillips Co (n 70) 184 (‘Because fluctuations in the oil and gas market are foreseeable as a matter of law, [they] cannot be considered a force majeure event unless specifically listed as such in the contract’). See also US v Panhandle Eastern Corp (n 69); Kodiak 1981 Drilling (n 74); Total Direct Energie (n 74).
On the allocation of the volume risk to the buyer under long-term gas agreements, see eg Energy Charter Secretariat (n 22) 153. See also the contributions in Freeman and Levy (n 22).
See eg California Energy Commission, ‘Declining Reliance on Coal’ (2019) <https://www.energy.ca.gov/data-reports/tracking-progress/declining-reliance-coal> accessed 14 November 2020; David Driesen, ‘Traditional Regulation’s Role in Greenhouse Gas Abatement’ in Michael Faure (ed), Elgar Encyclopedia of Environmental Law (Edward Elgar 2015) 415; Anatole Boute and Hao Zhang, ‘The Role of the Market and Traditional Regulation in Decarbonising China’s Energy Supply’ (2018) 30 Journal of Environmental Law 261.
See eg Europe Beyond Coal, Overview: National Coal Phase-out Announcements in Europe Status (October 2020) <https://beyond-coal.eu/wp-content/uploads/2020/10/Overview-of-national-coal-phase-out-announcements-Europe-Beyond-Coal-October-2020.pdf> accessed 14 November 2020.
William Acworth and others, ‘Emissions Trading in Regulated Electricity Markets’ (2020) 20 Climate Policy 60.
Miles (n 5). See also Kate Crowley, ‘Pricing Carbon: the Politics of Climate Policy in Australia’ (2013) 4 WIREs Climate Change 603; Andrea Baranzini and others, ‘Carbon Pricing in Climate Policy: Seven Reasons, Complementary Instruments, and Political Economy Considerations’ (2017) 8 WIREs Climate Change 462.
See eg Tienhaara (n 5); Kate Miles, ‘International Investment Law and Climate Change: Issues in the Transition to a Low Carbon World’ (2008) Society of International Economic Law <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1154588> accessed 15 November 2020. See, however, Stephan Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’ (2007) 24 Journal of International Arbitration 469.
Treitel (n 9) 345.
International Minerals and Chemical Corp v Llano, Inc (n 55) 886–7.
ibid 887.
Drummond Coal Sales, Inc v Norfolk S Ry Co (n 61).
ibid 36.
US v Panhandle Eastern Corp (n 69) 92.
Sabine Corp v ONG Western, Inc (n 25) 1166.
Classic Maritime Inc v Lion Diversified Holdings Berhad (n 57) [62].
Miles (n 5); Bradly J Condon and Tapen Sinha, The Role of Climate Change in Global Economic Governance (OUP 2013).
A potential explanation for the absence of force majeure cases concerning carbon pricing is that carbon prices have generally remained at too low a level to significantly impact on investment decisions. See eg Bloomberg, ‘Europe Needs a Higher Price on Carbon’ Bloomberg (20 February 2017) <https://www.bloomberg.com/opinion/articles/2017-02-20/europe-needs-a-higher-price-on-carbon> accessed 14 November 2020.
See eg Stefano F Verde, William Acworth, Christopher Kardish and Simone Borghesi, ‘Achieving Zero Emissions Under a Cap-And-Trade System’ (2020) International Carbon Action Partnership <https://icapcarbonaction.com/en/?option=com_attach&task=download&id=695> accessed 14 November 2020.
See eg IEA (n 52).
N Indiana Pub Serv Co v Carbon Cty Coal Co (n 73).
ibid 274.
Nykomb Synergetics Technology Holding AB v Latvia, SCC Arbitration, Award (16 December 2003) para 3.8.
Dyco Petroleum Corp v ANR Pipeline Co, 1988 US Dist LEXIS 18317 (N.D. Okla 1988); Burkhart Petroleum Corp v ANR Pipeline Co, 1988 US Dist LEXIS 9158 (ND Okla 1988). See also Hamilton Bros Oil Co. v ANR Pipeline Co, 1989 US Dist LEXIS 17871 (WD Okla, 1989); and Michael J Medina, ‘The Take-or-Pay Wars: A Cautionary Analysis for the Future’ (1991) Tulsa Law Journal 283; John B McArthur, ‘The Take-or-Pay Crisis: Diagnosis, Treatment, and Cure for Immorality in the Marketplace’ (1992) New Mexico Law Review 353.
According to the Final Award in Case 9812 (Extract) (2009) 20 ICC International Court of Arbitration Bulletin, ‘a government price control forcing sellers of gas to end-users not to exceed a certain price, so that sellers were unable to obtain the market value of gas’ can trigger renegotiation under economic hardship clauses.
See Seaboard Lumber Co v United States, 308 F3d 1283 (Fed Cir 2002) 1293 where it was opined that ‘government policies that affect the profitability of a contract but do not preclude performance should not be considered “acts of government” for force majeure clause purposes’.
See Westmoreland Coal Company v Canada, ICSID Case No UNCT/20/3 <https://www.italaw.com/cases/7002> accessed 14 November 2020 (challenging Alberta’s decision to phase out electricity generation from coal by 2030). See also Dave Keating, ‘Dutch Lawmakers Under Pressure Over Coal Phase-Out’ Forbes (2 December 2019) <https://www.forbes.com/sites/davekeating/2019/12/02/dutch-lawmakers-under-pressure-over-coal-phase-out/#712399144dc8> accessed 14 November 2020; and Pekka Niemelä and others, ‘Risky Business: Uniper’s Potential Investor-State Dispute Against the Dutch Coal Ban’ EJIL: Talk! (18 March 2020) <https://www.ejiltalk.org/risky-business-unipers-potential-investor-state-dispute-against-the-dutch-coal-ban/> accessed 14 November 2020 (on the threat of arbitration against the Dutch coal ban based on the allegation that it would amount to an indirect expropriation of coal-fired power plants).
See eg ClientEarth, ‘Legal Opinion on Uniper’s Legally Misconceived ISDS Threat to Dutch Coal Phase-out’ (21 November 2019) <https://www.documents.clientearth.org/wp-content/uploads/library/2019-11-26-clientearth-legal-opinion-isds-threat-uniper-ce-en.pdf> accessed 14 November 2020; Kyla Tienhaara, The Expropriation of Environmental Governance: Protecting Foreign Investors at the Expense of Public Policy (CUP 2009); Jorge Viñuales, Foreign Investment and the Environment in International Law (CUP 2015). Certain arbitral tribunals have ruled in favour of investors in claims against the impact of environmental regulation on their investments, see eg Metalclad Corporation v The United Mexican States, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000 (considering that the refusal of a municipal government to grant a construction permit to a waste treatment facility on environmental grounds amounted to indirect expropriation and unfair and inequitable treatment); William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon Delaware Inc v Canada, PCA Case No 2009–04, Award on Jurisdiction and Liability, 17 March 2015 (considering that the refusal to authorize a mining quarry based on a certain interpretation of the national law on environmental assessments amounted to a breach of the minimum standard of treatment and the national treatment standard).
N Illinois Gas Co v Energy Co-op, Inc, 122 Ill. App 3d 940, 951 (Ill App Ct 3d Dist 1984). See also Firoozmand and Zamani (n 68) 405; Martin Domke, ‘The Israeli-Soviet Oil Arbitration’ (1959) 53 American Journal of International Law 787, 800. On the ‘sole’ or ‘proximate’ cause requirement, see Seadrill Ghana Operations v Tullow Ghana Ltd [2018] EWHC 1640 (Comm); Intertradex SA v Lesieur-Tourteaux SARL (1978) 2 Lloyd’s Reports 509. See also Swift Co v Columbia Ry, Gas Electric Co, 17 F2d 46 (4th Cir 1927); Wheeling Valley Coal Corporation v Mead (n 77).
Ghana imposed the drilling moratorium in the offshore concession area controlled by Tullow, as part of provisional measures agreed in the arbitration with neighbouring Côte d’Ivoire on the delimitation of the maritime boundary.
Seadrill Ghana Operations v Tullow Ghana Ltd (n 113) [75].
ibid [89].
N Indiana Pub Serv Co v Carbon Cty Coal Co (n 73) 276.
ibid.
Drummond Coal Sales, Inc. v Norfolk S Ry Co (n 61) 31.
Tienhaara (n 112); Viñuales (n 112). See also Methanex Corporation v United States of America, UNCITRAL, Award on Jurisdiction and Merits, 3 August 2005 (‘[a]s a matter of general international law, a non-discriminatory regulation for a public purpose […] is not deemed expropriatory’).
See eg Nissho-Iwai Co v Occidental Crude Sales, Inc, 729 F2d 1530 (5th Cir 1984), where the court applied the requirement that a party cannot ‘rely on an excusing event if he could have taken reasonable steps to prevent it’ to a government-imposed oil embargo.
Karl-Heinz Böckstiegel, ‘Enterprise v. State: the New David and Goliath?’ (2007) 23(1) Arbitration International 102. See also Firoozmand and Zamani (n 68) 405.
Karaha Bodas Company L.L.C. v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (‘Pertamina’) and PT.PLN (Persero) (‘PLN’), Final Award, 18 December 2000 [2001] (16) Mealey’s International Arbitration Report C2-C17, para 64. See also Jordan Investments Ltd v Soiuznefteksport, discussed in Firoozmand and Zamani (n 68) 405; Michael D Aubrey, ‘Frustration Reconsidered – Some Comparative Aspects’ [1963] 12 ICLQ 1183.
International Minerals and Chemical Corp v Llano, Inc. (n 55) 884.
ibid 887.
ibid. Although these conclusions were not made under the force majeure clause, but under a related adjustment clause in case of inability to receive gas, they are relevant for the present analysis as, similarly to force majeure, the application of the adjustment clause was limited to any reason beyond the reasonable control of the affected party.
See eg David G Victor, David R Hults and Mark C Thurber, Oil and Governance: State-Owned Enterprises and the World Energy Supply (CUP 2012); Anatole Boute, Energy Security Along the New Silk Road: Energy Law and Geopolitics in Central Asia (CUP 2019).
Benoit Mayer and Mikko Rajavuori, ‘State Ownership and Climate Change Mitigation: Overcoming the Carbon Curse?’ (2017) 11 Carbon and Climate Law Review 223.
Ignaz Seidl-Hohenveldern, Corporations In and Under International Law (CUP 1987).
Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD, [2003] EWCA Civ 1031.
ibid.
Böckstiegel (n 122) 99. See also Karl-Heinz Böckstiegel, Arbitration and State Enterprises (ICC and Kluwer 1984).
According to Krupp-Koppers GmbH v Kopex (1983) in ICCA Yearbook Commercial Arbitration IX (Kluwer Law International 1987) 74, ‘it is the character of the State Act and the intended objectives which are decisive’. See also Brunner (n 10) 299.
See eg Jordan Investments Ltd v Sojuznefteksport concerning government interference with the export of oil to Israel in the context of the 1956 Israel-Egypt war, ‘to impress Arab countries with the prohibition of oil deliveries to Israel’, rather than achieve a specific financial interest in Domke (n 113).
Czarnikow (C) Ltd v Centrala Handlu Zagranicznego Rolimpex, [1979] AC 351. See also KPE Lasok, ‘Government Intervention and State Trading’ (1981) 44 The Modern Law Reveiw 262.
BP Master Ex-Ship LNG SPA (n 32).
art 18.2.1, Pakistan LNG SPA (n 23).
See eg art 21, Agreement on the Exploration, Development and Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea Between The State Oil Company Of The Azerbaijan Republic and BP and others (4 June 1996) <https://www.bp.com/content/dam/bp/country-sites/en_az/azerbaijan/home/pdfs/legalagreements/psas/sd-psa.pdf> accessed 14 November 2020,
See eg Kate Miles, ‘International Investment Law and Climate Change: Issues in the Transition to a Low Carbon World’ (2008) Society of International Economic Law, Online Proceedings of the Inaugural Conference, Working Paper 22–25. On discrimination and climate change, see also Bradly Condon, ‘Climate Change and International Investment Agreements’ (2015) 14 Chinese Journal of International Law 305; Anatole Boute, ‘The Potential Contribution of International Investment Protection Law to Combat Climate Change’ (2009) 27 Journal of Energy and Natural Resources Law 333.
At the same time, applied to power purchase agreements with renewable energy (low-carbon) investors, a strict interpretation of force majeure clauses avoids the perverse effect of hindering global efforts to combat climate change by justifying the termination of low-carbon agreements in case of regulatory changes to the electricity market structure, see Barton Windpower, LLC v N Ind Pub Serv Co, 2018 WL 3022673 (ND Ill 2018). See also Benton County Wind Farm LLC v Duke Energy Ind, 843 F3d 298 (7th Cir Ind 6 December 2016).
s 10.2, Armstrong Coal Company Supply Agreement (n 38); s 12.1, Westmoreland Coal Company Supply Agreement (n 43); Clause 17, Western Coalfields Model Supply Agreement (n 43).
s 12.1, Westmoreland Coal Company Supply Agreement (n 43).
Southern Company Coal Agreement (n 38).
Miles (n 5); Tienhaara (n 112); Freya Baetens, ‘Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol through Private Investment’ (2010) International Development Law Organization <https://cisdl.org/public/docs/legal/Baetens%20Freya%20_Foreign%20Investment%20Law%20and%20Climate%20Change.pdf> accessed 14 November 2020.
See eg s 19, Contract for Purchase and Sale of Coal between Alliance Coal, LLC and Tennesse Valley Authority, 20 August 2009 <https://www.sec.gov/Archives/edgar/data/1086600/000119312509227522/dex102.htm> accessed 14 November 2020 (‘In no event will TVA be obligated to divert deliveries from any affected Receiving Plant(s) to any alternate coal-fired fossil plant in TVA’s system’).
See Classic Maritime Inc v Lion Diversified Holdings Berhad (n 57) [61].
See Drummond Coal Sales, Inc. v Norfolk S. Ry. Co (n 61).
Bob McNally, Crude Volatility: The History and the Future of Boom-Bust Oil Prices (Columbia University Press 2017); Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (Simon & Schuster 1990). See also Kim Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Kluwer Law International 2011).
See eg Tom Mitchell and Emma Zhou, ‘Chinese Buyers Stock Up on Oil as Coronavirus Batters Prices’ Financial Times (Singapore and Beijing, 1 May 2020) <https://www.ft.com/content/9f89f35a-7142-4fde-b9da-344a823027a1> accessed 14 November 2020.