The recent civil unrest in certain countries in the Middle East and North Africa region, will inevitably lead to close scrutiny of relevant provisions in project documentation, whether a contractor, developer, lender or Governmental party. We can also expect parties to review whether the current accepted risk structures for the myriad of relationships which form a project, are still acceptable and appropriate.
Despite the best efforts of the draftsman, many contracts will not represent an exhaustive template for the resolution of issues resulting from the very different sets of circumstances coming out of Egypt, Libya, Tunisia and elsewhere. Ultimately, it will often be in the interests of supplier, developer, lender and host government for the project to continue. It will be the challenge of the parties to come to a shared understanding in relation to all aspects of the project which reflect the changed circumstances but also make it sufficiently attractive to the project participants. In addition, all players in the projects sector will be well advised to review their contracting strategies and their own contract templates to ensure they meet the challenges of the new environments in which they are conducting business.
Members of our energy and infrastructure projects team summarise below some of the legal issues facing the projects community as a consequence of the current troubles.
Whether it is an energy supply or offtake agreement, construction contract, throughout arrangement or services contract, parties will be looking at the relevant force majeure provisions if performance is prevented or inhibited. Key issues to consider in such a scenario are whether the event is explicitly referred to or at least covered in the "catch all" provisions of the clause, the extent of any obligation to mitigate the effects of Force Majeure, the procedure to invoke the clause and its consequences. Contractual Force Majeure provisions may offer a sledgehammer solution to a set of circumstances which require a more nuanced approach, which encourages the continuation of the contractual relationship, even if in a modified form. The advisor should also consider what remedies may be available under general law in the relevant circumstances. Although English common law and the doctrine of frustration is markedly non-interventionist, remedies under codified systems of law will often offer wider routes of recourse.
Stabilisation or adaption provisions, which are often included in concession agreements, power purchase agreements and the like, may offer protection to the foreign investor in relation to the economic consequences of current events. Again, the wording of the relevant provision is key to determining its application. Some may be restricted to change in law by the host Government (which may be an indirect result of the current events) whilst others may include riot and civil disturbances in relation to the host country jurisdiction or trade sanctions. Some may include a contractual mechanism for the adjustment of compensation; others may be drafted more on the basis of a good faith undertaking to renegotiate the agreement to nullify the economic effects to the project of the relevant event.
Project agreements, including those in the upstream oil and gas industry, often contain knock for knock indemnities in relation to property and people. The likelihood of these provisions being invoked and the cost incurred could significantly increase as a result of current events. Where such losses occur, the effectiveness of the indemnity will often hinge upon whether it is fault based or based on a strict liability structure. Any risk review will also need to take account of the availability of the project insurances to cover the relevant losses.
How the oil price may be affected by the current troubles is unclear but the trend is clearly upwards. The same can be said for the price of many other commodities. Whether this is driven by economic fundamentals or more by price speculation is unclear. However, pricing mechanisms under energy and commodity sale agreements will often include reference to an index which has an oil price or other commodity or inflation-linked component. Now is the time for contractual parties to review those provisions and ensure they are fully cognisant of the procedure for invoking them. Another factor to consider is currency – consideration should be given as to the base currency and who takes currency risk in the event of a significant diminution of value of the host country currency, another possible consequence of events such as those we are seeing currently.
Ultimately some scenarios may give rise to the need to take legal action against governmental bodies. Such bodies may be protected by sovereign immunity, unless immunity is waived and waiver is permitted by local legislation. Advice from local counsel may have to be sought on such matters.
Contact: George Booth
Banks hate volatility and uncertainty: their profitability in project finance transactions depends fundamentally on a very small proportion of borrowers defaulting on repayment. And typically, they have more cash at risk than the equity. So they will take a much more risk averse approach than commercial participants when faced with events which might lead to an interruption in construction or operation or, worse still, to expropriation. So when things start to go wrong, they will want the right to lend no further money and/or to recover the money already lent. Both actions will lead, sooner or later, to project collapse. Some things to watch out for: has a material adverse change occurred? Are sanctions being imposed? Is the government threatening expropriation or asserting an inability to pay its debts? Did the project agree to domestic governing law and/or in-country dispute resolution? Are IFIs like IFC or EBRD involved that might provide a degree of "halo" protection?
For investors/developers: to protect the project, they should obtain advice whether the circumstances could give other parties the right to take adverse action against the project. And they should consider preparing response plans to differing levels of uncertainty and threat and then "stress-testing" those plans, both technically and legally.
For lenders: preparation is also crucial. Lending groups can be slow to make dramatic decisions. But since they are one step removed from project activities, information is key. Lenders need to impose whatever additional reporting requirements they can on the project company so that they have the best chance of anticipating the train wreck, rather than reacting to it after the event. They should ensure that their legal and other advisers are briefed and standing by, even if they are not yet active. There will be little time to get them on board when the troops – or worse still, the insurgents – surround the project site.
Contact: Peter Gray
From buildings to infrastructure to hydrocarbons, international corporations are engaged on a range of projects in volatile markets around the world. The effect of social and political disruption on the rights and obligations of such corporations will depend on the terms of project contracts and on the applicable local laws.
Project participants need to look carefully at their project contracts. Apart from usual time and money claims which might arise, contracts will often have specific provisions dealing with situations of social and political disruption. For example, contracts influenced by the FIDIC suite may excuse parties from their obligations during a period of "force majeure" (as defined) and give rise to entitlements to extra time and perhaps also money.
Importantly, in civil law countries that have been influenced by the Napoleonic code (such as many countries in the Middle East and North Africa), contracting parties may find that the local law gives them various forms of relief. This may include automatic termination of the contract in the event that performance becomes "impossible" due to a force majeure event or the relaxation of obligations if performance has become "oppressive".
If the local court system has broken down, contractors may be exposed to additional risks in relation to bonds. The unavailability of urgent court intervention may mean that unwarranted bond calls cannot be challenged and bond proceeds transferred offshore. In circumstances where a contractor may have lost control of its site, project participants should consider who bears the risk of damage to the project and materials on site – and the extent to which insurance will cover damage and / or theft. The same goes for plant, equipment and temporary works.
Finally, in the context of government contracts, international corporations should weigh the legal and practical realities that arise from regime change. This will depend to a large extent on the counter-parties to those contracts (for example, state-run businesses versus the government itself).
Contact: David McElveney
Insurers have been reviewing their policy wordings since the uprising in the Middle East began. With no sign of abating and brokers helping their Insureds to present their claims, a very careful analysis of the coverage provided under All Risks and Political Violence policies is essential. For whilst many policies appear prima facie to cover property damage caused directly or indirectly by the recent events, such cover is often diluted or even excluded by way of Special Conditions, endorsements or political risk exclusions only then for some cover to be reintroduced by way of buybacks. In addition, the meaning of commonly used terms such as "hostilities", "civil war", "mutiny", "civil commotion", "warlike operations", "military rising", "rebellion" and "revolution" will likely prompt debate between insurers and their insureds and brokers just as they did recently following the riots in Thailand.
Since 2003 and the UN's lifting of sanctions, Libya has been considered by many insurers as politically stable. This encouraged some underwriters to take a more relaxed approach to writing risks in Libya compared to other areas of the Middle East and indeed their policy wordings may not offer as much protection as they now hope.
Whilst the energy and power market can expect an increase in claims for property damage, wider claims must also be contemplated. Disruption to supply services could prompt contingent business interruption claims. This is not ordinarily covered under standard BI policies and is often subject to numerous conditions and therefore such terms should be read with care before coverage is confirmed or denied. Claims for business interruption and DSU will be significant due to prolonged lead times for spare parts caused by the damage to infrastructure and breakdown of transportation systems. The imposition of a no fly zone over certain parts of the Middle East such as Libya will only serve to increase the value of those claims.
Close attention should be paid to the law and jurisdiction clauses governing the policy. In particular, if the policy refers disputes to arbitration insurers may have difficulty enforcing their awards because Libya has not acceded to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) and therefore all arbitration awards must be approved by the Libyan Courts before they can be enforced. This can be a long, complex and therefore expensive process.
Contact: Sarah Drury
Health, Safety, Security and Environmental (HSSE)
From a HSSE perspective the political unrest poses potentially catastrophic problems. We have a 24 hour emergency support hotline should you need our help. The number is +44 (0) 20 7648 1500.
In relation to the upstream oil and gas sector, clearly, wells cannot simply be left in an unsafe condition. In terms of who is responsible for what, this will all be set out in the contractual documentation between all of the relevant parties. Emergency plans must be actioned and the well must be made safe. A failure to do so could lead to a catastrophic event such as a blow out or pollution incident. In such a case the contractual liability regime will take effect although there would almost certainly be issues of gross negligence or wilful misconduct. All relevant HSSE standards must be met and where required Government notifications must be made.
Usually Petroleum Concession Agreements and Production Sharing Agreements provide that if an incident affects the environment, the operator shall notify the Government and promptly implement the relevant contingency in accordance with good international petroleum industry practices.
Environmental indemnities may also apply in the event of a catastrophic environmental incident. For example, in oil field services agreements, there are often mutual environmental indemnities between the oil company and the contractor. There is also often an obligation on the contractor to comply with all statutory requirements and approved HSSE codes of practice, together with the oil company's HSSE policies. Normally, failure to meet these requirements will be regarded as a cause for termination of the contract without notice and without financial penalty to the oil company.
Joint Operating Agreements usually include obligations on the operator to conduct joint operations in accordance with the HSSE Plan and conform with HSSE laws/regulations. With regards to liability insurance, if a pollution incident occurs as a result of civil commotion, war or terrorism, it would usually be excluded under the civil commotion, war or terrorism exclusion rather than the pollution exclusion.
Contact: Georgina Crowhurst
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.