Energy markets are grappling with a string of force majeure declarations across the Middle East, creating complications and potential disputes for buyers and traders affected by upstream disruption.
In the last week, producers in Qatar, Iraq, the UAE, Kuwait and Bahrain have notified counterparties that they are no longer required to fulfil certain pre-existing contractual obligations due to Iranian strikes on infrastructure and shipping routes.
QatarEnergy declared force majeure on long-term supply contracts affecting customers in Italy, Belgium, South Korea and China after attacks took out 17% of its LNG export capacity, while Iraq’s declaration covered all oil fields developed by foreign oil companies.
At Fujairah in the UAE, where storage facilities were damaged on March 3, bunker suppliers including Mediterranean Eastern Enterprise have served force majeure notices. State-owned oil companies in Bahrain and Kuwait have also taken similar steps, respectively citing attacks on refining capacity and threats to vessels in the Strait of Hormuz.
The situation could have far-reaching implications for an energy market already grappling with severe supply disruptions, legal experts have said – particularly for a buyer of oil or LNG whose supplier has issued a notification.
In that scenario, some entities can be “quite quick” to consider making a declaration, said Baldev Bhinder, managing director of Singapore law firm Blackstone & Gold.
“It’s not sufficient to simply say my supplier has declared force majeure… and my supplier’s force majeure is my force majeure,” he said during a March 24 webinar. “That is a slippery and costly position to take, I think, if it was to go into arbitration.”
Sumeet Malhotra, head of the commodities and international trade practice at law firm WFW, said that because force majeure is a feature of a contract rather than a common law principle, entities taking that step “need to ensure that declaration is valid in all respects”.
“If the contract has a force majeure clause you have to comply with all the technical requirements within that clause,” he said. “Otherwise, you risk not being able to avail of the defences provided.”
One such requirement could be that notification is made within a certain period of time, meaning that for some, the “clock is ticking”.
“Another difficulty is that the doctrine of force majeure has no sympathy for your commercial situation,” Malhotra said.
“The mere fact that a transaction has become more commercially onerous to perform does not, in and of itself, permit you to declare force majeure. Transiting the Strait of Hormuz is infinitely more expensive and more risky, but the strait isn’t closed.”
Blackstone & Gold’s Bhinder said entities declaring force majeure must take steps to mitigate the impact of the situation, which can prove a “highly sensitive” issue.
“This is where I see a whole bunch of disputes happening,” he said. “Mitigation could be what other sources of crude oil you could obtain, what other vessels you could secure, what other refined products you could have obtained.”
Bhinder said efforts must be reasonable – mitigation “doesn’t require you to go to the moon and get crude oil” – but steps taken would likely be considered if a dispute goes to arbitration. He suggested carefully documenting those efforts is “key”.
“They will seek evidence of you seeking that mitigation, trying to get quotes, and trying to get substitute cargo,” he said.
“A laid-back, nonchalant attitude of ‘my supplier’s passed me a force majeure notice so I’m passing it on’ I don’t think will cut it.”
Baldev Bhinder, Blackstone & Gold
The ease of finding substitute cargoes varies from case to case, Bhinder noted. While it may be theoretically easier for crude oil than LNG, because the market is typically more liquid, refineries may then have to factor in timing considerations and the need for blending to ensure feedstock is appropriate.
If an affected party ultimately does buy substitute cargo at a higher price, it may seek to pass those costs onto the party that has failed to perform, Bhinder added.
“At some point someone is going to have to put their hand into their pocket and pay for the extra vessel, pay for that cargo, and once you do that, you’re going to look towards your counterparty,” he said. “That’s where we’re likely to see legal claims.”
The lawyer added that a force majeure declaration does not negate a payment obligation under a letter of credit, provided cargo has already been loaded and a bill of lading issued.
“The letter of credit has very little interest… in looking into issues of force majeure,” Bhinder said. “If the letter of credit says you will pay upon presentation of a bill of lading, meaning cargo has been loaded, that’s it: you pay. It’s purely a payment instrument.”
