Force Majeure Clauses in Your Oil & Gas Leases
A force majeure clause provides contractual relief related to events (such as war, a labor strike, or extreme weather) or effects that cannot be reasonably anticipated or controlled. In the context of the spread of the novel coronavirus and the associated economic downturn, you will want to review your oil and gas leases to determine if they contain a force majeure clause and whether that clause will maintain your lease in effect in light of the developments relating to the COVID-19 pandemic.
Issues to Consider When Reviewing Your Force Majeure Clauses:
1. Identify the events covered by the force majeure clause.
- Review how force majeure events are defined and triggered. Consider whether the COVID-19 situation fits the definition of a force majeure event.
- Epidemics and pandemics generally will not be specifically defined as a force majeure event. The clause could still be triggered where it (i) covers labor and supply shortages (which are caused by COVID-19); (ii) broadly defines events as exceptional, beyond one party’s control, unavoidable, and not attributable to the other party; or (iii) includes broad catch-all language.
- Most force majeure clauses frequently list government rules or actions as a triggering event. Governmental orders, such as shelter-in-place orders, should be examined to determine if they trigger the force majeure clause.
- Courts generally find that economic hardship is not enough to constitute a force majeure event.
2. Consider how your clause links COVID-19 and non-performance.
- Consider what the link is between the failure to perform and COVID-19.
- A force majeure clause usually requires performance of contractual obligations to be “prevented,” “impeded,” “hindered,” or “delayed.” To rely on the clause, the event must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, “but for” COVID-19, a party must have been willing and able to perform.
3. Identify contractual notice requirements.
- The failure to notify in compliance with the terms of the force majeure clause could cause a waiver or limitation of your rights.
- Consider whether supporting details and evidence of the event and its effects must be provided with the notice.
- By when and in what form should notices (initial and subsequent) and supporting documents be served.
- Determine when the COVID-19 starts to affect your contract. If unsure, consider notifying your counterparty of the force majeure event at the earliest opportunity, followed by further periodic notices or updates regarding the continuing disruption so your claim is not time-barred.
4. Understand the tolling effects of a force majeure event.
- The force majeure clause may limit the term of the suspension or you may need to seek an extension of time.
5. Document evidence which supports your claim.
- You will have the burden of proof to support your claim of force majeure.
- Properly record and retain evidence of communications with your counterparties about the disruption and its effects, including order or service cancellations.
- You must mitigate the effects of a force majeure event. Document reasonable steps taken to do so.
6. Respond to force majeure notices.
- Failure to respond to a notice within stipulated time limits may constitute acceptance of the counterparty’s force majeure claim.
Application to the Habendum Clauses in Oil and Gas Leases.
- Some courts have held that a force majeure clause in an oil and gas lease applies to the covenants in the lease but does not apply to extend the term of a determinable fee interest, such as the habendum clause.
- You will have a stronger argument for an extension of the oil and gas lease if the force majeure clause specifically references the habendum clause and the operations or production related thereto.
- Many courts have supported an extension of the oil and gas lease even though the force majeure clause does not make specific reference to the habendum clause.
- A more favorable force majeure clause would be the following:
When drilling, reworking, production, or other operations are prevented or delayed, whether before or after the expiration of the primary term, by such laws, rules, regulations, or orders, or by inability to obtain necessary permits, equipment, services, material, water, electricity, fuel, access, or easements, or by fire, flood, adverse weather conditions, war, sabotage, rebellion, insurrection, riot, strike, or labor disputes, . . . this lease shall not terminate because of such prevention or delay, and the period of such prevention or delay shall be added to the term hereof.
About Davis Graham & Stubbs LLP
Davis Graham & Stubbs LLP, one of the Rocky Mountain region’s preeminent law firms, serves clients nationally and internationally, with a strong focus on corporate finance and governance, mergers and acquisitions, natural resources, environmental law, real estate, and complex litigation. Our lawyers have extensive experience working with companies in the energy, mining, technology, hospitality, private equity, manufacturing, asset management, and aviation industries. As the exclusive member firm in Colorado for Lex Mundi, the world’s leading network of independent law firms, DGS has access to in-depth experience in 100+ countries worldwide.