Despite oil downturn and COVID-19, force majeure relief not common in energy sector

Evading contractual obligations not in the best long-term interests of most companies, says lawyer

Despite oil downturn and COVID-19, force majeure relief not common in energy sector

Across Canada, every corporate commercial law practitioner is dealing with the fact that companies are increasingly at risk of being unable to perform contractual obligations, says Lucas Morrison, Calgary partner at Bennett Jones LLP. But despite the headlines and talk about force majeure clauses, and though the oil-price crash and COVID-19 pandemic are exactly what the clauses are designed for, Morrison is not seeing their widespread invocation in the Western Canadian energy sector, he says.

Companies are determining that evading contractual obligations are not in their best long-term interests, Morrison says.

“There is still a recognition here with energy companies, across the board, in Western Canada that no one in the production-to-consumer chain is immune or unaffected,” Morrison says. “There still is an undercurrent of a longer-term, pragmatic view and collaboration occurring between producers, suppliers, joint-venture partners. If parties start invoking force majeure and other relief clauses across the board, I think there's recognition that that has a ripple effect and is going to be counterproductive to longer-term health and getting over the current situation.

“From the last month or so of calls I've been getting and meetings I've been having, there's a streak of resiliency along with the anxiety and I think still a lot of collaboration and optimism happening.”

Force majeure clauses can excuse a party from fulfilling obligations due to unforeseeable circumstances. Canadian Lawyer InHouse has reported that in the wake of the economic turmoil of the COVID-19 pandemic, organizations across the world are invoking force majeure to avoid or postpone contractual obligations.

Morrison acts for energy companies on commercial transactions, both in Canada and internationally. Prior to the pandemic’s impact on the economy, his sector was already facing extraordinary challenges, he says.

“In Western Canada and particularly in Alberta, for the Canadian oil and gas industry, I think there's unprecedented levels of uncertainty, financial distress, liquidity challenges that are present even with government intervention so far,” says Morrison. “And I think there is some anxiety and recognition that it's going to be a huge uphill battle, that their downturn is going to be deep and slow here, both due to COVID and issues predating COVID like access to markets and price differentials for Canadian oil and gas.”

While there was not a widespread wave of relief through the invocation of force majeure clauses, he says he is receiving many inquiries on the subject as companies plan, in light of the undetermined length of COVID-related public-health measures. He adds that aside from showing the pandemic and oil downturn as a force majeure event, there are “other hurdles” to the contractual mechanics. There are often express exceptions or exclusions in energy contracts and parties need to ensure they’re doing everything they can to mitigate the force majeure’s detrimental effect on their performance, Morrison says.

“The mere fact that it's harder to perform and it's more expensive or unprofitable, that alone might not mean you're entitled to relief,” he says. “The short story is, you really got to kind of dig down into what you negotiate in your agreement and get really specific on circumstances around your commercial relationship.”

Contractual relief, in general, is also being impacted by provincial essential-services designations, which include many aspects of Alberta’s energy sector, Morrison says. Being tagged an essential service creates a tension between the “constantly evolving” government requirements and remaining able to function economically. Certain contractual relief measures require an entity to be “completely shut down from operating,” which an essential service will not be.

“That's an important thing to take into account when you're trying to figure out what your contractual rights and remedies are,” he says.

Companies also need to ensure they are taking advantage of every government relief program available, if they are going to make a claim for relief under a contract, Morrison says.

“Your counterparty is probably going to say, ‘well if those programs are available to you, you need to apply for them.’ And as part of your mitigation you need to be taking advantage of things you can to make sure you can perform,” he says.

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