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The state of emergency and force majeure events in the petroleum sector

COVID-19 Alert

By Leopoldo Orlando de Amaral

1. Introduction

On 31 March 2020, the Mozambican Parliament passed Law n.° 1/2020 of 31 March (the “Ratification Law”) ratifying the declaration of a state of emergency (the “State of Emergency”) announced the previous day by Presidential Decree n.° 11/2020 of 30 March (the “Presidential Decree”), introducing preventive measures against the spread of COVID-19 in order to safeguard public health in Mozambique. The State of Emergency will be in force from 01 April to 30 April 2020.

The ratified Presidential Decree introduces extraordinary measures pertaining to the normal life of people and business. Although not a lockdown, it provides for closure of national borders for individuals (cargo still allowed), suspension of visas, restrictions on movement and gathering of people, quarantine measures, and mandatory rotational shift among for workers in order to facilitate social distancing in the work place.

Further to the Presidential Decree, the Council of Ministers approved a decree (Decree n.° 12/2020 of 2 April, or the “State of Emergency Decree”) to regulate the Presidential Decree. The State of Emergency Decree lists the names of borders and airports that are closed during the State of Emergency, including Maputo and Pemba international airports, the main airports used by international oil companies (“IOCs”) and their subcontractors in support of operations in the Rovuma Basin.

Although IOCs and their subcontractors are not required to suspend operations under the State of Emergency, the global spread of COVID-19, including in Mozambique, has affected their operations in the country. These challenges have been exacerbated by worldwide travel restrictions and social distancing requirements. The dimension and impact of the measures on business lead to a situation of force majeure.

2. Force majeure under Mozambique’s petroleum legislation

The Petroleum Law (Law n.° 21/2014 of 18 August) and the Petroleum Operations Regulation (Decree n.° 34/2015 of 31 December, or “POR”) do not contain a definition of force majeure. However, the Petroleum Law provides in Article 15 paragraph h) that petroleum operations rights holders may lawfully suspend performance of petroleum operations on account of a force majeure event. Hence, an exploration of force majeure in the context of the Mozambican petroleum framework is in order.

We begin by distinguishing between political and legislative risk, on the one hand, and the State of Emergency Decree on the other. Petroleum operations projects are generally classified as business concessions (an exception is made for the Rovuma Basin projects which through Decree-Law n.° 2/2014 of 2 December are classified as large scale projects) pursuant to the terms of the Public-Private Partnership Law (Law n.° 15/2011 of 10 August or the “PPP Law”), under which risks arising from political and legislative production are the responsibility of the State. Should the State of Emergency Decree be classified as an instance of political and legislative risk?  In our view it does not. Under the Mozambican Constitution, a state of emergency may be declared in the event, among others, of a public calamity (as in the present case). While “political and legislative risk” is not clearly defined in the PPP Law, it seems to have been the legislator’s intent to identify and assign responsibility for damages to large scale projects arising out of legislative production, as distinct from damage arising from other causes to which legislative production is a response. Nor is it internally coherent to deem the same instrument that enables requisition – the legal taking of private property by government under a state of emergency – one that, in the absence of any act of requisition, makes the government liable for damage to private parties. We can safely say that the State of Emergency Decree is not an act engendering “political and legislative risk” within the meaning of the PPP Law.  Rather, the State of Emergency Decree is one consequence of an event of force majeure as recognized in Article 18 of the PPP Law. Under that article, the state and the other persons subject to the PPP Law are obliged to mitigate the effects of force majeure “under fair terms for both parties … as well as for third parties affected, in accordance with the liability, obligations and rights contractually undertaken and applicable to each party.”

We note that it is possible for the Minister of Mineral Resources and Energy to issue additional norms and administrative measures during the State of Emergency. However, the Minister is bound to consider any possible commercial consequences of any administrative measure he may issue (Article 118 of the Petroleum Law Regulation).

Insofar as further statutory treatment of force majeure is limited, the language of the PPP Law is fortunate in adverting to the division of risk made by the parties contractually. For that is, conventionally, the practice in the Mozambican legal framework for petroleum and in the petroleum industry more broadly. Both the exploration and production concession contract (the “EPCC”) and joint operating agreement (the “JOA”) define force majeure events and their consequences. Let us then consider that definition and those consequences under the relevant contractual instruments.

2.1 Force majeure events under the 2016 EPCC

We will analyze this matter based on the publically available 2016 Model Exploration and Production Concession Contract, as approved by Council of Ministers’ Resolution n.° 25/2016 of 3 October (the “2016 EPCC”).

The 2016 EPCC starts by recognizing that during the exploration period there may be a need to grant additional time to compensate for a force majeure event that halted or disrupted exploration activities (Clause 3.5.d)). Indeed, the 2016 EPCC dedicates an entire clause to regulate a situation of a force majeure event, Clause 22.

Clause 22 of the 2016 EPCC defines force majeure as:

“any cause or event beyond the reasonable control of, and not brought about at the instance of, the Party claiming to be affected by such event, and which has caused the non-performance or delay in performance.”

It further states that:

“[w]ithout limitation to the generality of the foregoing, events of force majeure shall include natural phenomena or calamities including but not limited to, epidemics, earthquakes, storms, lightning, floods, fires, blowouts, wars declared or undeclared, transboundary hostilities, blockades, civil unrest or disturbances, labour disturbances, strikes, quarantine restrictions and unlawful acts of Government” (emphasis supplied). This same definition is adopted by the 2016 JOA.

The definition presented herein is broad in nature as it includes anything which is “beyond the reasonable control” of the party as long as the event was not brought about by the party that claims to be affected by it.  Lest there be any doubt, the definition also contains a non-exhaustive list, including “epidemics” and “quarantine restrictions”. Thus, it is beyond question that the COVID-19 epidemic, and the preventive and restrictive measures introduced by the State of Emergency to control it (including quarantine restrictions), are force majeure events. 

Clause 22 further states that as a consequence of a force majeure event concessionaires “shall be excused if, and to the extent that such non-performance or delay is caused by force majeure,” except in respect to an obligation to make payments under the EPCC. And, as to avoid any doubt of the consequences, it dictates that “the specified period shall be extended so as to take reasonable account of any period during which by reason of force majeure the concessionaire has been unable to carry out the programme necessary to exercise a right, carry out its obligations or enjoy its rights hereunder”. The Mozambican approach is consistent with the standard drawn by the Association of International Petroleum Negotiators (AIPN) 2012 Model JOA (Article 16), under which payment obligations are excluded from a force majeure event.

As in many other contractual contexts, it is not enough for a force majeure event to occur for parties’ obligations to be suspended; the party or parties claiming to be affected must affirmatively engage with the counterparty. Under the 2016 EPCC, the party claiming to be affected by force majeure:

“promptly notifies the other Parties of the occurrence” and “takes all reasonable and legal actions to remove the cause of force majeure but nothing herein shall require the Concessionaires, subject to applicable law, to resolve any labour dispute except on terms satisfactory to the Concessionaires.”

Once the force majeure event has ceased to exist or been removed, the party that claimed to have been affected by it:

“promptly notifies the other Parties and take all reasonable action for the resumption of the performance of its obligations under this EPCC as soon as possible after the removal or termination of force majeure.”

The 2016 EPCC provides that if a force majeure event continues for more than fifteen (15) consecutive days, the government and the concessionaires shall meet to review the situation and to agree on measures both can take to remove the cause of the force majeure so that the Petroleum Operations may resume. The 2016 does not contemplate termination of the EPCC based on a prolonged force majeure event.

The State of Emergency will, by the terms of the State of Emergency Decree, last for 30 days. At some point in that period, the government will assess whether the COVID-19 preventive and restrictive measures will be rescinded or maintained for a further period of time. Pursuant to Article 292 of the Mozambican 2004 Constitution, as revised by Law n.° 1/2018 of 12 June, a 30-day State of Emergency may be renewed for a total of three 30-day periods, i.e., up to a total of one hundred and twenty (120) days.

Of note, Clause 22 of the EPCC does not make any reference to subcontractors, which suggests that that this clause does not extend to subcontractors. And indeed, subcontractors are not party to the EPCC. Still, subcontractors do enjoy some of the rights and benefits of the EPCC, particularly certain fiscal benefits and other charges, immigration and employment rights, government warranties (see, e.g. Articles 11, 16 and 17 of the 2016 EPCC). And, as noted above, the PPP Law provides that the state and the other persons subject to it are obliged to mitigate the effects of force majeure “under fair terms for both parties . . .  as well as for third parties affected, in accordance with the liability, obligations and rights contractually undertaken and applicable to each party.”  Especially considering the organic link between the duties of the concessionaire and those of its subcontractors, the effect of a declaration of force majeure by a concessionaire under the 2016 EPCC must be carefully analysed to determine its prospective effect on the obligations of that concessionaires’ subcontractors to it.

What happens if the force majeure event is not removed?

2.2 Prolonged force majeure event

The 2016 EPCC does not address situations of prolonged force majeure event. As indicated above, after fifteen (15) days of a force majeure event, the concessionaire and the government shall meet to decide what to do, particularly if no one was successful in removing the force majeure event.

A prolonged force majeure event is also not defined under Mozambique petroleum legislation. Considering that the State of Emergency can constitutionally be prolonged up to one hundred and twenty (120) days, and that pursuant to Article 24.1 of POR “the intention of revoking a concession contract shall be preceded by ninety (90) days’ prior notice” and, further, pursuant to Article 24.10 of POR “abandonment occurs when the concessionaire, without justifiable motive, does not perform petroleum operations in the concession contract area for a minimum period of three (3) months”, it seems reasonable that any force majeure event persisting for more than ninety (90) days should be considered prolonged.

Should a force majeure event continue beyond ninety (90) days, then pursuant to Article 437.1 of the Mozambican Civil Code, a party may seek to terminate or modify the relevant agreement based on equity rules “if the circumstances that the Parties based their decision to contract have suffered an unforeseen change” provided that “the obligation assumed by the Party [the party claiming to be affected by the force majeure event] is gravely affected by the principles of good faith and are not covered by the normal risks of the agreement.” Basically, if there is an extraordinary change of circumstances in respect of an agreement after its formation and which renders it impossible to implement, the agreement may be terminated or modified on the initiative of one the parties.

For an existing contract to be terminated or modified based on an extraordinary change of circumstances (such as a prolonged force majeure event), the prescribed legal elements provided for under Article 437.1 of the Mozambican Civil Code must be cumulatively met.  Specifically, there must be a) change of circumstances that led the parties to enter into the agreement; b) the circumstances gravely affect the good faith to demand the fulfilment of the contractual obligations as agreed, and c) such obligations are not covered by the normal risks of the executed agreement. Various legal scholars agree that demanding the fulfilment of a contract under those circumstances would be tantamount to an injustice (António Menezes Cordeiro, Tratado de Direito Civil, Livro II Tomo IV, Almedina, Coimbra, 2010) (Luís Leitão, Direito das Obrigações, Volume II, 17ª Edição, Almedina, Coimbra, 2017).

Therefore, should a prolonged force majeure event occur under the 2016 EPCC, it is at least arguable that either party may make a claim and reach out to the other to terminate it or amend it accordingly. Should one the parties not agree, the matter may be referred to arbitration pursuant to Clause 26 of the 2016 EPCC.

3. Conclusions

The COVID-19 global pandemic and the preventive and restrictive measures introduced by government are unforeseen circumstances beyond any party’s control, i.e., a force majeure event, and that event may be invoked by a concessionaire (and perhaps by a subcontractor), or by the government, to suspend performance of certain contractual obligations.

Insofar as the 2016 EPCC and the 2016 JOA, and the broader legal framework for the Rovuma Basin projects and for petroleum operations in Mozambique are complex, any invocation of force majeure must be considered with due care and attention to the consequences thereof, including subcontractors’ obligations to the concessionaire. This is especially true to the extent that the force majeure event is prolonged.   

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