Dear Friends of CRLN We’ve got another special treat for our readers! Ayodele Oni shares insightful thoughts on drafting boilerplate clauses in Energy sector contracts. If you’d also like to share articles on any area of commercial law please write to us at info@clrnltd to talk about scheduling you as a guest writer. All articles are also featured on our blog and remain the copyright of the original author. Enjoy this week’s article! We look forward to receiving comments and feedback from you on our blog or write to info@clrnltd. CLRN Editor Boiling Over - watch those standard clauses in energy sector contracts! INTRODUCTION: In contract negotiations, commercial persons and their attorneys indeed focus on the business terms and conditions of their contracts or agreements and would typically spend little or no time addressing the “boilerplate” provisions typically found at the end of such contracts or agreements. Boilerplate clauses are usual clauses that are contained in agreements and which can be easily copied from a similar agreement and inserted in another. Not all boilerplate clauses, however, are appropriate for all types of agreements as industry practices often times dictate what boilerplate provisions should be placed in certain types of contracts. Generally, there are various examples of boilerplate provisions and these include notices, force majeure events, expert determination, further assurances, governing law, liability provision (i.e. whether liability is joint, several or joint and several) etc. It is not uncommon for people to adopt (by copying and pasting) the boilerplate clauses used in one agreement, for a similar agreement. At other times reviewers or drafters of agreements adopt these and merely change the factual circumstances (e.g. for notices addresses of the parties are changed). BOILERPLATE CLAUSES IN THE ENERGY SECTOR: Where boilerplates are not given the attention they deserve when reviewing, drafting or negotiating energy sector contracts, huge financial liability, which could have been prevented, may arise; more so where it is the energy sector where deals or transactions are worth, in many situations, billions of United States Dollars. In the energy sector in particular, many of the boilerplate provisions require more than just copying and pasting. Some usual boilerplate provisions in energy sector contracts include clauses relating to force majeure, liquidated damages, confidentiality, expert determination, liability (joint and or several) etc. BOILERPLATE CLAUSES REQUIRING PROPER REVIEW Force Majeure A force majeure clause sets out the circumstances in which a party to a contract could be excused from performing its contractual obligations where such performance is precluded or made impossible by state of affairs outside that party’s control. In the absence of a force majeure clause, the parties to an agreement may only be able to rely on the common law doctrine of “frustration” which may be inauspicious for one or more parties. Although, the term “force majeure” is frequently used, it should be properly defined and not just copied and pasted. This is so, because a clause in an agreement which provided that “the usual force majeure clauses shall apply” was held by an English court to be void for uncertainty. There is, therefore, the need for certainty. A good example of where the need to properly draft a force majeure clause may arise is a situation where it is necessary to determine whether every conceivable type of strike is a force majeure event or whether strikes which amount to force majeure events are restricted to general strikes. Also, when advising a supplier of goods or services in the energy sector, it is prudent to include a force majeure clause that covers a wide variety of events. It may even be appropriate to draft a wide force majeure clause which covers in more detail the supplier’s inability to perform the contract (for example, a force majeure clause which includes an unexpected price rise in labour or raw materials that would make it undesirable, but not impossible, to perform the contract). Setoffs: This clause may or may not prevent one party from deducting money owed from money payable to the other party pursuant to a contract or transaction. A company which intends to obtain receivables financing should be wary of having a set-off against it in its agreement. This is because financial institutions would almost certainly not give receivables financing where a contract which is the basis for obtaining receivables financing contains a set-off clause. Confidentiality Clauses: As far as the energy sector is concerned, there are lots of collaborative efforts seen in the form of Areas of Mutual Interests, Joint Bidding and studies etc., which lead to the execution of agreements with confidentiality clauses. Typically, in these agreements, each party covenants to keep confidential the existence and terms of those agreements and all information received or obtained as a result of negotiating, preparing, executing, performing or implementing it and in particular, information which relates to the other party or any member of its Group or any agent or subcontractor acting on its behalf. In this respect, it is advisable for advisors to such companies, to consider very importantly, the size of persons authorized to receive these pieces of information without the company which is giving such information being in breach under any confidentiality clause. In this case, the inclusion of prospective financiers and prospective partners, should be given due consideration by a party likely to seek some form of financing or the other, as financiers may need some of the information classified as confidential. Expert Determination Clause In many energy related contracts such as Engineering, Procurement and Construction (EPC) contracts, it is not unusual for expert determination to be a dispute resolution mechanism for certain technical matters. It is therefore, important for a person drafting or reviewing such a contract to consider a number of issues including the qualification/ disqualification of experts. In this instance, it may be circumspect to exclude any persons who may have had any relationship of a pecuniary nature with any of the parties to the contract. Further Assurances Clause The purpose of a further assurances clause in an energy sector contract is to create an obligation on the part of one or more parties to execute any further documents or do any other acts that may be required to give effect to the terms of the agreement or a transaction. A further assurance clause would be used, for example, in an upstream oil and gas assets acquisition agreement to ensure that the seller does whatever is necessary for the purchaser to acquire perfect title to the assets and to obtain the full benefit of the rights and remedies conferred upon it in the agreement. As a person drafting or reviewing such a contract on behalf of a party receiving such assurances, beyond adopting an existing further assurances clause, it may be advisable, to insert a “power of attorney” clause, in which the party giving the further assurance, as a donor gives the other party a power of attorney to execute any documents or take any actions necessary. Liability (Joint and or Several) Considering that many energy sector contracts involve collaborative efforts, it is not strange to have two or more parties owing obligations under a contract to counterparty. Where a party under an energy sector contract is entitled to receive the benefit of obligations from two or more parties (“co-obligors”), it makes good commercial and legal sense to insist that such obligations are given on a joint and several basis. If the parties assume liability jointly and severally in relation to a particular obligation, each is treated as having assumed the obligation both collectively, on behalf of all those bound, and also individually for himself. Where these obligations arise and become enforceable; in such circumstances, the obligee may choose to proceed against any one or more of the co-obligors for the full performance of the obligation, or for all his loss or damage arising from a breach or failure by any of them to perform, irrespective of which of them caused the breach. By way of illustration, if James and John jointly and severally agree to pay Peter $1 million, then Peter is entitled to $1 million and may claim the whole of it from either James or John. Therefore, there is a joint obligation and there are also separate obligations. However, the obligations are not cumulative and Peter is entitled to $1 million in total. Payment of $1 million by either obligor will discharge the liability of both of them (James and John). Where two or more parties are jointly liable, the position is in many respects the same as if they were liable jointly and severally. However, if one party jointly liable with others dies, his personal representatives are released from liability, leaving the survivor(s) solely liable. On the other hand, either or both obligors may want to consider negotiating a several liability clause, so that they are not liable for a breach or some other obligations arising on the part of another party to the contract. The Obligee would be happy to be owed a joint and several obligation whilst each obligor should be happy having several liability to the oblige. Liquidated Damages Clause Liquidated damages are amounts or rates payable upon breach of a contract, or upon the occurrence of an event. The purpose of a liquidated damages clause is to make it easier for the party affected by the breach to recover its loss, without having to prove actual loss or become involved in arguments as to the remoteness of certain types of consequential or indirect losses. Typically, provisions for a liquidated damages clause often appear in commercial contracts, for example in the supply or sale of goods, and in the fields of construction and engineering. Under the common law, which the Nigerian legal system is fashioned after, liquidated damages provisions are generally enforceable provided they represent a genuine pre-estimate of the actual or greatest loss likely to be sustained by counterparty as a result of a breach. In reviewing or drafting such clauses a number of issues should be taken into consideration, including the fact that where the Court decides that the clause is a penalty clause, it will be unenforceable and the innocent party will not be able to enforce it. Additionally, it should be noted that by virtue of industry practice, some contracts have a cap on liability. Conclusion: When due consideration is not given and critically analysis done when adapting or adopting boilerplate provisions, the consequences, which may arise several years after drafting such contracts, may be very dire. It is therefore very important to avoid wholesale adoption of boilerplate clauses without taking a party’s interests and circumstances into consideration. A good grasp of industry practices and the relevant laws and statutory instruments is also very important when drafting even boilerplate clauses. For more on energy contracts, please read the book, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business”. Ayodele Oni (ayodeleoni@outlook), a Senior Associate with the Law Firm Banwo & Ighodalo specialises in international energy (oil, gas & electricity) investment law. Note: Articles do not constitute and are not intended to be legal advice and are not the views of Commercial Law Reports Nigeria Ltd.
Posted on: Fri, 19 Jul 2013 12:13:24 +0000
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