A recent ICC arbitration award highlights the importance of the governing law on force majeure clauses. ConocoPhillips invested in an E&P project located in Venezuela’s offshore territory, and entered into an association agreement with a Venezuelan state-owned oil company, CVP. Later, Venezuela passed the 2007 Nationalization Decree, which initiated a process of what ultimately expropriated specified hydrocarbons projects, including ConocoPhillips’s project. Consequently, CVP stopped performing under their association agreement.
ConocoPhillips commenced arbitration against CVP for damages arising from CVP’s nonperformance. CVP argued that its performance was excused by force majeure. The association agreement’s force majeure clause provided in relevant part:
Failure of Party to fulfill any obligation incurred under this Agreement shall be excused . . . except that if the Event of Force Majeure is an act of the Venezuelan State that is not of general applicability, such Event of Force Majeure shall not preclude an action for damages against CVP for the nonperformance of the relevant obligation.
Based on this excerpt, the force majeure clause only protects against an act of the Venezuelan State that is of “general applicability.” Accordingly, the arbitral tribunal had to determine whether the 2007 Nationalization Decree was an act that was not of general applicability.
The tribunal noted that the 2007 Nationalization Decree targeted “a list of [foreign oil companies] and agreements.” However, under Venezuelan law, legislation that targets identified entities or individuals can be a “general act.” Consequently, the tribunal determined that the decree was of “general applicability” even though its plain language suggests otherwise. As a result, CVP’s performance was excused under the force majeure clause.
Arbitration awards are not precedential. However, this award is instructive on how the governing law may impact the scope of force majeure clauses. One may question why the contracting parties limited state acts to those of “general applicability.” More importantly, however, the contracting parties apparently did not contemplate that Venezuelan law would consider legislation like the 2007 Nationalization Decree to be of “general applicability,” particularly, when it targets specific companies and projects. Consequently, this arbitration award is a helpful reminder that drafters should carefully read force majeure clauses in light of the governing law, because they may not adequately reflect the parties’ intention.
For more information, see ConocoPhillips Gulf of Paria B.V. v. Corporacion Venezolana De Petroleo, S.A. and Petroleos De Venezuela, S.A., (ICC Case No. 22527/ASM/JPA).
Thompson & Knight, LLP
Andy Derman, Andrew Melsheimer, and TJ Auner
