- Consequences of cancelling international oil contracts
Only few months ago, it was inconceivable that international trade agreements might be cancelled under force majeure, economies like stock markets swing between extremes, and food supply chains become a point of contention between governments, but today all this is not only a possibility, it has assumed the dimensions of a fact. Pakistan is no different in undergoing such an ordeal. Pakistan too has international commitments and contracts, of which two are of pressing interest. One, being those related to oil, gas supplies and the other ones related to international debt obligations. Amidst the advent of corona, has the government of Pakistan, decided what it will do towards unfavourable contracts? Will the government reviews some of these contracts? Whether the government can afford frustrating “iron-clad” commitments, and how will the state of Pakistan move if such contracts are challenged in international arbitration councils? Is there a plan? Has anyone developed a plan and measured the consequences?
According to sources and newspaper reports, the Government of Pakistan is considering cancelling the international contract of supply of LNG from Qatar. The Government may also like to review many other obligations or deals, including Pakistan’s debt repayments. These two distinct contracts and obligations need to be analyzed separately. Oil, gas contracts are suppl-based products, and by that definition have distinct contracts which have a force majeure clause inserted in them. The LNG gas supply contracts have been in the limelight because those contracts were dubbed as being a deal which locked Pakistan into buying ‘expensive” LNG. Pakistan has been trying to wiggle its way out of the so-called LNG contract and has had different options evaluated in that scenario. The present political government wanted to renew the contract at lower rates. Does the arrival of the coronavirus provide a reason to back out of the contract? This must be analyzed in light of international arbitration and the principle of force majeure if Pakistan is not repeat the mistakes made in Reko Diq and the Indus Water Treaty and Kishenganga. Reko Diq is more relevant in this scenario as the international contractors went and challenged the cancellation of contract in the international arbitration court. The net result was a penalty running in billions of dollars.
Bilateral agreements and loans from international multilateral organizations are mostly made under a covenant whereby such debts or loans could be rescheduled, but that is not true for commodities like oil and LNG. Pakistan must weigh its options before exhausting or executing any available ones
The clause of force majeure is not limited to Pakistan. Many countries across the world are not considering or some even executing such clauses. According to some, this might be favorable especially in Pakistan’s LNG-related case. Just a few weeks back, according to news reports, Pakistan was interested in seeking better deals for LNG. Pakistan was not an exception. Japan’s Osaka Gas entered into arbitration last year with the marketing unit of Exxon Mobil Corp’s Papua New Guinea LNG project after a dispute during a price review. Indian gas importers have started discussions with Qatar on moving away from linking LNG prices to oil and are seeking cheaper rates. However, the Pakistan LNG contrac,t under the terms of the contract (as shared on the LNG Pakistan website), the company must give a 90-day termination notice and pay damages equal to the value of six cargoes, which is based on average Brent prices for the three months preceding the month the notice is served. It is advisable to take averages and also revisit the definitions of the above terms, contract clauses, and of course three-month averages which are roughly $ 29-35 (this is not accurate nor a substitute for a number offered by a technical expert).
The Principle of impossibilium nulla obligatio est, as it is often referred to, an obligation which is impossible to meet, is another term for force majeure. The frustration of the contract needs to meet two important conditionalities before they can be acceptable. One, that the event must be an insurmountable obstacle which renders performance absolutely impossible even though there is case law which tempers this requirement of absolute impossibility and holds that there needs to be a degree of reasonableness in assessing the impossibility. Two, the event may not be attributable to the defaulting party or its representatives, and the event’s consequences must be unavoidable. These two conditions will be applied across on Pakistan’s case if that is Pakistan calls for applying force majeure clauses. The burden of proof will then be on Pakistan to satisfy that the above conditions were met. This is the point where it is critical that Pakistan must strategize. The legal framework will revolve around these principles.
Some contracts are signed with powerful global conglomerate, others with states, while some are made with multilateral organizations such as the World Bank, the Asian Development Bank, and so on. The contracts made for goods (and services) such as oil or gas fall under a different scheme of laws, terms and framework. The later contracts are mostly governed under the force majeure and international arbitration schemes like New York convention, International Centre for the Settlement of Investment Disputes, World Intellectual Property Organisation, United Nations Commission on International Trade Law and so on.
Bilateral agreements and loans from international multilateral organizations are mostly made under a covenant whereby such debts or loans could be rescheduled but that is not true for commodities like oil and LNG. However when it comes to debt repayments to donor agencies, and multilateral organizations Pakistan needs to reschedule the loans repayment scheme. Pakistan according to sources is pursuing debt rescheduling on case to case basis.
Pakistan must weigh its options before exhausting any options or executing available ones.
