Corporate Law Update

This week:

• The High Court rules that a party could not end a contract on the basis of force majeure when there were other reasons it could not carry out its obligations
• The Government publishes yet another draft of the regulations designed to stop contract parties from restricting the ability to assign contractual receivables
• The London Stock Exchange announces changes to the AIM Rules for Nominated Advisers
• The London Stock Exchange announces a consultation on changes to its Admission and Disclosure Standards

Company could not rely on force majeure clause

The High Court has found that a company was not entitled to end a contract due to force majeure, because its failure to comply with the contract was not caused solely by the force majeure event.

What happened?
Seadrill Ghana Operations Limited v Tullow Ghana Limited concerned a contract under which Seadrill provided a floating production storage and offloading vessel (or FPSO) to Tullow. An FPSO is a floating vessel used to receive, process and store hydrocarbons until they can be offloaded to a larger vessel, such as a tanker.

Tullow had planned to use the FPSO in two oil fields in offshore Ghana over which it had exploration rights.

Under the terms of the contract, Tullow was able to end the contract at any time “for convenience” (i.e. without giving a reason), in which case it would pay Seadrill a “for convenience” fee equal to 60% of the headline contract rate for the rest of the contract term.

In addition, Tullow was entitled to end the contract if a force majeure event arose which prevented Tullow from fulfilling its contractual obligations, and the event continued for 60 consecutive days.

The contract specifically stated that a drilling moratorium imposed by the Ghanaian government would constitute a force majeure.

What is a "force majeure"?
Force majeure (or FM) is a contractual mechanism that relieves a party from liability for breach of contract if the breach is caused by an event outside the party’s control. It is designed to recognise that a party should not be culpable if it simply cannot avoid contravening the agreement.

An FM clause normally suspends a party’s obligations while it tries to rectify the issue. It will also normally allow a party to end the contract if the FM is not resolved after a specified period of time.

The contract will usually set out what constitutes an FM. As we mentioned in our Corporate Law Update earlier this year, this often includes a rather bleak panoply of natural disasters, epidemics, civil unrest and war. However, if the contract relates to a specific project, the parties can (as they did here) include more specific events in their definition of “force majeure”.

What was in dispute?
Over time a territorial dispute arose between Ghana and its neighbour, Côte d’Ivoire, over who owned which parts of the oil fields. In April 2015, Côte d’Ivoire obtained an order requiring Ghana to prevent new drilling in the disputed areas. This led to Ghana imposing a drilling moratorium over parts of the fields.

In addition, in February 2016, a technical problem arose on the FPSO. Concerned by the fault, the Government of Ghana refused to approve Tullow’s plan to develop and drill one of the oil fields.

In March 2016, Tullow notified Seadrill that it was terminating the FPSO contract under the FM clause. Tullow’s notice referred to both the drilling moratorium and the Ghanaian government’s refusal to approve its drilling plan. It alleged that both events prevented Tullow from performing its obligation under the FPSO contract to provide Seadrill with a drilling programme.

Seadrill rejected Tullow’s notice. It argued (among other things) that Tullow’s failure was caused both by an FM event (the moratorium) and a non-FM event (the plan refusal). In those circumstances, Seadrill said, Tullow could not rely on the FM clause to end the contract.

This issue was important. If Tullow could end the contract under the FM clause, it would not be required to pay the “for convenience” fee. However, if the FM clause was not available, it would only be able to end the contract “for convenience”, so incurring the fee.

What did the court say?
The court agreed with Seadrill. It said the moratorium was one reason why Tullow was unable to continue drilling and so could not provide Seadrill with a drilling programme.

However, the greater impediment to continued drilling was the Ghanaian government’s refusal to approve Tullow’s drilling plan. That refusal did not arise from the arbitral order or the moratorium; it arose from the technical problem affecting the FPSO, which was not an FM event under the contract.

The judge therefore concluded that Tullow’s breach of its obligations arose from both an FM event and a separate event that did not constitute a force majeure.

Drawing on previous case law, the court concluded that Tullow was not entitled to end the contract on the basis of a force majeure.

Practical implications
This decision emphasises the need to tread carefully when trying to invoke an FM clause. Normally it is not enough to show that a force majeure has occurred. Often a party will need to show that an FM event actually prevented it from fulfilling its contractual obligations and that it was the sole cause.

The operation of an FM clause will always depend on the precise wording of the contract. However, if looking to end a contract under an FM clause, there are certain questions a contact party can ask itself:

• Is the event within the scope of the FM clause? The clause will normally set out what constitutes an FM. If the event is not listed, the party is unlikely to be able to invoke the clause.
• Does the event need to have prevented performance of the contract? Can a party invoke the FM clause if the party’s performance is merely hindered or delayed?
• If so, did the event actually prevent the party from performing a contractual obligation? An FM event might make a contract unprofitable or compromise a contract party’s objectives, but if it doesn't result in a breach of contract, it may not be possible to use the FM clause to end the agreement. Likewise, if the party was looking to end the contract anyway, there may be an argument that it was not the FM event itself that led to the party failing to perform.
• Are there any other reasons why the party is unable to perform its obligations? As this decision shows, if the failure is also attributable to an event that is not an FM, the party will probably not be able to end the contract under the FM clause.

Another draft of the receivables regulations published

The Department for Business, Energy and Industrial Strategy (BEIS) has published yet another draft of the regulations designed to nullify contract clauses that stop a party from assigning its right to payment.

BEIS first published draft regulations in December 2014. The purpose of the regulations was to open up invoice finance to smaller businesses by removing contractual obstacles. However, the original draft regulations were perceived as having various flaws, and BEIS has since been working on successive drafts to produce a final, workable version.

The latest draft regulations, if approved by Parliament, would provide as follows:

• General prohibition. A contract term would be of no effect to the extent it prohibits a party from assigning a receivable (i.e. a right to payment) under that contract or any other contract, or if it imposes a condition or restriction on a party’s ability to assign a receivable.
• Anti-avoidance. In addition, a contract term would be of no effect if it prevents an assignee from valuing a receivable or determining whether the receivable is valid or enforceable. This is designed to prevent businesses from circumventing the prohibition.
  
  The draft regulations now set out 13 categories of information that are relevant in this regard. If the contract prevents the assignee from obtaining any of these details, it will be regarded as preventing the assignee from valuing or assessing the receivable.
  
  These details include (among other things) the names of the contract parties, the contract goods or services and the date on which they are to be supplied, the amount of any discount, the total amount of VAT chargeable, and the credit period for payment.
  
  In essence, this means that it will be difficult to keep certain, core information about the contract confidential, as it must be available to a potential assignee.
  
  
• Exemption for large enterprises. The regulations now state that the prohibition will not apply if the supplier (i.e. creditor) is a large enterprise. In other words, this would allow small businesses to continue to include prohibitions on assignment when dealing with large businesses.
  
  Broadly speaking, for these purposes, a company or limited liability partnership (LLP) would be a “large enterprise” unless it is small or medium-sized and does not form part of a large group.
  
  There is also an exemption where the supplier is a special-purpose vehicle (SPV) that meets certain criteria.
  
  
• Exempt contracts. The draft regulations continue to exempt certain financial services contracts, real estate contracts, consumer contracts, petroleum licences, contracts under the low-carbon contracts for difference (CfD) regime, and contracts with a national security dimension.
  
  However, the new regulations also exempt contracts to acquire a business or an interest in a firm; securities options, forwards, swaps and other derivatives; certain infrastructure contracts; and lease contracts for assets other than land.
  
  In particular, this removes previous uncertainty over whether the prohibition would apply to restrictions on assignment in share and business sale agreements. It will not.
  
  
• Territorial scope. As before, the regulations would only apply to contracts governed by the law of England and Wales or by Northern Irish law, but there are deeming provisions to prevent parties from “contracting out” of the regulations by choosing Scottish law or some other law.

The draft regulations have been laid before Parliament, but we await a date for them to be approved. If approved, they would apply to contracts entered into on or after 31 December 2018.

LSE amends AIM Rules for Nominated Advisers

The London Stock Exchange (the “Exchange”) has published AIM Notice 52, announcing changes to the AIM Rules for Nominated Advisers (or “nomads”). The changes broadly track the proposals previously announced by the Exchange in AIM Notice 51, but with two changes.

The main points to note are:

• Firms wishing to become or continue as a nomad will need to satisfy new, additional eligibility criteria. These include demonstrating “appropriate financial and non-financial resources”.
  
  However, the Exchange has not adopted its original proposal to require new applicants to show they have “adequate risk management systems”, as it believes this is already covered by the requirement to have “proper procedures” in place.
  
  The Exchange does not intend to review existing nomads against the new criteria, unless an issue is identified as part of the Exchange’s supervisory work or relevant information comes to its attention bringing a nomad’s ability to comply with the continuing eligibility criteria into question.
  
  
• The Exchange would be able to refuse approval to a prospective nomad if it feels the applicant (or any of its shareholders or officers) might be detrimental to the reputation or integrity of AIM. This could be the case even if the applicant satisfies all of the other eligibility criteria.
• The rules would clarify which events a nomad is required to report to the Exchange. These would now include the commencement of any investigation or disciplinary proceedings relating to the nomad’s conduct. However, the Exchange has not adopted its original proposal to extend this to investigations into the conduct of the nomad’s employees.
• A new Rule 27 will allow the Exchange to take steps to address poor nomad performance, including requiring remedial action, imposing restrictions or limitations on nomad services, and suspending individual employees’ approvals.

The Exchange has published an updated set of Rules, as well as a mark-up showing the changes it has made (including the proposals it has not carried through).

The amended Rules come into effect on 30 July 2018.

LSE consults on changes to Admission and Disclosure Standards

The London Stock Exchange (the “Exchange”) has published Market Notice N13/18, in which it is consulting on proposed changes to its Admission and Disclosure Standards (the “Standards”).

The Standards apply to a company seeking to admit securities to the Exchange’s Main Market (including the High Growth Segment or Specialist Fund Segment) or Professional Securities Market (PSM). Some parts also apply to admission to the Exchange’s International Securities Market (ISM). The Standards do not apply to a company seeking admission to AIM.

The main change is to extend the Standards to companies looking to admit depositary receipts (DRs) to the new Shanghai-London Stock Connect Segment (the “Shanghai Segment”) of the Exchange’s Main Market. The Shanghai Segment is a collaboration between the Exchange and the Shanghai Stock Exchange to allow global investors to access Chinese A-shares through a DR programme.

Companies seeking admission to the Shanghai Segment would need to comply with the Standards, including a new schedule that would apply specifically to Shanghai Segment applications.

The notice also proposes other changes, including an ability for the Exchange to cancel an issuer’s admission to trading if there are special circumstances that preclude normal dealing in the issuer’s securities. This would include where the securities have been suspended for more than six months.

The Exchange has asked for comments by 7 September 2018.