10 April 2020

Impact Of COVID-19 On Iraqi Oil And Gas Contracts And The Possibility Of Declaring Force Majeure

Aljad Law


Over the past several weeks and up to the time of writing of this article (26 March 2020), Iraq has registered a total of 382 cases of COVID-19, with 36 deaths (the "Outbreak").
Lebanon Coronavirus (COVID-19)
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COVID-19 Outbreak in Iraq and the Official Outbreak Response

Over the past several weeks and up to the time of writing of this article (26 March 2020), Iraq has registered a total of 382 cases of COVID-19, with 36 deaths (the "Outbreak"). The Outbreak has led the Iraqi government to take precautionary measures against the Outbreak including the establishment of a special national committee to contain the proliferation of COVID-19 and to issue the necessary related recommendations and decisions (the "Committee"). The Committee was established by virtue of Diwan Order 55/2020; it is chaired by the Minister of Health and Environment and includes among others representatives of the Ministry of Defence, Ministry of Interior, Ministry of Oil, Ministry of Foreign Affairs, Ministry of Transportation, the Civil Aviation Authority, the Iraqi Media Network and the Government of Kurdistan.

Some of the main actions/measures taken by the Committee include ("Outbreak Response"):

  1. Applying a national lockdown which is currently scheduled to extend until 11 April 2020;
  2. Enforcing a travel ban from and to Iraq (currently scheduled until 28 March 2020) and in any case restricting until further notice entries to Iraq of foreigners coming directly or indirectly from China, Iran, Thailand, South Korea, Japan, Italy, Singapore, Germany, or Qatar (with the exception of diplomatic and official delegations);
  3. Declaring that the Outbreak is considered as force majeure ("FM") with respect to all projects and contracts, as of 20 February 2020 and until the Ministry of Health announces the elimination of Covid-19.

Enforceability of the Outbreak Response implemented by the Committee

It may be argued that the Committee is vested with sufficient legal power and authority to implement the Outbreak Response actions/measures, particularly based on the following:

  1. Article 46 of the Iraqi Public Health Law grants competent authorities the power to take all the necessary measures to fight the spread of a disease declared as such by the Minister of Health. These measures may include (i) imposing a curfew and restrictions on entry and exit to/from infected regions, (ii) closure of public places that are subject to permitting/supervision by health authorities, and (iii) closure of educational institutions, factories, projects, state directorates and public, mixed and private sectors.
  2. the Council of Ministers, in its Decision 65/2020, endorsed the mandatory status of the Committee's decisions by resolving, among other things, to:
    1. Grant the Ministry of Health the power to shut down public and private institutions in case of non-compliance with the decisions of the Committee;
    2. Compel the ministries, non-ministerial parties, governorates, and public and private institutions to immediately comply with the decisions and recommendations of the Committee; and
    3. Grant the Committee the power to issue the necessary recommendations and decisions to control the proliferation of Covid-19 and manage the epidemic.

Notwithstanding the foregoing, it may be argued that the scope of the measures taken by the Committee cannot automatically result in the application of FM to contractual relationships. In fact, we believe that an event of FM would not have an impact on a specific contract unless one or more of the contractual parties declares such FM event in compliance with applicable law and any relevant contractually agreed processes. On that basis, we believe that the decision of the Committee (mentioned above) declaring 'that the Outbreak is considered as force majeure with respect to all projects and contracts, as of 20 February 2020 until the Ministry of Health announces the elimination of Covid-19' may be deemed beyond the scope of authority of the Committee, and that FM must be declared by relevant contractual parties on a case-by-case basis if its conditions are met under each relevant contract.

FM under Iraqi oil and gas contracts

The relationship between the Iraqi government, represented through various state oil companies, and international oil companies ("IOCs") operating in Federal Iraq is governed by unique model contracts drafted by the Iraqi Ministry of Oil. For the purpose of this article, we have considered two of these model contracts, namely the model 'Technical Service Contract' ("TSC") and the model 'Development and Production Service Contract' ("DPSC"), which are both subject to Iraqi law.

Generally, FM is an event or a series of events beyond a party's control, which delay or hinder the execution of that party's contractual obligations or render such execution impossible. Subject to contractual provisions, FM usually either relieves the affected party from its obligations under the contract, suspends its obligations, or grants parties the right to terminate the contract.

The TSC and DPSC each contain specific FM provisions and define FM as "any cause or event unforeseen or beyond the reasonable control of the party claiming to be affected by such cause or event", which delays or prevents such party from performing its obligations or duties under the contract. Such acts or circumstances must not be however attributable to the party invoking FM or its affiliates. Both model contracts contain an indicative list of FM events which includes, among other things, Acts of God, war, force of nature, insurrection and, with respect to IOCs, legislation/order of the government, and other acts or circumstances beyond the control of either party affected by the FM. Both model contracts exclude from the events that constitute FM (i) the inability to pay, and (ii) the security conditions prevailing in the contract area or the security and political conditions generally prevailing in Iraq on the contract signing date (unless these conditions prevent the implementation of petroleum operations).

As for contracts between IOCs and their subcontractors, it is common that the parties submit their agreement to non-Iraqi law (except for any mandatory Iraqi statutory provisions). While there are no standard FM provisions in subcontracts used in the Iraqi oil gas industry, FM provisions typically mirror the FM provisions of the TSC and the DPSC which are subject to Iraqi law. Furthermore, the declaration of FM event, similar to the current Outbreak, at any level of a particular project may likely result in a chain reaction leading to FM across the entire project. Hence, we believe that it is important for IOCs and their subcontractors to have a clear understanding of the application and impact of FM events under Iraqi law even if the relevant contract is governed by non-Iraqi law.

IOCs and subcontractors that are delayed or prevented from performing their contractual obligations under a TSC, DPSC or subcontract due to the Outbreak and/or the Outbreak Response may potentially argue that such events trigger the application of the FM provisions under their respective agreements. IOCs/subcontractors may possibly have grounds to argue that the Outbreak and the Outbreak Response are unforeseen, not attributable to IOCs/subcontractors or their affiliates and are beyond the reasonable control of IOCs/subcontractors. IOCs may also have possible grounds to argue that the Outbreak Response corresponds to one of the FM events indicatively listed in the TSC and DPSC FM provisions, i.e. the introduction of new legislation/order of the government.

FM under Iraqi law

FM in Iraq is a civil law concept. Some Iraqi scholars define FM as being an event which is not attributable to the debtor, creditor or relevant third parties (i.e. not due to their act, fault or negligence) such as wars, earthquakes, fires, floods, storms, pandemics or the issuance of a new legislation or a foreign applicable order. Other scholars define FM as the occurrence of an event which is unforeseeable, irresistible, not attributable to the debtor and beyond its control and that renders the execution of the contractual obligation impossible.

The impact of FM on contractual obligations are generally determined under the Iraqi Civil Code including, inter alia, Articles 168 and 425 of the Civil Code which relieve a party from executing its contractual obligations when such execution is rendered impossible due to a reason that is not attributable to that party and that is beyond its reasonable control. According to Iraqi scholars, such impossibility may be either physical or legal.

Subject to relevant specific circumstances, there may be scope for IOCs/subcontractors to argue that the Outbreak and/or the actions/measures implemented as part of the Outbreak Response lead to the application of Articles 168 and 425 of the Civil Code by rendering the execution of contractual obligations both physically and legally impossible and (temporarily) releasing contractual parties from their obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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