Okta Crude Oil Refinery AD v Mamidoil-Jetoil Greek Petroleum Company S.A. & Anor

A party cannot rely on a force majeure clause requiring an event to be beyond its control where it instigated the governmental request said to excuse performance. A party relying on such a clause must also take all reasonable steps to avoid its operation or mitigate its effects.

A supply contract is not uncertain merely because its pricing clause permits one party to challenge a proposed price. It remains enforceable where the parties have agreed a workable pricing mechanism and a court can resolve any resulting dispute. Subsequent performance may be examined to test an allegation that an agreed term was too vague to operate, although it cannot be used to construct a contract retrospectively.

Two actions concerning oil contracts were tried together in the Commercial Court. Under a 1993 contract, Jetoil held exclusive handling rights and a right of first refusal concerning crude oil bought by Okta. Okta admitted non-performance but relied on governmental letters as requests engaging a force majeure clause.

Under a separate 1998 agreement, Moil-Coal was to supply about 500,000 metric tons of crude oil. After accepting and paying for about 290,000 tons, Okta refused further deliveries and contended that the pricing provisions were too uncertain to create an enforceable contract.

Aikens J rejected both defences. Okta appealed against the two judgments. The central questions were whether requests procured through Okta's own initiative were beyond its control and whether the 1998 agreement contained a sufficiently certain mechanism for determining price.

1. Both appeals were dismissed unanimously. Lord Justice Longmore delivered the judgment, with which Lady Justice Arden and the Vice-Chancellor agreed.

2. The force majeure clause excused only a failure attributable to a governmental request which was beyond Okta's control. A request was not beyond its control where Okta and its advisers instigated the process, prepared the drafts and procured the government's letter. Okta could have refrained from setting that process in motion and complied with its contractual obligations. The governmental letters therefore did not excuse non-performance.

3. The construction accorded with Channel Island Ferries Ltd v Sealink UK Ltd [1998] 1 Lloyds Rep 323. A party invoking force majeure must bring itself within the clause and take all reasonable steps to avoid its operation or mitigate its effects.

4. The judge's alternative reasoning about whether the requests were governmental and whether Okta's earlier decision to breach was the sole cause was unnecessary to the result. The court observed that judicial examination of governmental motives may be inappropriate. It also accepted that a subsequent force majeure event can excuse future performance even where a breach already exists, but the event must still be beyond the affected party's control.

5. The court left undecided whether prompt notice was a condition of reliance on the force majeure clause. The appeal was highly fact-specific, and resolution of that issue was unnecessary.

6. The 1998 oil supply agreement was enforceable. Its provisions supplied a mechanism for proposing a price by reference to Dated Brent quotations, with a premium or discount, and allowed Okta to challenge the proposal. Any unresolved disagreement could be referred consensually to an oil broker or determined by the court.

7. The parties' successful operation of the pricing arrangements could properly be considered when testing the contention that the clause was too vague to work. This did not amount to constructing a contract from subsequent conduct. The agreement contained contractual terms governing quantity, quality and delivery, and invalidating it for uncertainty would defeat the parties' proper expectations.

• Court of Appeal (Civil Division): Both appeals were dismissed unanimously. The two judgments of Aikens J were upheld, with costs and interim payments ordered.
• High Court, Queen's Bench Division (Commercial Court): Aikens J held that Okta could not rely on the governmental requests under the force majeure clause and that the 1998 oil supply agreement was enforceable.
• Earlier proceedings concerning the 1993 contract: Thomas J had decided a preliminary issue by holding that the contract expired on 31 December 1999. The Court of Appeal reversed that determination in March 2001 and held that the contract continued until March 2003.