Baker & O'Brien, Inc.

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When Failure to Operate “Prudently” Can Trump Force Majeure

International Arbitration, London

October 1, 2013

A refinery entered into a long term contract with an adjacent petrochemical plant to provide feedstock for the latter’s olefin production operations.  The contract had a clause that defined a “force majeure event” as one which was “…not foreseeable, or, if foreseeable, could not have been avoided or overcome by the affected party acting in accordance with prudent operating procedures.”  

Following start-up and initial operation, the owner/operator of the refinery declared seven force majeure events, resulting in reduced and irregular feedstock supply to the petrochemical facility.  The petrochemical plant owner filed an arbitration against the refiner to recover damages due to lost production, alleging that the events were, in fact, foreseeable and/or could have been avoided by a prudent operator.

Baker & O'Brien was engaged to analyze each of the alleged force majeure events and opine on whether they were foreseeable, and if so, could they have been avoided.

The claimed force majeure events included, among other issues, changes to the refinery’s crude oil quality, EPC contractor performance, offsite equipment failures, and technology performance limitations.  A key element of our analysis was to define what constituted “prudent operating procedures” and whether the refinery had been operated in conformance with such procedures.

As part of this assignment, our consultants conducted on-site inspections and interviews at both the refinery and the petrochemical plant.  Our opinions, written and oral, were entered into evidence at the arbitration hearing.  After the hearing, but before any awards, the parties reached a mutually agreeable settlement.