As has been widely reported, the last few years in the offshore industry have been characterized by huge rises in the price of crude oil coupled with a serious “capacity squeeze” in the availability of offshore equipment and experienced contracting personnel, which have resulted from many previous years of limited investment in the sector.

Oil company operators are under significant pressures to achieve offshore first oil as quickly as possible and to do so in deeper and more technically challenging waters than was previously possible. The shortage of experienced offshore contracting capacity to meet these demands has led to a situation in which the bargaining strength of the contractor relative to the operator has significantly shifted in the contractor’s favor — indeed, if the “boot” is not yet fully on the contractors’ foot, it is certainly no longer being used by operators to kick them as hard as before!

As part of this shift, experienced contractors, confident of their position in a tight market, are — in our experience — showing more willingness than before to pursue claims against operators where the costs of an engineering, procurement and construction effort or other lump-sum offshore project have increased in consequence of factors for which the contractor is in truth not responsible.

We are in consequence increasingly being asked by contractor clients to take a “bolder” position in contract negotiations in order to secure (in their view) a more balanced allocation of the project risks. Additionally, where problems have arisen in relation to ongoing projects, in particular in connection with cost overruns on lump-sum contracts, we are more and more being employed to review the contract terms and to advise on the remedies available to the contractor to recover its extra costs.

Secure the right contract
There are a number of specific terms and clauses which, depending upon the precise sector involved, an offshore contractor can seek to incorporate in the contract to protect his position.

However, speaking in general terms, the most important step he can take is to ensure that the agreement is clearly expressed and defines in readily intelligible language both the scope of the works to be undertaken and the responsibilities that each party (operator and contractor) is going to assume in relation to the same.

In order to achieve these objectives, it is usually sensible to base the contract negotiations upon a detailed and properly structured specification and, in contractual terms, a standard form contract (such as, for example, one of the CRINE/LOGIC suite of forms widely used in the North Sea) relevant to the works to be undertaken. However, if no standard form exists, or this would require very significant amendment to reflect the contractor’s requirements for the specific project, it is plainly sensible for the contractor or his lawyers to draw up a new contract from scratch. This is usually a better course to follow than taking a contract form for a different type of offshore project and attempting to amend it to suit the project in question — there is invariably a tendency in these situations to keep more of the original contract wording than is actually appropriate. The “worst case” scenario from the contractor’s perspective will, of course, be to base the contract negotiations on the operator’s standard form of contract, which is almost certainly going to require significant re-negotiation to achieve the contractor’s objectives in terms of risk allocation.

Perhaps most importantly in this context, the contractor should seek to ensure that the contract contains appropriate choice of law and dispute resolution provisions which he would, if necessary, be prepared to invoke. It will clearly not assist the contractor, even in the context of seeking to secure a commercial settlement of his claims, that the choices of law and jurisdiction in the contract are so slanted in favor of the operator that it is clear that the contractor will not obtain prompt, neutral and cost-efficient determination of any dispute which may arise between the parties.

The second important general point — particularly if the contract negotiations have been complex and lengthy — is to ensure that this is properly reviewed in its entirety before it is finally agreed. While contract negotiators are always reluctant to spend time re-visiting contract clauses that have been agreed, a “sanity check” on the whole contract just before contract signature will often save a great deal of trouble later on.

And in this context, do not place absolute reliance on the lawyers used to negotiate the contract! Bear in mind instead the words of the United Kingdom’s Lord Justice Sedley, in a recent Court of Appeal decision in Petromec Inc. vs Petroleo Brasiliro SA Petrobras and others relating to a contract for the employment of a drilling rig, when he said, “We were told in the course of argument that a number of the most prestigious firms of solicitors in the City of London had had a hand in drafting this charterparty. That perhaps begins to explain why its parts do not fit together… a careful professional eye cast over this document when the parties’ lawyers had had their say and departed would probably have picked up the anomalies and discontinuities which have led to this costly litigation.”

Secure the right remedies
If, alternatively, the contract has already been concluded, seeking to reopen its terms will normally not be an option for the contractor. In these circumstances, he should instead perform a risk assessment, which should identify the major risks in the project and to determine the extent to which he is responsible for the same. For example, who has the design risk?

How easy will it be to claim additional monies in respect of changes to the contract specification? Which party has assumed responsibility for delays to the project caused by external events, and have either of the parties’ liabilities in this respect been limited or excluded, thereby effectively putting some or all of that risk on to the other party?

Once these risks have been identified, the contractor can devise strategies for ensuring that steps are taken to minimise his exposure to the same. So, for example, where a contractor has been provided with a verification period for the contract design, at the end of which the contractor assumes full design responsibility unless errors or omissions in the design are identified during the verification period, an internal operating procedure must be developed to ensure that any errors or omissions in the design are picked up and properly notified to the operator within the design verification period.

Secondly, the contract should be checked to identify any contract procedures that must be followed by the contractor to enforce or preserve his rights and entitlements under the contract. In particular, the contractor should identify any provisions of the contract which provide time limits within which claims, such as claims for force majeure delays or for increased costs consequent upon variations to the works, must be asserted.

There is a tendency in the offshore industry to view such time bar provisions as “technical arguments” which sensible commercial businessmen do not hide behind. However, the danger is that they provide an operator with an easy and final answer to what may be a very substantial claim and one which will operate even if it produces a harsh result for the contractor. As an example of such an outcome, in Senate Electrical v Alcatel Submarine Networks, the Court of Appeal dismissed a contractor’s claim for failure to comply with contractual notice provisions and said, “Notice in writing is required in order to constitute the record which dispels the need for further argument and creates the certainty… In our judgment, given the need for certainty, the need to avoid argument, the need for a written record, it is not a futile thing to require that the commercial purpose of cl. 11 be fulfilled. In our judgment the [notice given by the Claimant] was inadequate notice. Notice complying with cl. 11.5 was a contractual bar to [the Claimant] bringing their claim. As they have failed to give proper notice, their claim should be dismissed.”

Conclusions
The “terms of trade” in the offshore construction industry are moving in favor of the offshore contractor community. Contractors can and should take advantage of their improved bargaining position by seeking to ensure that in each project in which they are involved an appropriate contract is put in place to share the project risks equitably. Where an offshore contract has already been concluded, the contractor should carry out a formal assessment of the contract risks he has agreed to assume and should ensure in particular that he does not lose any rights that he would otherwise enjoy by failing to follow the procedures agreed in the contract.

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