Exploring subsea contractsCurrent trends & market insights

Presented by:

Liz HardwickLegal Counsel Asia Pacific, DOF Subsea

Bree LudlowSenior Associate, Corrs Chambers Westgarth

Negotiating &

Managing contracts

Legal approach &

Managing disputes

DOF Subsea

Presentation Disclaimer: This power point is an education tool that is general in nature. Statements of fact & opinions expressed arethose of the presenters and not their company. DOF Subsea and Corrs do not assume any responsibility for the content, accuracy orcompleteness of the information presented.

Agenda

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• Challenging subsea market conditions• How do head contracts, sub-contracts and scope of work inter relate• Current trends

Contractual hierarchy

1

Topcontractual issues

2

• Late delivery of equipment, vessel or completion• Negotiating fair indemnity terms• Accepting or declining a variation order• Late or delayed payments

Risk allocation&managing compliance

3

• Liquidated Damages• Indemnity Terms• Variation Orders

Contractual hierarchy

DOF Subsea

Contractual hierarchy

Challenging Subsea Market

� Volatile oil prices

� Increased cost focus

� Uncertain offshore E&P spending in the

short term

� Uncertainty in project timing

� Tougher contract negotiation

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Contractual hierarchy

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Integrated subsea solutions across life-of-field• Field development• Production phase• Field abandonment / decommissioning

Contractual hierarchy

� Involve the engagement of different parties to complete the workcontemplated by the head contract.

� Hierarchy is important in establishing bargaining power.

� Decides which terms will dictate the contractual relationship.

� High focus in economy down-turn.

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Contractual hierarchy

A contractual hierarchy for any major project, subsea or otherwise, is typically going to involve the engagement of different subcontractors to complete the work contemplated by the head contract. Subcontractors may be divided for reasons of:

• Industry specialisation

• Geographical separation

• Deliverable timelines

EXPLORING SUBSEA CONTRACTS

Head Contractor

Vessel supplier

Subcontractor B Subcontractor C Subcontractor A

Principal

Personnel Equipment

Contractual hierarchy

Current trends - hierarchy

� Operators / head contractors dictating

the terms.

� Pushing indemnities down the chain.

� Higher risks exposure to be adopted.

� Back-to-back critical.

� Requests for guarantees increasing.

� Requests for reduction in pricing &/or

review of costs.

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Top contractual issues

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Top contractual issues

• Liability for late delivery of equipment, vessel or completion.

• Negotiating fair indemnity terms.

• Accepting or declining a variation order.

• Late or delayed payments.

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Risk Allocation & Managing Compliance

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Risk Allocation & Managing Compliance

� Liquidated Damages

� Indemnity Terms

� Variation Orders

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Liquidated Damages

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Codify a breaching party’s obligation to pay damages.

Simplify the process of obtaining compensation when a breach occurs.

Consequence of breach known in advance by both parties.

Must however be a genuine pre-estimate of loss in order to be enforceable.

What are they and what are the issues?

Liquidated Damages

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When applied How calculated

Delay commencement

Arrival date of vessel and /or equipment later than the contractually promised.

Usually expressed as a rate per day which represents estimated extra costs incurred

Delay completion Completion later than the contractually promised date.

Usually expressed as a rate per day which represents estimated extra costs incurred

Performance Issues

Failure of plant/facility to meet contractually stipulated performance requirements, due to contractor’s performance.

Measure will depend on relevant performance indicator

Usually expressed as the calculated net present value of foregone revenue or maintenance / remediation expense over the life of the contract

Liquidated Damages

Understanding the benefits & limitations:

• Contractor can make an informed choice to accept damages or make additional efforts to avoid breach.

• Recovered as a debt, negating the timely and expensive requirement to prove damages.

• Sometimes difficult to pass down.

• Downstream ‘subcontractor’ risks can be quantified and managed by all parties.

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Liquidated Damages

In order to be enforceable liquidated damages must:

• Be a genuine pre-estimate of the loss that would be suffered as a result of the breach, even if this is different to the actual loss suffered.

• Provide a mechanism in the clause for the calculation of damages which is consistent with the rest of the contract.

• Otherwise courts will hold that the clause is unenforceable as a penalty.

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Indemnity Clauses

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Indemnity clauses

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Powerful mechanism for passing risks.

Standard indemnity in subsea is knock-4-knock.

Shifting the standard & passing liability & risk down.

Strictly construed by courts – draft with precision.

What are they and what are the issues?

Contractual hierarchy

EXPLORING SUBSEA CONTRACTS

5 March 2015

Head Contractor

Vessel supplier

Subcontractor B Subcontractor CSubcontractor A

Principal

Personnel Equipment

Risk & Liability

Indemnity clauses

Understanding the benefits & limitations:

� Philosophy of risk management versus reality.

� Misconceptions traps:

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Trap Allowing an indemnity to be subject to conditions

Trap Third parties not covered by an indemnity.

Trap Indemnity not surviving termination or expiry of the contract.

Indemnity clauses

� Courts do not take a light approach to the interpretation of indemnity clauses.

� Oversights in drafting will be contrary to intentions.

� Acceptable not to use knock-4-knock when:

� Risks under contract are identifiable and can or have been allocated by the contract.

� The market can provide insurance at an affordable level.

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Variation Orders (VOR)

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Variations

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Changes to the scope of work.

Role of the variation clause, which provides a mechanism through which the scope of work can be changed.

Variations questions to ask to determine whether enforceable.

Strictly construed in accordance with contract – draft with precision.

What are they and what are the issues?

Variations

� Drafting tips – clear & concise.

� Mechanism for requests, response, time frames, price, disputes.

� Can make or break project budgets.

� Difficult to manage when hovers at PM level.

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Variations

Understanding its benefits & limitations:

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Is it really a variation

� Question whether particular deliverable is in fact within the current SOW.

What hinders reliance on variation

� Verbal discussions other than through formal written variation process is fraught with error & risks.

� Right of party to rely on written instructions or strict compliance with VOR procedure.

Ramifications of variation

� Once the scope of work has been varied there can be an issue if the performance of the variation itself is the cause of further difficulty and delay.

Variations

A change in scope of work is required

Initial discussions / negotiations between

Principal and Contractor

The variation process

Variation work completed

Variation order issued

Adjustment to programme of work if required

Change in contract price

Variation work completedPotential dispute resolution needed

Discoverable documents

Summary of trends & market insights

� Importance placed on contract negotiations.

� Terms & Conditions under scrutiny.

� Need to understand benefits & limitations.

� LD enforceability in question of genuine pre-estimate.

� Shift in indemnity terms, down the chain.

� Variations make or break projects.

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Questions?