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Offshore construction contracts: Not worth the paper they’re written on?

This article was published on Construction News on 6 September 2016.

New arguments over contract terms in offshore construction mean contractors can get caught out if they don’t jump through all of the required hoops.

When times get tough in construction, parties often pay closer attention to the terms of the contract. However, this frequently happens too late for one party who has already breached some of its obligations, no matter how seemingly trivial.

In the energy sector, onshore construction activity is currently doing well despite the referendum, but the offshore construction sector has generally seen a reduced volume of work for 18 months now.

While there are still sub-sectors of offshore construction which are seeing no slowdown at all, particularly renewables and subsea transmission links, the decline is most obviously felt in the oil and gas sector. The direct correlation between the price of oil and the amount of capital expenditure in the industry means that the decline in the oil price since the middle of 2014 has caused work to dry up dramatically.

Amended clauses

Therefore, whilst the forms of contracts and the terms of those contracts haven’t really changed, how people act under those contracts has. We are seeing more arguments based on the strict wording of the contract terms, because clients need to cut costs to maintain profits, and also contractors need to recover as much profit from a project as possible due to falling volumes of work.

The two most commonly used standard forms of contract we come across in offshore construction, internationally and domestically, are the LOGIC and FIDIC forms. Both, even in their unamended state, have conditions precedent to a contractor’s right to recover costs of a variation, and/or an extension of time.

Clients often amend these clauses to make them even tougher. In those circumstances, a contractor has to jump through a number of hoops, in usually quite short timescales, just to be able to keep its entitlements to additional cost and time alive. For example, in a fairly typical scenario a contractor has to:

  • submit a notice of delay with 14 days of an event arising;
  • use a specific form of notification, for example a pro forma variation order, with no other format being valid; and
  • submit its full claim, with very detailed information of scope and costs, within a further 14 or 28 day period.

If the contractor fails to fulfil any of these conditions, it will be left high and dry.

A defence

If the circumstances allow it, a common way to avoid losing all entitlements in this way is for a contractor to argue that the reason it did not comply with the condition precedent was that the client said that it didn’t have to. This defence takes two very closely linked forms, either promissory estoppel, or waiver by estoppel.

In brief, if one party fails to perform an obligation in the contract, allowing the other, innocent party to exercise a right or remedy, i.e. the ability of the innocent party to rely on the condition precedent, then the innocent party should ordinarily be allowed to do so. However, if the reason the first party failed to perform its obligation was an act or promise from the innocent party that indicated it would not rely on the condition precedent, then the innocent party is said to have waived its rights or is estopped from relying on those rights.

On a substantial project, this can have huge implications, with the cost of a single variation often running into the millions of pounds, and an extension of time relieving the contractor from often eye watering rates of liquidated damages.

A client often raises the argument that the contract contains a ‘no oral variation’ or ‘no waiver’ clause, meaning any spoken or sometimes emailed promises made by the client to the contractor, as above, does not have any such effect. Such a clause would typically say:

  • that a variation to the contract terms must be in writing and signed as a deed by the parties; and
  • that any waiver must also be signed as a deed.

New arguments needed

These arguments are generally no longer going to work. There have been two recent cases in the Court of Appeal that say that a client can no longer rely on this argument to avoid responsibility for its own actions. Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] and MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] both stated that despite the presence of these clauses in contracts, oral agreements varying other terms of the contract were valid.

What to do with this information depends on which side of the contracting fence you are on.

  • If you are a contractor, such a clause shouldn’t prevent you from bringing a claim for additional cost or an extension of time where you have not complied with a condition precedent, if the client said you didn’t have to.
  • If you are a client, you need to be very careful when issuing statements at meetings or in emails, thinking they will not have any lasting, contractual effect. You could well be caught out.

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