Oil and gas represent two of most valuable resources in the contemporary world, being of paramount importance both for the sustainability of the worldwide economic growth as well as the wellness of the economic international relations. The growing power demand as forecasted in the next decades keeps on stimulating the oil & gas research and production activities, thus making such resources extremely strategic in the current and future world political scenario.
The modern oil & gas exploration is an activity connoted by a high risk degree. In it, the scientific research is coupled at the highest levels with the technological progress, which makes such activity extremely capital intensive.
For this reason, the research and production activities of oil & gas products, as well as those related with transportation and refinement, have historically been carried forward by international oil & gas companies (IOCs), to which national oil companies (NOCs) have been adding over the years.
The current standardization in the model contracts represent the outcome of the evolution of the relationship between the IOCs and NOCs. In fact, at a certain point in time need arose to elaborate increasingly sophisticated mechanisms aimed, on one side, at ensuring a higher protection and stabilization degree to international investors in their contractual relations with the State and the States parties and, on the other side, at enabling the latter to more effectively control and manage the existing natural resources as well as obtain higher profits from activities conducted on their territories.
The contracts CRINE/LOGIC, as model agreements promoted in oil & gas transactions in the United Kingdom continental shelf , are the outcome of the above premises, that is the intention by a certain state (in such case, UK) to foster the oil & gas activities on its territory by increasing the spectrum of international oil and gas companies eager to commit a substantial part of their worldwide budgets and at the same time not giving up on the long run its national interests.
In the oil & gas industry, the contracts standardization may be considered an almost natural, arguments-free process. In fact, as much as the 80% of the clauses contained in the various forms of contractual agreements as used over the years is common to all these agreements, which has therefore been an ideal breeding ground for the development of standardized documents.
However, like in any other process whose aim is the harmonization of several and different issues, also the standardization of contracts in the oil & gas sector has its advantages and disadvantages.
Just to name a few of both of them, as regards the advantages,
- A proper drafting of a model agreement enables the parties to save time on less time consuming clauses and devote their care to trickier provisions, which results in having their transaction concluded in a less cost-consuming and more expeditious way;
- Model agreements are normally drafted by highly skilled professionals, who therefore provide a high amount of added value in terms of knowledge and understanding of the needs of parties involved, which may benefit in terms of reduced ground for disputes and legal arguments;
- Because of its the large use over the years, case law and schools of thoughts have developed around certain clauses or groups of clauses, which enable the parties to enjoy invaluable help from eminent experts (judges, professors, lawyers) in certain specific matters;
- Model agreements may help the oil & gas industry in improving its efficiency and companies in properly allocating internal resources;
whilst, as regards the disadvantages,
- A model agreement is just a model and not a fit-for-all-purposes dress and as such great care should be employed when applying it to a specific transaction. As stated in the LOGIC standard contracts, “they may not be appropriate for every circumstance and do not deal with every eventuality”;
- When drafting a model agreement, several and common interests by a number of parties potentially using it are taken into consideration, which may result in it being vague and undetermined as to its wording and contents;
- By having a model agreement, a perception may arise that whatever professional of whatever function in the company may use it by just ticking some boxes. This may lead to undesirable consequences;
- Since, as expressed earlier, oil & gas agreements are characterized by a large number of common clauses, the temptation of using a model agreement for similar transactions is high and high are also the chances that blatant mistakes may be made.
The disadvantages mentioned above highlight the potential inconveniences in the use of the CRINE/LOGIC contracts and strongly contribute to open a debate about which effectiveness and validity such model contracts may have.
To this end, it is worth to mention that, in the construction of a contract, it is objectively acknowledged by the English courts that, the more parties are commercially and legally skilled and experienced, the more focus will be applied to the contract as it is, meaning both on its wording on the whole and on any word as separately considered from the others. Since the very first analysis by English courts is not on the intention of the parties and/or implied terms, the parties are therefore inclined to shape an as complete as possible agreement in order for it to provide an as closer to reality as possible perspective and so be self-explanatory.
Such approach inevitably leads the parties to amend and delete certain standard clauses and draft brand new ones, which in some way shakes the foundations of the model agreements as they have been designed. This is so much true that, besides the general conditions, as potentially applicable to a number of circumstances, specific conditions are also applicable as a result of tailor-made interventions by drafters.
When little care is employed in analyzing and ascertaining the consequences of a flat application of standard clauses, the outcome may be problematic.
In this respect, a paradigmatic case under UK case law is BP Exploration Operating Company Limited v Dolphin Drilling Limited, which serves as a lesson to all those who neglect the risks associated with the use of contractual standard forms.
Such two parties signed a Heads of Agreement providing a later commencement date with respect to its execution and containing a standard general termination clause in favour of BP as practically copied and pasted from the general conditions of a CRINE/LOGIC standard contract. Following BP’s decision to exercise such right before the commencement date and challenging Dolphin such decision, the Court, in construing the HoA on the grounds of certain general interpretation principles as applied in a previous case as well as a specific, well drafted termination clause existing in the same HoA, ruled that the interpretation given by Dolphin could not be deemed as commercially meaningless (BP claimed that) and as such upheld Dolphin’s stand.
Besides reasoning on the most correct wording, in assessing the extent of certain standard clauses specific focus should be put in order to avoid those risks linked with the intrinsic nature of certain legal structures which are potentially able to lead parties to substantial misunderstandings. One of such structure is the risk allocation through indemnity clauses.
Under the CRINE/LOGIC contracts, the "knock for knock" liability scheme is established.
Under it, broadly speaking a certain party agrees to indemnify and hold harmless the other party, their affiliates and other group members against any claims or liabilities arising in respect of: (i) damage to property owned, hired or leased by the first party and (ii) injury to personnel of first party.
Different cases law have shown that the extent of such scheme may get diminished when not properly dealt with.
In one of them, WesternGeco Ltd v ATP Oil & Gas, the contractor Westerngeco caused damage to a property item belonging to a third party, Total E&P. Under the indemnity clause of the contract between the contractor and the employer ATP Oil & Gas, as based on LOGIC standard conditions (as amended), the contractor was bound to indemnify the employer against any liabilities arising in relation to damage to the property of a third party, as a result of a negligent behavior by the contractor. Following a claim filed by Total E&P against the contractor, the contractor in its turn claimed against the employer an indemnity exceeding the aggregate amount of payments the contractor had received for the works performed (as stated in the contract).
The court considered that the liability by the contractor related to the damage caused to Total E&P was not a contractual liability, as such arising from the contract signed between the contractor and the employer. For this reason, the contractor was deemed not to have any liability under the contract to pay any money to the employer; being no liability, no limitation of liability was existing either.
The above examples generally suggest that the contracts standardization process should not be demonized, yet continuously tackled and improved so that the UK oil & gas industry and the players making part of it may count on reliable and fit-for-purpose standard forms and increase their sensitiveness when any necessary amendments to the standard conditions are necessary in order to safeguard their commercial needs.
Such a continuous effort for making CRINE/LOGIC standard forms as effective as possible is not a tricky task. In fact, being the UK North Sea area characterized by the presence of a limited number of players boasting long-lasting commercial relationships and well established cost-effective procedures, a ripe environment already exists. Therefore, any further improvement would only be beneficial for the competitiveness of the region.
Author - Valerio Abbagnara firstname.lastname@example.org