Standard Bulletin October 2007

Transcription

1 The Standard Standard Bulletin October 2007 Special Edition - Offshore BY ALISTAIR GROOM, CHIEF EXECUTIVE +44 (0) Alistair.Groom@ctcplc.com BARBARA JENNINGS DIRECTOR, OFFSHORE +44 (0) Barbara.Jennings@ctcplc.com The Standard Steamship Owners Protection & Indemnity Association (Bermuda) Limited The Standard Steamship Owners Protection & Indemnity Association (Europe) Limited The Standard Steamship Owners Protection & Indemnity Association (Asia) Limited Standard Bulletin is published by the Managers London Agents: Charles Taylor & Co. Limited International House 1 St. Katharine s Way London, E1W 1UT England Telephone: +44 (0) Fax: +44 (0) Emergency mobile: +44 (0) p&i.london@ctcplc.com Please send any comments to the Editor John.Croucher@ctcplc.com Telephone +44 (0) Welcome to our second special edition of the Standard Bulletin focusing exclusively on offshore matters. Since our last offshore edition of the Bulletin was published, in October 2006, Standard Offshore has continued to grow. The global expansion in the offshore oil and energy business has resulted in large numbers of new units coming onto the market, and the Standard has taken advantage of this activity. More offshore tonnage has joined the Club, both in the shape of new Club members and as entries in existing fleets. We now have 55 offshore members entered in the Club, and the offshore entry includes every type of unit, from the largest FPSOs through offshore installation vessels and cable-layers to AHTs and supply boats. Standard Asia, our Singapore based Club, has been particularly active in the offshore sector this year. In the meantime, we have also been improving and expanding our offshore team. Although the Standard Club has underwritten oil and gas business since the first drillships entered the North Sea in the 1970s and a specialist team has supervised the Club s offshore business since 1999, it was only last year that we decided the time had finally come to consolidate our offshore business in one syndicate. On 1st December 2006, the offshore syndicate came into being and now that we have done it, we are rather surprised it took us so long! Robert Dorey as syndicate head and Sharmini Murugason as syndicate claims director lead a team of specialists who handle all aspects of the offshore members day-to-day business. As a repository of knowledge and expertise, the syndicate is the natural result of the Club s ongoing commitment in this area, and working with Offshore Director Barbara Jennings, they provide us with an excellent platform to further expand the Club s offshore portfolio. In the meantime, the Standard Offshore brand has been rolling out in other ways during the past year. We held our first Standard Asia Offshore Forum in Singapore in December More than 65 club members from Asia and Australasia and representatives from the shipping, offshore, and oil and gas sectors attended the one-day seminar at the Shangri La Hotel. The event was judged so successful that it is being repeated later this year. Standard Club representatives have also been invited to speak at conferences in Houston, Norway and Dubai, and we are proud of our team s ongoing contribution to industry training and debate. In This Issue - OFFSHORE REVIEW - REINSURANCE REVIEW - SPECIALIST OPERATIONS AND CAR - HARMONISING FPSO PROJECT CONTRACTS - NEW BIMCO CONTRACT - KNOCK-FOR-KNOCK - CONSEQUENTIAL LOSS - OFFSHORE FORUM - ASIA OFFSHORE CONTINUED ON PAGE 2

2 BY MIKE DEAN, DIRECTOR OF CTC'S BUSINESS DEVELOPMENT UNIT +44 (0) Industry Review 2007 Offshore Industry Review In last year's bulletin, we talked about the strong demands for contractor services. This trend remains within the industry and, on a recent drive across the Cromarty Firth just north of Inverness, it was apparent that even the stacked rigs that have adorned the seascape for the last decade had finally disappeared. So whilst the industry remains buoyant, what of operating expenses? For those working in the energy sector, insurance costs have always been a major item. One of the difficulties with regard to premium levels has been their unpredictability and volatility. The nature of P&I Clubs is such that to some extent their very structure enables much of this volatility to be removed. But this ability is less apparent in the wider insurance industry. We know that the energy losses of 2005 amounted to around US$20 billion and, whilst 2006 was relatively benign, the problem for insurers and reinsurers is not having a crystal ball - or at least one that works. The models that are being used have been shown to be inaccurate at best and sadly lacking at worst. Modelling aside, the insurance industry is mostly reactive to events, and right now, we are still in the post post-katrina period. We saw rates rise dramatically in late 2005 and continue to rise during This in turn brought new players into the insurance market with commensurate increased capacity. If contractors and operators were able to do so, they tended to buy less insurance and to absorb more risk themselves. So did direct insurers, who bought less reinsurance and took larger retentions. All of these trends are putting a downward pressure on rates, but this has yet to lead to any significant softening of the market. Insurers are able to command top rates as regards capacity risks or those operating in the most exposed geographical areas of the world. In the energy sector, we still think of 'Piper Alpha' as being a huge loss. Whilst in real terms it was indeed catastrophic, it falls a long way short of the top ten worldwide insured losses. Interestingly, the top ten losses are all the result of natural disasters, except for 9/11. Of those nine natural catastrophe losses, seven were in the United States, the other two being in the Far East and Europe. Clearly, if you are an operator or contractor working in and around the southern United States, Caribbean or Gulf of Mexico, you are going to be paying a lot more for your insurance than those in other parts of the world. What we have today are all the above competing with pressures of recent historical losses, a more recent good year, increased capacity and competition. These combine to create an anxious and fragile market, with insurers trying to hold the line wherever possible and buyers seeking some amelioration of the post-katrina premium hikes in the belief that 2005 and not 2006 was the aberration. Who knows - back to the crystal ball! CONTINUED FROM FRONT COVER On that note, BIMCO contracts are some of the most widely used in the industry and, this year, we are pleased that representatives of the Standard Club were invited to sit on three of the subcommittees currently redrafting contracts used widely by the offshore industry. Barbara Jennings sits on the subcommittees to revise Heavycon and to produce a new form for the mid-size heavy lift business, whilst Robert Dorey is representing the clubs on the committee that is revising Bargehire. Grant Hunter from Bimco writes on page 9 of this Bulletin about the developments in the Heavycon form. In insurance, as in the rest of the industry, business does not stand still, and this year has seen a change in the way the International Group approaches towage. In many previous editions of the Bulletin, we have commented on the regrettable erosion of the knock-for-knock principle in offshore contracts, particularly in supply boat charterparties. Although we firmly believe that knock-for-knock is and remains the fairest and most effective way to approach offshore liabilities, we are also aware that too rigid an approach by insurers can make life difficult for their clients. This year, therefore, we were happy to support a move by the International Group of P&I Clubs to increase the numbers of towage contracts that can be pooled, despite not adhering to knock-for-knock principles, if the member is contracting in jurisdictions that do not uphold knock-forknock. On page 10 of this edition of the Bulletin, Sharmini Murugason examines knock-for-knock worldwide in a comprehensive review that we believe is the first of its kind. We also continue to offer our contract review service to members, providing them with a full analysis of their insured exposure under individual contracts, whether at the negotiation stage or once the contract has been finalised. Also in this edition of the Standard Bulletin, we consider the key contractual issues that can arise in an FPSO project, courtesy of William Cecil of solicitors Curtis David Garrard; we examine the interface between P&I and CAR insurance with broker David Sharp; and we take a look forward to this year s London Offshore Forum in an interview with one of our speakers, Marcus Jones of Lloyd s Register. All this is in addition to our regular overview of the energy and insurance markets and examination of legal updates of particular relevance to our members. We very much hope you will enjoy reading this issue of the Standard Bulletin as much as we have enjoyed putting it together, and we look forward to receiving any feedback or suggestions you may have. 2

3 BY STUART CAPEWELL, REINSURANCE DIRECTOR +44 (0) Reinsurance 2007 Reinsurance Review In the last two years, the reinsurance industry has experienced two extremes was as exceptional from a positive perspective as 2005 was from a negative perspective. Most of the companies that made losses in 2005 made large profits in 2006; in fact, one was partly the result of the other. The losses of 2005 led to significant price increases and dislocations in the United States windmarket, resulting in considerable profitability when no major storms occurred. And, in addition to a scarcity of hurricanes, there were no major insurance losses in 2006 from earthquakes, typhoons, floods or tsunamis. The other remarkable thing about 2006 was that most lines of business produced record profitability in the same year. For a global diversified reinsurer with exposure in various markets, it would be normal to expect some lines of business to face increased losses or softer market conditions. The 2006 results have shown that a professional reinsurer can withstand the turmoil of years like 2005, respond to the opportunities that invariably follow, and earn back the lost money in a very short period of time. Quantifying risks for the offshore energy market is markedly different and more complicated than modelling for onshore property risks. Most damage onshore is attributed to wind, but losses to the offshore energy market are primarily due to severe waves and currents generated by a storm, as well as undersea landslides. Whilst some of the risks to offshore energy include property exposures to platforms, well heads and pipelines, an important component of the risk is centred on continuous production issues. At Lloyd s, we now see the clear influence of the Franchise Performance Director s initiatives. These include very close monitoring of each syndicate s performance compared to their stated Realistic Disaster Scenario submissions. For the first time in 2005, these included a Gulf of Mexico hurricane causing US$10 billion of insured offshore losses (and US$50 billion onshore). The modelled loss had a damage track almost identical to that of Hurricane Rita. The fact that individual syndicates have experienced losses both above and below their own predictions has led to a huge demand for clearer recording and monitoring of exposure data in this sector. The long range forecasters at Colorado State University this year warned of expected Atlantic Basin hurricane activity at twice the average levels, with five major hurricanes projected in It is timely that new offshore energy modelling tools such as Eqecat are being launched to help insurers quantify their offshore risks, leading to improved pricing and better use of capital. We don t believe that any single year, either good or bad, defines whether a reinsurer has a good strategy or whether it is able to execute its strategy effectively. Reinsurance is a long-term business, and a reinsurer s performance can only be quantified over a multi-year period. It is capacity, stability and consistency that we value in our reinsurers. At the Club, we view our role as ensuring not only that our reinsurers have the resilience to handle large losses, but they will be there at the next renewal, providing stable capacity in the turmoil that inevitably follows close upon catastrophe. It is not surprising that FPSO facilities have developed to become an increasingly popular solution worldwide for offshore field development. Within the US Gulf of Mexico, the dominant production facilities have been fixed structures and floating production systems based on Spar, TLP and semi-submersible platforms. Higher oil prices, and significant ultra deepwater prospects extending farther beyond established pipeline infrastructure, make FPSOs an increasingly viable option, especially as they can move off site if there is a threat of hurricanes. The Minerals Management Service, the federal regulatory agency that overseas oil and gas activities offshore United States has recently approved the first FPSOs to operate in United States territorial waters. It has approved an FPSO for the Cascade/Chinook fields for Petrobras, and in the meantime, Helix Energy Solutions have approval for their floating production unit Helix Producer 1, which will be dynamically positioned and capable of disconnecting from the risers in the event of tropical storms or hurricanes. This is foreseen as being a growth area for the Club as we are well positioned to offer high levels of flexible cover for operating FPSOs both on and off the riser. THE LUTINE BELL AT LLOYD S 3

4 BY ROBERT DOREY, SYNDICATE DIRECTOR +44 (0) BY DAVID SHARP EXECUTIVE DIRECTOR, OPERATING GROUP, AAA INSURANCE & REINSURANCE BROKERS LIMITED +44 (0) Underwriting P&I Specialist Operations and the Interface with Construction All Risk Policies P&I Specialist Operations are set out in a wide and non-exhaustive list of marine activities in the Standard Offshore Extension or Rule of the Rules. The Specialist Operations exclusion has its roots in a desire by the traditional shipowning market not to mutually share liabilities arising out of activities that involve exposures beyond the carriage by sea of persons or property under a contract subject to statutory principles of liability. Many Specialist Operations liabilities involve activities that have little or no overlap with other insurances. One significant exception to this is the installation and marine construction market, where shipowners may transport and/or install property that falls under the Construction All Risks policy placed by an oil company client or other principal. The P&I Perspective - by Robert Dorey This article addresses some of the areas of overlap between the two covers, and David Sharp s article opposite looks at those issues from the Construction All Risks perspective. From the Club point of view, where a member has bought back liabilities arising from the nature of the Specialist Operation, the Club cover still excludes liabilities in respect of failure to perform or fitness for purpose/quality of the member s work and also liabilities in respect of contract works. The exclusion for failure to perform is because the exposure is a pure economic loss. The exclusion in respect of liabilities for contract works arises primarily because of the existence of a CAR policy, which is the proper market for these risks. David Sharp makes the point that the gaps between P&I and CAR covers, in most cases, relate to the operation and interpretation of contractual and hold harmless indemnities. The commercial reality of the offshore installation market is that there is no standard industry agreed wording covering the obligations of each contracting party. This means that every single contract is different. The contracts will reflect the prevailing market bargaining positions of the parties, which can be seen not only in scope of work definitions but also in respect of the liabilities that each party assumes. Many of the deviations from a knock-for-knock regime in contractually assumed liabilities represent the exclusions or deductibles applicable to other insurances. Whilst the Club has a wide reinsurance programme, gaps in CAR and similar covers cannot be normally accommodated under our extended covers. It is therefore imperative that members ascertain at the outset whether their contractually assumed liabilities fall under their P&I or extended covers. The Club operates a contract review system so that cover can be positively confirmed. Contract reviewers in the Offshore Syndicate work with the underwriters to produce a comprehensive contract review so that there is clarity and certainty in respect of the P&I cover. Any gaps in cover can then either be dealt with by a further extension of cover if appropriate, or by the member and his contractual partner clarifying his access to the CAR cover or reframing the contractual liabilities as necessary. 4

5 Liability Cover Available to Contractors Under Offshore Construction All Risks Policies The CAR Perspective - by David Sharp There has been much discussion regarding the extent to which offshore contractors are insured under CAR policies arranged by their Principals, which in most cases, will be the oil company operating the lease block (the Operator ). The topic has been the focus of legal disputes in the UK, United States and Australia, to name but three jurisdictions. Invariably, practice within the oil industry determines that it is the Operator who arranges the CAR insurance, there being good reasons for this, albeit the contractor generally has primary responsibility for the works whilst under his control. The Operator will include all his contractors and indeed subcontractors as Other Assured parties under the CAR insurance, but such parties will only have the benefits of the policy to the extent made available under contract. Cover The contract should then spell out the basis of the cover arranged. So far as concerns physical damage risk, this usually occurs with some clarity, but many contracts are silent on the issue of third-party cover. The contract itself will usually stipulate that each party is responsible for its own third-party losses, but the Operator s CAR insurers are not unhappy to provide such protection to the contractors on the unwritten understanding that the contractor will have a primary policy in force. The contract will therefore normally stipulate that the contractor effects a primary comprehensive general liability policy up to certain limits. Thirdparty cover under offshore CAR policies is arranged as a separate section (Section 2) to physical damage, for a limit generally pitched at between $50 million and $100 million per event, such cover being available to the Operator from the ground-up, and for contractors in excess of their primary policies. However, there is only one limit per event provided for all parties. It used to be the case that certain contractors would consider this benefit as providing them with Excess Protection and Indemnity Risk on vessel operations connected with the CAR works, sometimes in order to protect their existing arrangements. This is no longer possible because of the existence of a Watercraft exclusion in Section 2 coverage, which CAR insurers will not normally delete for contractors. The contract will therefore stipulate that contractors should have P&I insurance in existence for specified minimum limits. Given the specialised vessels exclusion in force where the P&I is provided by a Club, the contract should ideally stipulate that this exclusion is deleted, although interestingly, it very rarely does in so many words. Another feature of CAR coverage that was historically provided was removal of wreck cover that enabled any insured party to recover claims for removal of wreck of their properties, howsoever arising, provided that a liability existed for wreck removal or the wreck interfered with current operations. Thus contractors could have the benefit of this cover, although a primary insurance clause would have meant that any collectible claims under a valid P&I insurance had to be exhausted first. This is no longer possible under the standard CAR policy, which only provides such cover on more restricted wording to the Operator for removal of wreck of its own properties. Indemnity Arrangements What benefit is really being conferred on the contractor, absent coverage for vessel-related liabilities and removal of wreck? This question has more resonance when it is considered that mutual indemnity arrangements between Operators and contractors will theoretically interpret third-party claims at site as between the two parties. Mutual indemnities, however, come under the microscope when a catastrophe occurs, particularly if it involves loss of life, and courts may not always construe the contractual indemnity clauses in the manner intended. It must also be recognised that such indemnities can only be effective between contracting parties. Different contractors at the worksite will not be in a contract with each other, only with the Operator. The same, if not more complex, position arises with subcontractors. Contracting strategies in the UK have only partially dealt with this position by utilising what is known as the small family indemnity concept. This provides that the contracting parties are grouped into larger entities. On the one hand is the Operator Group comprising the Operator and its coventurers, plus their affiliates, but excluding any member of the Contractor Group. The latter consists of the contractor, its subcontractors of any tier who are performing work at construction sites, and their affiliates, but excluding any member of the Operator Group. This grouping is favoured by CRINE and its successor organisation LOGIC in seeking to create more uniformity in UK offshore contracting. The inclusion of subcontractors within this latter group creates an attempt to bring subcontractors within the ambit of the indemnity arrangements. Under English law, this would not have been legally enforceable until the passing of the Contracts (Rights of Third Parties) Act in 1999, which enables persons who are not parties to a contract to enforce rights under the contract. However, a gap still exists in terms of liabilities between different contractors and their subcontractors. An alternative is the large family concept, which includes the Operator s other contractors and subcontractors in the Operator Group, and is commonly used in Norway, where the basic contract - the NF97 form - includes the large family as standard. The Norwegian contracting regime allows for standardisation in the indemnity structure, thus each contract is on a back to back, word for word basis, which is essential if the principles are to be upheld and the indemnities to operate in the manner intended within the entire community involved in the construction project. CONTINUED OVER 5

6 Industry Mutual Hold Harmless In the absence of a Norwegian model for structuring indemnities, the offshore industry in the UK has, through LOGIC, introduced an Industry Mutual Hold Harmless (IMHH) scheme to seek to avoid any such gaps as might still exist in the small family concept. The IMHH is not tied to a specific contract but is designed to underpin all offshore activity in the oil and gas industry on a global basis. Participants need only enter the scheme once by signing up for the long term. It is not intended that the IMHH Deed that participants sign takes precedence over existing or future contractual arrangements; its purpose is to address liability for property damage or personal injury where there is no contractual arrangement in force between the respective parties. A significant number of the parties working on the UK Continental Shelf have signed up to the scheme. Conclusion So, to come back to the question what benefit is actually available to the contractor by accessing the Operator s third-party cover under CAR Section 2? In theory, these must be very little. Off-site liabilities (i.e. during tows and movements to the field) will fall to be dealt with by P&I insurance. Removal of wreck of contractor s vessels and equipment is excluded under the CAR policy. On-site liabilities should be dealt with by indemnity arrangements and, so far as the gap in terms of noncontracting parties is concerned, should be dealt with by parties signing up to the IMHH Deed or similar schemes. It must be concluded that the exposure in relation to offshore operations is very small, possibly reduced to the risk that indemnities will fail to operate in the manner intended or, where parties have not signed up to IMHH schemes, that no indemnities exist. It follows that any issue with respect to the interface between the CAR policy and the P&I insurance so far as concerns the contractor - narrows in similar fashion to the point that it is marginal. David Sharp has worked in energy insurance in the London Market for more than 40 years. He is the author of the seminal book Offshore Oil and Gas Insurance, published by Witherby & Co, London in 1994, a new edition of which is in preparation. 6

7 BY WILLIAM CECIL PARTNER, DAVIS GARRARD LLP, LONDON +44 (0) Contractual Harmonising FPSO Project Contracts Advances in recent years in FPSO vessel technologies have fundamentally altered the economics of offshore oilfield development. Floating production systems represent a safe and efficient method of exploiting previously inaccessible deepwater fields they are also a costeffective means of developing marginal fields that would otherwise be incapable of supporting the construction and decommissioning costs of fixed platform development. To employ this technology, the oilfield operator must obviously acquire, or engage the use of, a suitable vessel to act as an operating platform and an integrated crude oil processing and storage system. Furthermore, the system must be capable of meeting the requirements, both technical and commercial, of the project in question. To achieve this normally requires the operator to enter into a range of complex contractual arrangements. Principal FPSO Project Phases The first principal phase of the project is design and engineering. This stage encompasses the conceptual design and front-end engineering and design, through to the more detailed engineering phase. These tasks will often fall within part of the head contractor s workscope. Next comes the construction of the hull or the conversion of an existing vessel. Thus an existing vessel will need to be purchased for conversion or, particularly for projects involving harsh environments or extended life, a hull will need to be built from scratch. This is followed by the construction of the processing facilities. The topsides contract will define the contractual relationship between the owner and processing contractor. This will either form part of the shipyard construction or conversion contract, or will be a separate contract with a specialist contractor. Once the construction stage is completed, the FPSO unit will be towed or transported to the field location 1. Following arrival at the field, the unit will be installed and hooked up with the subsea system. This is usually undertaken pursuant to a separate contract between the operator or head contractor and specialist subcontractors. The head contractor will then undertake commissioning of the unit. Finally, once the FPSO has been accepted by the operator, the unit will need to be operated and maintained throughout its life at the producing field until demobilisation. FPSO Contract Strategy 1. The Turnkey Strategy The most commonly employed approach to FPSO contracting is for the operator to employ a single contractor, referred to here as the head contractor, to manage the project and to engage any subcontractors required for those elements of the project that the head contractor is not himself able or willing to undertake. As the name suggests, the operator is looking for an integrated, managed solution. When employing a turnkey strategy, the operator broadly has two options. First, the operator can enter into an EPIC (Engineering, Procurement, Commissioning and Installation) contract with the head contractor for the provision of a fully functioning FPSO at the required field location. Usually the head contractor will, in return for payment of a lump sum fee, assume vis-à-vis the operator full responsibility for completing the construction or conversion of the FPSO, its hook-up and commissioning offshore at the field. Where the FPSO is supplied under an EPIC contract, the operator will normally retain title to the unit throughout the project. Indeed, where the project involves a conversion rather than a newbuilding, the operator will often purchase the tanker at the outset and free issue this to the head contractor for the purposes of the construction works and topside installation. The use of EPIC structures in the offshore sector has become a controversial issue in recent years, with a number of major contractors suggesting that the risk/reward balance associated with lump sum contracting has become too heavily weighted in favour of the operators. The second option is for the operator to enter into an agreement with the head contractor for the provision of the FPSO and associated operating and management services. This is in effect a time charter of the unit, although this is normally known as a Production Services Contract or an operating lease. The key differences between this scheme and the EPIC approach are that the head contractor, rather than the operator, normally assumes full responsibility for the management and operation of the unit post-delivery and retains both title to it and any entitlement to the residual value. There are, of course, a number of reasons why an operator might choose to enter into an EPIC contract in preference to adopting the Production Service Contract approach, or vice-versa. In addition to the risk issues indicated above, tax/customs considerations will often be a key driver. In order to minimise these potential exposures, it may for example be prudent for the operator to acquire title to all or part of the FPSO equipment prior to entry into the host country, in which event, the Production Services Contract approach may be unworkable. 2. The Modular Strategy The alternative approach is for the operator to contract separately for the component parts of the project i.e. design, procurement, construction and installation. The operator may also decide to manage the marine and offshore operations of the FPSO itself. This is, however, relatively rare, given the scale and complexity of the tasks involved, and few operators are able to maintain the necessary expertise and skill sets needed to achieve this successfully, and most do not even attempt to do so. 1 In addition, the hull may be towed from the shipyard building the hull to the facilities of the topsides contractor, if different. 7

8 Key Contract Issues The contractual workscope Assuming that a turnkey contracting strategy has been adopted, the most important issue in any FPSO project contract is defining and agreeing the Contractual Workscope, i.e. the precise scope of the works to be undertaken and the allocation of responsibility between the parties. A key element in this context is the question of delegating design responsibility between the operator, the head contractor and the subcontractors of each of them. The Contractual Workscope is normally set out in a technical specification. A number of factors render the agreement of the Contractual Workscope a complicated process. First, many operators express their requirements for FPSO tonnage partly in functional, rather than purely descriptive, terms. This should in principle work well, except that shipyards are more accustomed to dealing with descriptive specifications and are often cautious about accepting responsibility for guaranteeing functionality. This is particularly problematic given that the FPSO s functionality cannot normally be demonstrated before the unit undergoes acceptance tests at its first producing well. Problems can also arise where there are inconsistencies between the descriptive and functional parts of the specification. Second, the complexity of the FPSO s onboard processing systems means that these are frequently designed and engineered, in whole or in part, by a large number of third-party contractors, some of whom may be selected by, and in some cases employed by, the operator rather than the head contractor, the shipyard or the topsides contractor. The multiplicity of the parties involved can often lead to serious questions concerning the delineation of their respective responsibilities and workscopes. crude regime 2, it is well established in the offshore sector and has the very great virtue of simplicity. In the absence of a knock-for-knock arrangement, English law will hold each party working at the field liable (primarily in negligence) for all foreseeable losses resulting from its negligent acts or omissions and those of its employees. The size of the potential liabilities involved renders this exposure unacceptable for the majority of offshore contractors and their insurers; moreover, each contractor working at the field will, to the extent that insurance is obtainable, be required to insure to the full extent of the damage for which it is potentially liable and this multiplicity of insurance will add significantly to the costs of the project. The indemnity is normally agreed to apply to damage or injury to the operator and contractor groups. A key issue in the indemnity structure will be whether the operator group is broadly or narrowly defined. If a broad approach is adopted, the operator group will include all of the operator s other contractors working at the field. Alternatively, where a more narrow approach is adopted, the operator s indemnity will not extend to the property and personnel of its other contractors. A narrow definition of operator group can cause the head contractor significant difficulties, particularly if he is working in close proximity with subcontractors of the operator, who are not included within the definition of operator group and therefore are not covered by the indemnity provided by the operator. 2 Per Morrison in the unreported case of Smit International (Deutschland) Gmbh v Josef Mobius. The third complicating factor relates primarily to FPSO conversions, where the head contractor and its subcontractor, the shipyard, will be required to incorporate new designs and materials within an existing structure in order to permit the new and the old to operate together as an integrated whole. Problems can arise at the interface between new and old, particularly where the old structure is unable to cope with additional demands placed upon it after the conversion. The contract must be clear as to which party is responsible for this interface. Indemnities Indemnities are another key contractual issue. As in many types of offshore contract, indemnities form an important part of FPSO project structures and, in terms of harmonisation, it is vital to ensure that these provisions are as far as possible consistent between the head contract and the principal subcontracts. The indemnity structure most commonly employed is the usual knock-for-knock approach under which the operator and the head contractor indemnify each other against property damage, personal injury and death sustained by members of their own groups and employees in the course of undertaking the project irrespective of cause (i.e. regardless of whether the damage was inflicted negligently or in breach of duty). Although the knock-for-knock structure was recently described by an English High Court judge as a blunt and 8

9 BY GRANT HUNTER, HEAD OF DOCUMENTARY DEPARTMENT, BIMCO +44 (0) Contractual New BIMCO Mid-Sized Heavy Lift Contract to Join Revised HEAVYCON The offshore industry is a tremendous user and supporter of BIMCO standard contracts. Over the years, BIMCO documents have established a firm and welcome foothold in this niche market. In some sectors, such as heavy lift, BIMCO s charter parties and contracts enjoy almost universal use. The heavy lift sector is currently experiencing something of a boom, with a sizeable number of newbuildings on order. One particular growth area over the past few years has been in the lift on/lift off and roll on/roll off mid-sized heavy lift sector. Unlike the super-heavy lift market, which has relied on the HEAVYCON form for its contractual needs, the mid-sized sector tends to operate on a more conventional cargo basis where goods are stowed below as well as above deck. The HEAVYCON form was originally designed with special offshore projects in mind and uses the knock-for-knock principle as the primary basis of liability. In contrast, the mid-sized sector generally relies on conventional cargo liability regimes such as the Hague/Hague-Visby Rules. Using HEAVYCON for the latter type of operation is not ideal and requires significant amendments to be made to the form. As a result, operators in the mid-size sector have generally relied on using an amended CONLINEBOOKING Note or similar generic form as their contractual platform. With this in mind, BIMCO has in response to industry demand decided to develop a new standard contract for the mid-size heavy lift sector based on the CONLINEBOOKING Note, while simultaneously updating the well-used HEAVYCON form to reflect current commercial practice. The new mid-size form will offer a comprehensive trade-specific alternative to the less than ideal generic forms currently in use. A drafting group consisting of trade representatives from companies such as BigLift Shipping, Dockwise, SAL Shipping, Heerema and Fairmount is currently working on the revision of HEAVYCON and is making good progress. It is hoped that the project will be completed by November To ensure consistency between the revised HEAVYCON and the new mid-size contract, some members of the HEAVYCON drafting team will participate in the development of the new standard form for the midsized trade. Work on the new form will begin in September and should be completed towards the end of The great benefit for end users is that this will be a form developed by people working in this trade and entirely familiar with the contractual needs of the business. Tied to BIMCO s sound track record for producing clearly written and well-balanced standard forms of contract, the new heavy lift contract should make a welcome addition to the existing suite of BIMCO offshore contracts. BIMCO is the world s principal organisation responsible for the development of maritime contracts and other related forms. Barbara Jennings, the Standard Club s Director, Offshore, sits on the BIMCO Heavycon subcommittees. CONTINUED FROM PREVIOUS PAGE An alternative solution is to utilise a stand-alone Field Mutual Hold Harmless agreement, such as the one prepared by CRINE/LOGIC. Under such an agreement, each contractor working at the field assumes responsibility for its own property and personnel and indemnifies all other contractors against loss or damage to such property/personnel incurred working at that field. If such a scheme is not put in place, however, it is obviously sensible from the perspective of both the operator and the head contractor that they each ensure that, in the contracts they each place with their own subcontractors, the knock-for-knock principle contained in the head contract is adopted. Post-delivery defects A third key issue is the question of post-delivery defects. This is one of the most difficult areas in which to harmonise the various project contracts, particularly in respect of defects that affect the FPSO s operating status and, therefore, the income stream under the head contract. In the event of a defect affecting the FPSO s operations, the operator will almost certainly insist on a reduction in the contractual day rates, sometimes to a zero level, while the problem is resolved. However, while most shipyards and topsides contractors are prepared to provide a contractual commitment to undertake the repair works, this is normally limited to a period of 12 or 24 months from the date of completion of their portion of the construction or conversion works. Further, they are almost universally unwilling to assume any responsibility for associated downtime. Experience shows that it is very difficult to achieve any measure of harmonisation between the Production Services Contract and the subcontracts regarding the issue and, although this can be addressed to some extent by loss of hire insurance coverage, this represents one of the largest exposures faced by the head contractor. Conclusion After consideration of the key stages in an FPSO project, the contracting strategies employed and the contractual issues that are likely to arise, there is no doubt that these projects are highly complex. The success of the project will in large part depend on the time and attention spent at the early stages to ensure that adequate time and resources are invested in the design and engineering stages of the project and to ensure that a proper and detailed contractual framework is put in place to cover the construction, installation and eventual operation of the FPSO unit. 9

10 BY SHARMINI MURUGASON, SYNDICATE CLAIMS DIRECTOR +44 (0) Knock Contractual for Knock Contracts such as industry-standard forms Towcon and Towhire or the UK or Dutch standard towage conditions. The amendment recognises that certain jurisdictions will not uphold a contract that allows a towing vessel to avoid liability for its own negligence and to be indemnified by the innocent tow for all losses arising from such negligence. The amendment relaxes requirements for towage contracts where the concept of kfk is unenforceable in whole or in part in that particular jurisdiction, provided that those contracts do not impose liability for negligence of the tow on the member and allow him to limit liability to the greatest extent possible. International Recognition of Knock-for-Knock Contracts Mutual allocation of risk by way of knock-for-knock (kfk) contracts is common in the offshore industry and industry standard contracts incorporating kfk principles such as BIMCO Supplytime have been accepted by the International Group of P&I Clubs, thereby affording poolable cover. These contracts operate an apportionment regime where each party takes responsibility for loss/damage to its respective property and for the death/injury of its personnel irrespective of each party s negligence and provides the other with a corresponding indemnity. The benefits of such a regime are great: it provides legal certainty and avoids substantial costs being incurred in proving fault; it encourages an open exchange of information, which improves safety in this high-risk industry; it avoids double insurance thereby reducing the costs of insurance; and it is a reflection of the proportionate risk and reward ratio in the offshore industry where an accident could have substantial cost implications for the operators involved. Most of these contracts incorporate English law and jurisdiction, and the concept of kfk contracts is recognised and well established in English law, for example, in Smit International (Deutschland) Gmbh v Joseph Mobius (unreported). However, there will be occasions when contractors are required to incorporate a different law and jurisdiction clause in their contracts, perhaps to reflect provisions up the chain of contracts or to incorporate the law of the jurisdiction where the ultimate client is based or where the activity in question takes place. There is a risk that those other jurisdictions may not recognise the legality of kfk provisions. The pooling agreement This issue was acknowledged by the International Group when it amended the Pooling Agreement requirements of vessels providing towing services with effect from 20 February 2007 (a commentary by Brian Glover on the extent of the amendment was published in the Standard Bulletin 16 May 2007). Prior to the amendment, it was a requirement of poolable cover that such vessels contract on kfk terms or on contracts that incorporate provisions even more favourable to the tug, We therefore felt it opportune to take a sounding on the recognition of kfk contracts from around the world and, in particular, from those jurisdictions with offshore activity. It was apparent from the responses received that the concept is largely untested in most jurisdictions, perhaps due to the tendency to retain English law and jurisdiction clauses in Bimco standard contracts, but nonetheless the lawyers we approached were prepared to form a view based on existing law. Europe In most of Europe, it appears that the courts will uphold kfk contracts except in the case of wilful misconduct or gross negligence of the management of a contracting party. Some countries such as Italy or Germany may not enforce kfk contracts in the case of personal injury claims. In countries that are subject to a Civil Code, such as Russia, it is possible that the courts will refuse to apply contractual provisions if these conflict with the applicable Code. The Americas In the United States, kfk contracts are enforceable as a general rule except in the case of towage, where any agreement requiring the tow to indemnify the tug is considered null and void. In Canada, kfk contracts are widely used and accepted in the offshore industry. The same applies in Venezuela where such contracts are likely to be upheld except in case of wilful misconduct and, in Mexico, although kfk is not acceptable in contracts with the state. In most other South American jurisdictions, it appears that whether or not the courts uphold contracts on kfk terms will depend on the facts of the individual case, with the courts taking into consideration such factors as the relative bargaining power of the parties and whether clauses exonerating a party from the consequences of its own negligence were specifically negotiated and accepted. Again, in some jurisdictions, kfk provisions may not be upheld in the case of personal injury claims or a conflict with a Civil Code. Africa and the Middle East As a general rule, it would seem that kfk contracts will probably be upheld in these jurisdictions, although the law is not sufficiently developed in many West African jurisdictions to be able to predict the outcome of any case with great certainty. 10

11 Australia and Asia As with the United States, in many jurisdictions, it appears that kfk contracts will be upheld except in the case of towage. This is the case in Australia where the Queensland Supreme Court recently overturned the UK Standard Towage Conditions when it decided that the Conditions contravened the Trade Practices Act 1974, the Australian unfair contract terms legislation. In Asia generally English law, which upholds kfk contracts, is likely to be followed as a persuasive authority, except in Vietnam where a duty of care is imposed on tug owners and in Thailand where parties are not entitled to contract out of the consequences of their gross negligence. In China, the Shanghai Supreme Court recently confirmed the enforceability of the BIMCO Heavycon form, although here, too, the law voids any exclusion from liability in cases where a party has been guilty of gross negligence or wilful misconduct. Summary It would appear that contrary to what might be assumed, the courts in many countries where there is a developed oil and gas industry in fact show a sophisticated understanding of the nature of kfk agreements and are likely to uphold them in many cases. The main exceptions will be in cases of senior level gross negligence or wilful misconduct or where the individual contract conflicts with public policy or codified law. In countries where there are no prior cases upholding kfk contracts, such contracts are perhaps more likely to be upheld if clauses that exempt the parties from the consequences of their own negligence are specifically negotiated and agreed. Unfortunately, it would appear that towage is one area where the courts are increasingly reluctant to completely exonerate the tug from the consequences of its negligence and, in such cases, members would be well advised to take advice from a suitably qualified lawyer. Towage contracts concluded in jurisdictions that do not uphold kfk can still be covered provided that the tug takes no liability for the tow s negligence and the member s right to limit liability is protected. The position in respect of individual countries is set out in full in an extended version of this article available on our website: This article is intended as a guide only and should not be relied upon as a substitute for specific legal advice. 11

12 BY JOHN CROUCHER, OFFSHORE LEGAL EXECUTIVE +44 (0) Legal Consequential Loss Clauses in Offshore Contracts We examine a recent case (Ease Faith Ltd v Leonis Marine Management Ltd [2006] 2 All ER) that underlines the importance of clarity of language in consequential loss clauses. Many pitfalls can arise in the interpretation of consequential loss clauses in offshore contracts, a risk that the Club considered in March 2005 in Marine Matters, the precursor to the Standard Bulletin. The article concluded: Excluding consequential losses will not necessarily exclude all losses consequent upon a breach of contract. If the parties want to exclude direct losses, which can include economic losses, then they should be very clear in the language used. Rules of construction Subject to specific authority on the treatment of standard form clauses, the basic and underlying rule of construction under English law can be briefly summarised: in the absence of clear words to the contrary, any ambiguity is to be construed against the party seeking to rely on that clause (contra proferentem). In the context of exclusion clauses, therefore, clear words are required to exclude a liability that would otherwise have arisen. By way of example, the courts have previously attributed precise technical meanings to words so as to narrow the application of an exclusion where it is less than clear whether the parties understood or intended such a distinction. This rule has been applied, qualified and extended so as to form a number of guidelines that are well recognised. For example: (a) general words of exclusion will not normally be taken to cover serious or fundamental breaches going to the root of the contract; (b) clauses that purport to merely limit liability will be construed less strictly than those seeking to exclude liability all together; (c) an exclusion clause may not be given effect where doing so would render the agreement devoid of contractual content so as to turn it into a mere statement of intent. 12

13 Direct and indirect losses Another well-known rule of construction is that the exclusion of consequential losses will not cover a 'naturally resulting' direct loss. This distinction between consequential (or indirect) and direct losses is established law deriving from the decision in Hadley v Baxendale (1854) 9 Exch 341. The judgment made a distinction as to whether the losses: (i) arose naturally from the breach (i.e. direct losses); (ii) were such that they may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as a probable result of the breach (consequential/indirect losses). Therefore, when considering whether a loss is recoverable, it is necessary to ask two questions, namely, whether the loss is foreseeable under the test in Hadley v Baxendale and, secondly, whether any relevant exclusion clause may be construed as being applicable to such a foreseeable loss. The International Ocean Towage Agreements Towcon and Towhire were produced by BIMCO with a view to achieving clarity in apportioning liability. The contracts have proved to be popular, and the simplified knock-for-knock liability regime can be considered to have been successful by virtue of a reduced level of litigation. An undoubted benefit of using such standard form contracts is that the intent behind the clauses is often clear, thereby reducing the scope for dispute. Notwithstanding this, while such standard contracts invariably have consequential loss provisions, there have been a number of cases that have sought to clarify the nature and extent of the liabilities such clauses are designed to exclude. Ease Faith Ltd v Leonis Marine Management In the case of Ease Faith Ltd v Leonis Marine Management, a number of complicated evidential issues and detailed facts were considered. Amongst these was a question as to the correct interpretation of clause 18.3 of Towcon, which is designed to exclude liability for consequential losses. By way of brief background, the facts in issue were as follows. The Kent Reliant had been purchased for scrapping in China with an agreed date of delivery of the end April Ease Faith entered into an agreement with Leonis for the services of the tug Naporistyi to tow the ship to China (sub-towcon) and, in order to fulfil the sub-towcon, Leonis entered into an agreement (the head towcon) with the co-defendants, Cloudfree. The ship was delivered late, and the claimants issued proceedings on the basis that the tug had failed to proceed with proper dispatch and the defendant was therefore in breach of the sub-towcon. Ease Faith claimed damages for, amongst other things, losses arising because the late delivery caused the Chinese buyers to reduce their price for the ship. loss of profit, loss of use, loss or production or any other indirect or consequential damage for any reason whatsoever. The court held that the words "loss of profit" referred to the loss of profits generated by future use of the tug by the tugowner or the tow by the hirer, whilst the nature of the loss in this case was more akin to a diminution of price than a loss of profit. The Judge considered that "there were very few, if any, losses suffered by a commercial concern which could not be described as amounting to or producing a reduction in profits", and that it must therefore be the case that clause 18.3 was intended to have a restricted meaning. The correct interpretation of the clause, in accordance with the Eiusdem generis rule, was to consider the term "loss of profit" to be of the same nature as loss of use, both of which should be considered contra proferentem. In following these rules of construction, the court held that the losses that were claimed could not be considered to fall within the exclusion clause, the purpose of which was to exclude consequential losses such as the future use of the tug or tow rather than those losses that could be more readily categorised as direct losses. Conclusion In this case, the court was not prepared to use a broad construction of an exclusion clause so as to apply it to direct losses in a similar manner to those indirect or consequential losses that may properly be considered to fall within the second limb of Hadley v Baxendale. While a loss of profit is potentially capable of being an indirect loss, the court was clear in its view that clause 18.3 is not applicable to a claim for loss of profit that is properly to be considered as a direct loss within the first limb of Hadley v Baxendale. Ease Faith Ltd v Leonis Marine Management is an important reminder that even under standard form contracts, the potential for litigation is ever present where there is no clear agreement on the precise nature of the terms that have been agreed. Both Leonis and Cloudfree sought to argue that the claimant's claim was excluded by clause 18.3 of the standard Towcon form, which provides:..neither the tugowner nor the hirer shall be liable to the other party for 13

14 BY MARK BAYLIS CONSULTANT +44 (0) MARCUS JONES OIL AND GAS DIRECTOR, LLOYDS REGISTER +44 (0) Regulatory New Frontiers for the Offshore Industry The offshore industry has become more complex and technically challenging as oil companies venture into increasingly remote locations. How best to manage the resulting risks will be among the subjects debated at this year s Standard Offshore Forum. The world s known oil and gas reserves are diminishing just as newly industrialised nations such as China and India are pushing demand to unprecedented levels. The inevitable result is that oil companies have started to explore, drill and produce in locations that would once have been considered too difficult and dangerous. The recent row over rights to the Arctic suggests that it is just a matter of time before even this most inhospitable of environments is explored for whatever may lie beneath the seabed. As the oil industry pushes into new frontier regions, it is encountering new types of risk, and it s still getting to grips with them, according to Lloyd s Register Oil and Gas Director Marcus Jones, a speaker at this year s Offshore Forum. The difficulties associated with remote locations have been compounded by increased political and supply chain risk, says Mr Jones. Apart from the obvious dangers of instability in many territories, where governments and their regulations may change quickly, there are growing demands for local content in any oil or gas activity. For example, it is quite common for the national authorities to ask that a certain percentage of the workforce should come from their country or that their own yards do much of the construction work. You often get a project that s already high risk, and you have the added problem of having to use people who you have not chosen, says Mr Jones. Even without this distraction, the oil and gas business is already much more complex logistically than it used to be. Whereas oil companies would once have used their own resources to do the bulk of the exploration and production work, they are now much more likely to use contractors and subcontractors. It s a very complicated scene, says Mr Jones. You could have lots of firms from many different countries working on the same project. You need to have very strong procedures in place to manage the supply chain. Meanwhile, back in the more established oil and gas fields, existing units are working to peak capacity to meet the world s need for energy. And, whenever commercial activity increases, so does the risk of something going wrong. This scenario of greater opportunity and risk asks all kinds of questions of the oil industry: of its systems and procedures; its ability to communicate; and whether it can continue to operate to the highest practical health and safety standards. And it provides the backdrop for what should be a lively discussion at the Forum. There will be some highly knowledgeable and experienced people in the audience, and I see it very much as an interactive session. I aim to generate a stimulating debate by asking relevant questions, and I m genuinely excited at the prospect of discussing this subject with such a wide range of experts. I hope that we can all learn from each other, that we ll go home with fresh ideas and insights. Marcus Jones, Oil & Gas Director, Lloyd s Register Marcus is responsible for the global Oil & Gas business at Lloyd s Register. His primary role is to lead the development and implementation of the global strategy and planning. He is also responsible for directing worldwide business development and the definition of the commercial, technical and marketing policies for the business. Marcus joined Lloyd s Register in 1990 as a basic grade engineer surveyor, having previously worked in the merchant navy. He was later appointed lead surveyor for onshore and offshore activities to oil and gas clients such as Conoco, Arco and finally Shell, where he was responsible for the offshore certification of 25 platforms. Marcus is qualified as an Extra First Class Marine Engineer and is a Fellow of the Institute of Marine Engineers. Lloyd s Register Lloyd s Register is an independent risk management and safety assurance organisation. As well as being the oldest of the classification societies, it provides a wide range of other services. These include assisting clients with their safety, quality and environmental performance. Its expertise covers shipping and other forms of transportation, oil, gas, as well as general industry and manufacturing, and management systems. It is recognised as a world leader in the provision of compliance services to the oil and gas industry. With 240 offices in 80 countries, employing 6,000 people from 90 different nationalities, Lloyd s Register will still bring a truly global perspective to the debate. Information about the seventh Standard Offshore Forum can be found on the back cover. Although he is going to set the scene and lead the debate, Mr Jones is clear about one thing: he does not have all the answers. 14

15 BY WENDY NG, CLAIMS DIRECTOR Asia Offshore We have written elsewhere in this issue of the Bulletin about the worldwide boom in the offshore oil and energy business. Asia is no exception; new oil and gas discoveries in Asia and Australia are fuelling regional expansion as companies scramble to support present and future projects. Established operators and well-funded start-ups are ramping up their fleets to service their oil company clients, and south-east Asian shipyards are full of orders to build, convert and refurbish floating production units, drilling rigs and support vessels. Standard Asia, the Standard Club s Singapore based P&I Club, is seeing a similar expansion in its business. Ten years ago, the Standard Club decided that Asian shipowners needed their own dedicated club based and incorporated in the region. That led to the setting up of Standard Asia, with the express intention of providing a full range of P&I functions from a management base in Asia. During the decade since it was founded as the first mainstream P&I club in the region, Standard Asia has become a major player in the offshore energy market. A book of offshore business which was dominated by fleets of supply boats in 1997, has now expanded to provide full cover for FPSOs and jack-ups. For Standard Asia, as for other companies based in Singapore, projects such as Tanker Pacific s FPSO Raroa have now become almost routine. The 53,287 gt FPSO is currently under conversion in Singapore s Jurong Shipyard, which is installing a turret, boilers and process facilities as well as other renewal and life extension work. When the project is completed next year, the FPSO will take up her station on New Zealand s Maari field. Standard Asia has been able to provide Tanker Pacific with an insurance programme to cover the FPSO from the conversion through the installation phases and onwards to operation on the field. In the meantime, companies such as Rubicon Offshore International are breaking new ground in production technology, producing flexible versatile solutions for small to medium-sized fields. Both of their FPSOs, which will be used to maximise production at the beginning and end of field life, or on fields where larger permanent units are unsuitable, are entered with Standard Asia. Of course, the growing book of production units does not mean that Standard Asia is no longer interested in other offshore business. We are proud to insure fleets such as that of Emas Offshore, which is typical of the new and energetic Singaporean companies taking up leading positions in the oil and energy business. Emas young fleet of AHTs and supply boats is used to provide support throughout the lifecycle of an oilfield, and it too is moving into construction and production with the formation of a new division. We believe that companies operating out of the Asia Pacific region will increasingly be looking for local provision of their support services, and Standard Asia is confident that we can offer insurance solutions as flexible and innovative as the technological solutions our clients are providing to the industry. From our Singapore office, we are able to underwrite and service the business from cradle to grave, and through products such as the Standard Offshore Conditions for FPSOs and the Offshore Liability Extension for support units, we can give tailored cover designed for our members particular needs. We also work closely with our reinsurance colleagues in the London office to ensure that we are making the best use of the insurance capacity available in the market. And of course, our position in Singapore means that we are on hand to provide claims services not just to Standard Asia members but also to Standard Bermuda members working in the region. This is how we believe we give our clients the best of both worlds insurances locally sourced, underwritten and serviced but backed by global security and expertise. 15