Risky business? Contracting liability in oil and gas

By Rod Hutchison, Partner, Ledingham Chalmers

The oil and gas sector’s a challenging and inherently hazardous operating environment and that means risk and liability allocation calls for careful consideration, and even more careful contract drafting.

One example of commonplace risk allocation is mutual indemnities: a familiar fixture in UKCS contracts for well over two decades.

Here, contractors agree to hold each other harmless for loss and damage to people and property, even if the contractor relying on the indemnity was at fault. The underlying principle recognises potential huge losses, such as the destruction of an entire oil rig or platform, could not be borne by a single contractor.

However, much has happened in the North Sea during that time, not least of which the introduction of the Oil and Gas Authority in 2016.

So, are mutual indemnities still fit for purpose, and what other aspects of liability should energy businesses bear in mind?

Up to the job?

While the Oil and Gas Authority-mandated requirement to collaborate only applies to operators, it is the service and supply chain sector where these collaborative projects are increasingly being initiated.

Collaboration brings together particular skill sets for specific work and there is an argument risks and liability need to be apportioned in line with these divisions.

And that change may be seen by some as a reason to seek to contract out the of mutual hold harmless regime. This isn’t something we’d see as a positive change.

The value in these indemnities is a clear understanding of liabilities, which allows contractors to take appropriate steps to insure against risk for damage to property and injury to personnel, regardless of the cause.

As a contracting structure, it continues to be the initial negotiating position for many industry contracts and a move away from that would mean more time spent round the negotiating table. Perhaps even for some smaller contractors, the liability for a project could exceed the likely commercial gain or securing insurance may be nigh-on impossible or financially prohibitive.

As such, it seems sensible to continue with the mutual hold harmless status quo.

What’s up for grabs?

That said, no matter how collaborative you are, there are contract areas where it would be unrealistic to expect to have uniformity.

One of these areas is suspension clauses.

Here, work is stopped generally in two circumstances: firstly, there’s fault of one party; secondly, that it’s convenient to, say, the operator. Perhaps, for example, a project’s no longer commercially viable.

In the second circumstance, where it’s not your fault as a contractor, you’d be looking for some form of compensation.

And what about financial caps on liability? Your liability may be capped at a fixed amount, perhaps the value of the purchase order, or a percentage of it. Plus, payment terms need careful consideration, as does when the obligation to pay kicks in. For example, should a contractor further up the chain only pay a subordinate contractor when it has been paid?

When it comes to liabilities and risk in the oil and gas industry, it still makes sense that mutual hold harmless is the starting point for any negotiation; however, allocation of risk and liability doesn’t end there. As ever, its important contracts are carefully drafted to ensure contractors don’t end up disadvantaged, whatever happens.