IMCA continues to promote fair contracting

Organisations and Associations - May 3, 2006

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Contracting conditions around the world are complex and numerous. Service contracting is a high-risk activity and risk exposure can be very large and bear no relationship to contract value.  With these challenges in mind, the International Marine Contractors Association (IMCA) published their contracting principles a year ago; and since then has taken on board feedback from their members and their members’ clients to ensure a win:win situation.  The recently formed IMCA Americas Contracts Workgroup has continued the efforts with a slant towards the Gulf of Mexico market.

“The world of risk management has changed following such major incidents as 9/11, and offshore industry-specific ones like the capsizing of the Petrobras platform in 2001 and the Hurricanes in the Gulf in 2004 and 2005,” explained Hugh Williams, Chief Executive of IMCA, the international trade association representing offshore, marine and underwater engineering companies. 

“Insurance companies and financial institutions have become more risk aware and as a result, insurance has become more restrictive and expensive and clients are attempting to transfer increasing levels of risk to contractors. That was why by Spring 2005 we responded to this challenge by working with our members to come up with a fair solution – producing ‘IMCA Contracting Principles’ a document that appears on the IMCA website at www.imca-int.com/contracts."

“Since then our member organisations – 300+ marine contracting organisations around the globe – and their clients (primarily oil and gas operating companies) report that they have found the document extremely useful. We have also established the Americas Contracts Workgroup, set up specifically to look at the particular interests of companies based or working in the waters surround the Americas where conditions of contract are traditionally tuned to particular regional or state issues. Feedback from clients and contractors about the Contracting Principles include such comments as:

• “It’s a useful dialogue document”
• ”I’ve circulated it to our commercial team and project managers”
• ”Alongside our own in-house approach this provides a clear basis for developing contracts”

In 2002, one oil company commissioned a study of the business environment in offshore contracting. The study included interviews with 15 major contractors and a dozen oil companies and summary results were shared with the contributors. The feedback identified some bad experiences and an inequitable balance of risk and reward for contractors. The root of the problem was almost always in the conditions of contract.

“This is not an isolated event, but one which reflects views expressed by several contractors, clients and industry observers in recent years,” explained Williams.  “Often the risks and rewards have become imbalanced – a position which is not sustainable for the industry generally.IMCA has several roles but a key one is communication and promoting dialogue amongst the various companies, both clients and contractors, for the benefit of the whole industry, and that is why we published “IMCA Contracting Principles” a discussion document that has already proved to serve the long-term interests of all participants in the oil and gas industry by encouraging an equitable contractual balance based on the parties’ respective risks and rewards.  This, in turn, has helped to improve relations, increase efficiency and reduce overall costs.”

As IMCA’s President, Frits Janmaat, VP Finance, Legal & Commercial of the Allseas Group, explained in a message to members at the time of the launch of the document: “IMCA has reached a significant milestone – the launch of its Contracting Principles. After more than twenty years of discussions with various partners and on different platforms IMCA is almost there. A serious effort to jointly work out these principles with normal contracting parties has, unfortunately, not been successful. IMCA has therefore taken the initiative to produce what it considers to be a well-balanced result."

“The present market situation is beginning to help contractors to get a better balance between risk and reward. Operators achieve rapid ‘pay back’ on their project investments but this does not compare well with contractors working hard and needing all the luck in the world to depreciate their investments over a 15 to 20 year period.”

Risk allocation goals with the very apt acronym ‘FAIR’ lie at the heart of the newly published “IMCA Contracting Principles”:

• Fair (not equal) and realistic distribution of risk in proportion to relative rewards
• Allocation of risk – to the party best placed to assume
• Insure – sufficient scope of cover
• Reasonable – avoid “duplicate” assumptions of risk and minimise potential for dispute
 
The eight-page “IMCA Contracting Principles” highlights fifteen principles with a legal definition being given followed by a comment more easily understood by the layman showing clearly how each principle measures up to IMCA’s FAIR risk allocation goals.  The principles covered are:

• Company group and contractor group property and personnel
• Project works (including both company and contractor supplied items)
• Pollution
• Third parties
• Consequential losses
• Warranty obligations
• Limitation of liabilities
• Minimum insurance requirements
• Force majeure and suspension
• Delay
• Variation orders
• Free access to worksite
• Intellectual property rights
• Termination by company for convenience
• Company’s obligation to pay contractor

The final page of “IMCA Contracting Principles” is devoted to IMCA Guidelines on Competition Law Compliance. 

The Principles are not intended to represent a complete analysis of all risks, which are covered by contracts in the oil and gas industry. In general, they reflect well-established industry custom and practice in addressing certain risks, such as the knock for knock indemnity regime. They are not contractual clauses. They do not in any way form a standard contract, nor is their adoption in any way mandatory – indeed, every page of the document carries a reminder that ‘The publication of these Principles by IMCA is intended to assist and promote industry dialogue and efficiency and their adoption is not mandatory’.  

“We must reiterate that the Principles are published as a discussion document and as an aide for clients and contractors alongside their in-house standard contracts and industry published standard contracts,” explained Williams. “Each IMCA member is, of course, free to negotiate their own terms, qualify such contracts and to make use of the Principles should it wish to do so in order to achieve a contract satisfactory to both parties.”

Copies of “IMCA Contracting Principles” are available from IMCA at IMCA, 5 Lower Belgrave Street, London SW1W 0NR, UK.  Tel: +44 (0)20 7824 5520; Fax: + 44 (0) 20 7824 5521; email: imca@imca-int.com  and the document is also on their website at www.imca-int.com/contracts.

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