Here be monsters

The complexities of the extraction game are such that standard form contracts are seldom acceptable to the players, and long, complicated and thus expensive contract documents are drawn up. Indeed, they are so long and complicated that, when disputes arise, it can be difficult to work out what they mean, and there is almost always room for each side to argue that it means whatever suits it.

North Sea construction projects have one feature in common with more mundane land-based jobs – the temptation to recover losses (or make extra profit) through claims. Oil companies are especially sensitive about claims. They really do not like them, and they try hard to find clauses to put into their contracts to discourage, or, if possible, exclude, claims for extra money for delay and disruption and the like. Contractors then try to do the same in their subcontracts.

Of course, it is not suggested that there will be no variations – the business is far too uncertain for that. But the contractor will be expected to quantify the likely cost of any delay at the earliest moment and justify its calculations on contractual principles. The intention is to avoid any possibility of the contractor coming back at the end of the job and asking for extra money in respect of a problem it encountered at the start.

But does a complicated valuation clause providing for all delay and disruption costs to be valued as part of the variation process stop a later claim for damages for breach of contract? That sort of question was answered negatively in the context of a JCT contract in 1985 in London Borough of Merton vs Leach, but things have a come a long way since then, and contracts, particularly in the North Sea, have become much more sophisticated.

His Honour Judge John Hicks recently grappled with one of these new sea monsters in AMEC Process & Energy Ltd vs Stork Engineers & Contractors BV. Stork was constructing the topsides of a floating oil production unit for Shell, and subcontracted a large part of the work to Amec. Amec brought a large claim for price adjustments and damages. One of several preliminary issues that came up for trial was whether the variation clause effectively excluded claims for breach of contract.

The long and complicated clause essentially said this:

• The price and programme were only to be adjusted as a result of a variation

• Amec could request a variation in certain circumstances, but, if it failed to do so, it lost the right to a variation, and therefore to adjustment to price and programme

• In making the request it had to provide estimates

  • Claims arising from variations can be strictly circumscribed
  • The drafting of these clauses must be explicit if they are to work
  • Contractors should not give up claims too easily

• If Amec felt that it was entitled to more than it was being paid as a variation, it had to give immediate notice

• Stork could require all sorts of records to be kept

• A full account of all disputed claims had to be submitted every month

• If Amec failed in giving notice, keeping records and giving monthly updates, it would lose its right to extra money or time.

Amec was attempting to recover extra money in respect of additional and varied work, late information and late provision of materials and equipment by Stork. Stork argued that the contract was expressed to be the entire agreement between the parties, and the definition of contract price made it clear that that would be full compensation to Amec for carrying out the works. The contract price could only be changed by a variation, and Amec could have applied for a variation in appropriate circumstances. It was not allowed to seek an addition to the contract price by any other means.

Judge Hicks found the contract clauses difficult, and anyone reading the transcript of his judgment is bound to sympathise. He commented that the whole problem resulted from “a lack of exact draftsmanship”. In the end, he decided that neither Amec nor anyone else should be taken as having given up rights to claim damages for breach of contract without very clear words being used, and these words were not clear.

But Amec was not home and dry. It had put its case not only as a claim for damages for breach. It had also expressed some of the claims alternatively as variations, confusing the issue somewhat. Judge Hicks was unable to decide at the preliminary issue stage whether it had effectively elected to pursue its case on that basis, making its victory rather pyrrhic.

There will be more of these cases washed ashore from the North Sea before long.