Contracting in the offshore environment: Lessons from Oil & Gas

It is tempting to reach for the LOGIC or FIDIC contract template for your next offshore wind project. These are well used and well understood. But, they were both designed for a different context. Is there a better approach?

LOGIC vs FIDIC?

In the absence of a recognized standard template contract or suite of contracts in offshore wind, there are different reasons for applying either LOGIC or FIDIC.

LOGIC:

is designed with the hostile, offshore environment that is the North Sea
many of the parties involved will be familiar with the provisions and the make-up of these contracts
the different variations on the standard can be applied to different points on the supply chain (e.g. product supply, offshore services, heavy plant, etc.)

FIDIC:

is frequently used for onshore renewable projects
many of the parties will, again be familiar with this standard

There are pitfalls to be considered when applying either of these approaches to offshore wind projects or other offshore energy projects:

neither LOGIC nor FIDIC standards were designed specifically for offshore renewables
LOGIC contracts have heavy emphasis on pollution liabilities which will often be unnecessary in renewables contracts
FIDIC is an “onshore” contract – it is not designed to be directly applied to an offshore environment – a good example being the detailed time programme and related conditions contained in FIDIC – these all have to be heavily modified to allow for realistic weather delays.

What lessons can we learn from Oil & Gas?

One of the fundamentals of offshore contracts is the mutual hold harmless (MHH) regime. Head over to my previous blog on the subject of indemnities and MHH here. This is something that isn’t filtering through in Offshore Wind contracts based on FIDIC or NEC.

MHH is well understood in Oil & Gas contracts and the rationale is simple: the person that holds the insurance to cover that risk is (subject to certain exceptions) generally the person contractually responsible for that risk. That is the case, regardless of fault.

This helps in three key areas, as laid out in my previous blog:

CERTAINTY – each party knows where it stands
REDUCED COSTS – risks being insured once, rather than multiple times and the cost being passed up the chain
PROTECTING THE INDUSTRY – if the offshore wind industry is going to flourish, we need supply chain companies of all sizes. We can’t force smaller companies into a position where the choice is between taking on potential risks that could be disastrous for their company or taking out costly insurance policies that they might not even be able to place.

Supply chain companies should also consider joining the Industry Mutual Hold Harmless (IMHH) scheme, which acts as a bridge between companies working on the same project and/or same area offshore where there is no direct contract between them, but provides an MHH between these companies. This has worked very well in Oil & Gas, but is at odds with the traditional onshore construction contracts and, in particular, collateral warranties. For the reasons mentioned above, the rationale for this is sound from an industry-wide and from an individual company perspective.

Insurance plays a key part in the offshore industry and insurance companies well-versed in offshore Oil & Gas and/or Wind projects will understand the positions on indemnities – be sure to liaise with your insurers before signing offshore contracts to ensure you are covered. It is also crucial to ensure subrogation rights are properly addressed to ensure indemnities are not undermined.

Conclusion

LOGIC shades it for me because it has been designed for the offshore environment. However, a more balanced approach would be more appropriate – one that uses elements of both LOGIC and FIDIC to create a proper fit-for-purpose contract in each case.

If you would like further information on the topic discussed in this blog, please contact Calum Crighton.