Oil & Gas Service Providers: Getting Your Dues

Force Majeure

Most contractors will be familiar with force majeure clauses in commercial contracts. They are typically intended to protect against catastrophic events such as terrorist attacks or environmental catastrophes. Consequently, it is normally relatively easy to identify a force majeure event.

The important points to note are that: (i) force majeure is a creature of contract and if something is not defined as a force majeure event then it cannot necessarily be relied on to suspend performance or render it unnecessary (ii) an economic downturn or an oil company’s associated financial difficulties will not be force majeure events unless described as such in the relevant contract.

Unless there is a specific defined force majeure event that has arisen, you should not accept vague claims of force majeure as a reason for non-payment.

Frustration

A contract may be discharged on the ground of frustration when something occurs after the formation of the contract, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that agreed when you entered the contract.

There are a number of important points to note here:

1. A contract is not frustrated because the project has become uneconomic for the buyer of the services, or because it is not going to achieve its projected internal rate of return. These issues do not amount to frustration and are no reason not to pay.

2. Where the law changes in a country or perhaps it proves impossible to obtain necessary permits to undertake, e.g. a seismic survey or other oil and gas exploration activity, then a contract can be frustrated. In those circumstances, there may be what is called a total failure of consideration, and you as the service provider could face a claim for repayment of sums advanced to you if no work has been done. We look at this and your rights in such circumstances in the next section.

3. Because neither party is at fault when a contract is frustrated, neither party can claim damages and each party is released from its obligations to either undertake unperformed work or to pay for it. However, even if a contract has been frustrated, the relevant oil company must still pay for work done prior to the frustrating event(s), and the service provider may be entitled to retain, from any advanced payment, expenses incurred before the frustrating event as well as potentially the value of any benefit conferred on the commissioning party prior to the frustrating event.

Repayment of Advance Payments/Deposits: Total Failure of Consideration

It is not uncommon for advanced payments to be made to service companies, e.g., mobilisation payments or other advanced payments which might be recouped by way of a discount against the invoiced value of the services provided. Where a contract is frustrated without any, or any substantial, part of the relevant services having been performed there may be what is called a total failure of consideration. In short, this means that the party commissioning the services received none of the benefit that it contracted to obtain. In these circumstances, the oil companies may have a claim for restitution of the advanced payment.

Claims for Expenses or Reasonable Value of Benefit

As a service provider, you may be entitled to retain from those advanced payments a reasonable sum to cover your expenses as actually incurred, and you may also have a claim for the reasonable value of any benefit that you in fact conferred on the oil company.

Different Forms of Dispute Resolution: Arbitration, Litigation, Mediation and Early Neutral Evaluation

The main forms of commercial dispute resolution are arbitration, litigation and mediation.

Arbitration and litigation are, broadly speaking, similar in the procedures adopted (i.e., pleadings, some form of documentary disclosure, witness statements, trial and then a final determination by an arbitrator or judge). We have found that given the prevailing tough economic climate, both service providers and oil companies want increasingly to avoid these time consuming and often expensive forms of dispute resolution, in favour of alternative methods of dispute resolution such as mediation or early neutral evaluation.

Mediation is a structured and facilitated negotiation, where an independent third party mediator will be appraised of each parties’ claim, and will attempt to act as an honest broker between them in an effort to bring the parties to a position where they are able to conclude a settlement on acceptable terms. The parties must agree to a mediation and the mediator has no power to issue a binding decision. Mediation is a useful tool in resolving commercial disputes in an industry where there are both limited numbers of service companies and oil companies because it can help preserve valuable commercial relationships even where parties have been in substantial dispute.

A further useful but underused tool is early neutral evaluation. This is where the parties agree to appoint a very senior lawyer, typically a Queen’s Counsel, to give a view on how a case might be resolved. It is a non-binding process. It is a very useful tool in the context of disputes concerning the construction of contractual provisions, as it can serve as a powerful reality check for a party adopting an unreasonable construction.

Litigation Funding

Cash flow is severely constrained for some service companies at the moment, given the commercial pressures in the sector, and they may feel that there is little choice but to walk away from an otherwise good claim because they cannot tie up free cash flow in lawyers’ and other advisers’ bills in order to try to recover unpaid fees. There are litigation funders who, in return for a share of the proceeds, will both fund legal fees and arrange for After the Event Insurance (“ATE”) in order to limit the downside risks of a dispute. ATE is an insurance policy to cover the adverse costs of litigation if you lose your claim. We have good links to all of the substantial funders in the market.