The development of the offshore oil industry in the 20th century gave rise to the need for specialised contracts for the hire of vessels in this technical (often highly technical) sector of shipping. Beginning with SUPPLYTIME in the mid-1970s, there are now numerous very specific charter parties for use within the industry. These include HEAVYCON 2007, a voyage charter party for the heavy-lift trade that contains a 'knock-for-knock' regime for semi-submersible vessels carrying cargo, such as jack-up rigs on deck, WINDTIME, a time charter party for high-speed personnel craft used in the offshore wind sector, and BARGEHIRE, a time charter party for the hire of non-self-propelled barges.
These contracts, and the many others used in offshore shipping, have had to develop significantly over time to keep abreast of the advancing technologies and changing issues facing the industry. This in turn has resulted in an increasingly complicated contractual matrix surrounding the exploitation of offshore natural resources. In this chapter, we provide a short overview of some of the most frequently used contracts in the field of offshore shipping, and make some general comments about their characteristics and nature.
In the wake of the growth in offshore activities in the 1970s, and oil exploration in particular, there was a significant increase in demand for offshore service vessels. Originally these service contracts were based on standard time charter party forms or in-house forms produced by tug owners. Increasingly, the industry felt that it needed a specialist contract, and so the Baltic and International Maritime Council (BIMCO) was approached to draw up a suitable solution. This led to the creation of the SUPPLYTIME form in 1975 (SUPPLYTIME 75). Its purpose was to regulate the relationship between owners and charterers when chartering tugs and offshore service and supply vessels on a time charter basis. Similarly to the widely used NYPE and BALTIME forms, the owners were paid a daily rate in exchange for use of the vessels.
As the industry continued to specialise, a number of revisions were made to SUPPLYTIME in the form of SUPPLYTIME 89. In particular, the aim of the revised version was to strike a more equal balance between owners and charterers and to avoid the use of extensive rider clauses, which had become common with the SUPPLYTIME 75 form. One of the key features introduced by SUPPLYTIME 89 was the knock-for-knock regime between owners and charterers (discussed further in Section II.i), which had been a feature of the 1985 versions of TOWCON and TOWHIRE (see Section III).
SUPPLYTIME 89 became the industry standard form contract for offshore activities. In 2005, a further review was undertaken (largely because of criticism of the early termination mechanism in Clause 26, which was the source of much litigation) and led to the creation of SUPPLYTIME 2005. Following the 10th anniversary of the 2005 form, BIMCO reviewed the contract and a new version came into force in 2017.
Given that the revised 2017 form appears broadly similar to its 2005 predecessor, we highlight and discuss some of the key changes contained in SUPPLYTIME 2017.
i Clause 14 of SUPPLYTIME 2017: liabilities and indemnities (knock-for-knock)
SUPPLYTIME 2005 reinforced the principle that the apportionment of liability should be on knock-for-knock terms, whereby the owners and charterers each assume liability for loss of or damage to their own property and that of their contractors and subcontractors, as well as for injury to their own personnel and that of their contractors and subcontractors, regardless of which party caused the loss, damage or injury. However, the 2005 form contains numerous owner-friendly exceptions whereby the knock-for-knock regime does not apply (e.g., if damage is caused by undisclosed dangerous or explosive cargo, or liability is incurred as a result of the owners' suspension of the vessel's service).
The 2017 form serves to level the playing field by removing the majority of these exceptions. The three remaining exceptions (down from 16) relate to:
- owners' and charterers' towing wire;
- limitation of liability at law; and
- salvage of charterers' property.
The reduction in the number of the available carveouts has extended the scope of the knock-for-knock regime. This is a trend that has been supported by the amended definitions of 'charterers' group' and 'owners' group'. These definitions now include reference to 'clients (of any tier)' (for charterers' group) and 'affiliates' (being those legal entities under the corporate control of owners, charterers or charterers' clients or co-venturers). The expanded definitions address previous uncertainty as to whether these defined terms include other participants in a project further along the contractual chain. However, the amended definitions are still not without their problems and there may still be scope for claims from some parties to fall outside the knock-for-knock regime. Accordingly, thought should be given to appropriate amendments to the 2017 form to ensure that an effective knock-for-knock regime will apply.
In addition to expanding the scope of the knock-for-regime, SUPPLYTIME 2017 includes amendments to the included losses that fall within the knock-for-knock regime. Clause 14(a) now includes reference to 'non-performance' so that parties are protected under the knock-for-knock regime for losses arising from a total failure to perform the charter party. These amendments ensure that 'radical breaches' of the charter party, such as deliberate non-performance, fall within the scope of the knock-for-knock regime.2 The SUPPLYTIME form is now consistent with other recent forms in the offshore shipping sector, such as WINDTIME.
The knock-for-knock regime continues to be supported by reciprocal indemnities. In addition, charterers assume liability for the property and personnel of their co-venturers and of their clients (of any tier). This is necessary as charterers often hire a vessel as part of a wider project to which the chartered vessel is providing services.
ii Clause 14(b)(ii): consequential damages
Clause 14(b)(ii) of SUPPLYTIME 2017 excludes liability for any consequential loss. Under the 2005 form, this term was widely understood to incorporate an exclusion for loss of use, loss of production, loss of profits and similar losses. The problem was that under English law, the word 'consequential' has a very specific meaning, restricted to losses that do not flow naturally from the breach. In addition, English courts have traditionally construed exclusion clauses restrictively pursuant to the contra proferentem rule.
In Ferryways NV v. Associated British Ports3 (and a number of earlier decisions), it was held that exclusions of 'indirect or consequential' losses were only effective for excluding losses that did not flow naturally from the breach in question. However, exclusion clauses in commercial contexts between sophisticated parties are increasingly being given their ordinary meaning rather than the traditional narrow interpretation. Thus, in the more recent Star Polaris case,4 the court held that 'consequential losses' had the wider meaning of financial losses, as the words are typically used by commercial parties. There was therefore uncertainty as to whether losses of production and losses of profits that follow naturally from a breach of contract would be excluded under the 2005 form.
SUPPLYTIME 2017 addresses this uncertainty by including a separate head of excluded loss under Clause 14(b)(i), which expressly identifies excluded losses as including loss of use, loss of profits, loss of product and loss of business, inter alia. By including these specific heads of losses, the 2017 form removes uncertainty and aligns itself with the wording of TOWCON 2008, TOWHIRE 2008 and WINDTIME.
iii Clause 10: fuel
SUPPLYTIME 2017 contains updated provisions concerning the payment for fuel that more closely reflect current industry practice. The previous regime provided that charterers would purchase the fuel on board at the time of delivery and owners would purchase the fuel on board at redelivery (at the price prevailing at the relevant port).
The 2017 form allows for a more flexible regime that details two payment alternatives: (1) the parties can pay for fuel in a manner consistent with the 2005 form, but the price to be paid must be supported by evidence obtained at the most recent bunkering operation; or (2) the difference in quantity of fuel on board between delivery and redelivery is paid at a pre-agreed rate or a rate substantiated by evidence from the vessel's most recent loading of fuel.
The vessel's chief engineer can stop the loading of fuel should the owner reasonably believe that the charterer is loading fuel that does not comply with the specifications and grades agreed with the owner. Importantly, the vessel remains on hire during any stoppage of loading under Clause 10.
iv Clause 34: termination
The termination provisions in SUPPLYTIME 2017 have been clarified to avoid disputes regarding what constitutes an event of termination. Requisition, confiscation, loss of vessel and force majeure are now stated to be events of termination. Conversely, bankruptcy and owners' failure to acquire insurance only provide the innocent party with a right of termination.
The right of termination, after a stipulated period, in the event of vessel breakdown has been removed in the 2017 form. Breakdown is now referred to solely within the off-hire regime and is accompanied by a termination right linked to prolonged off-hire for a single continuous period or cumulative separate periods.
v Clause: maintenance and dry-docking
Under SUPPLYTIME 2017, owners will no longer be compensated for unused maintenance allowance unless such an allowance has remained unused at the charterer's request. Uncertainty still remains as to whether the owner can use maintenance as a defence against off-hire.
The 2017 form removes the owner-friendly provision that stipulated that the vessel remains on-hire during transit to and from the dry-dock facility. The vessel will now be off-hire once it is placed at the owners' disposal, a position that is more consistent with industry standards.
Towage has been a maritime activity for centuries. The first recorded tug on the River Thames is said to be the Lady Dundas in 1832. A further example of early towing can be found in William Turner's painting of The Temeraire being towed to a breaker's yard in 1839. Since those formative years, towage has developed to assist with the arrival and departure of ships at ports, with offshore activities, and with salvage operations. Until relatively recently, however, there was a plethora of different towage contracts in use, such as the UK Standard Conditions for Towage and many other forms drafted by the tug owners themselves.
The International Salvage Union, which includes many of the major international towage and salvage contractors, approached BIMCO in the 1980s to produce a standard form international towage contract. The aim was to redress the perceived imbalance arising from the use of tug owners' agreements for ocean towage, which often contained exceptions favouring the tug. There was also inconsistent use of the 'American Conditions', which used a simple risk allocation between tug and tow, with each party bearing the risks incidental to their vessel, which was then laid off through insurance.
Accordingly, a subcommittee of the documentary committee of BIMCO, together with the International Salvage Union and the European Tugowners Association, debated and produced two standard form contracts for international ocean towage services. The aim of the group was to produce a more balanced contract based on the 'American Conditions' that did not unfairly favour the tug. The result was the publication of the TOWCON and TOWHIRE forms in 1985, introducing the knock-for-knock liability regime.
The TOWCON form is a contract for the service of a tug for a particular voyage. It is a voyage charter designed for towage between specified locations, and accordingly the remuneration is on a lump sum basis. In return for this lump sum (which may be payable in several instalments), the tug will bear the majority of the risks in respect of time and delay.
As already discussed, under a typical knock-for-knock regime, parties agree that the loss lies where it falls, irrespective of fault and without recourse to other parties (i.e., 'your people, your property, your problem'). Its purpose is to strike a balance between the tug owner and the hirer. It also offers contracting parties certainty, reducing insurance costs and avoiding the time, expense and difficulties in attributing fault and causation. In essence, each party is responsible for and agrees to indemnify the other contracting parties against injury to, or death of, its own personnel, loss of or damage to its property, and any other specified losses (such as consequential loss or environmental liability).
In 2008, the 1985 version of the TOWCON form was amended to clarify the period to which the regime applies (i.e., from arrival of the tug at the place of departure until disconnection at the place of destination) and exclude liability for direct or indirect financial loss, except for breaches of permits, tow-worthiness of the tow, seaworthiness of the tug and termination by the hirer or tug owner.
Recent interpretations of the term 'consequential loss' in exclusion clauses have cast doubt on the scope of such clauses (see discussion at Section II.ii). As with SUPPLYTIME 2017 and WINDTIME, TOWCON 2008 avoids this potential pitfall by setting out separate exclusions for loss of profit and similar losses (Clause 25(c)(i)) and 'any consequential loss or damage whatsoever' (Clause 25(c)(i)).
One further interesting point worth highlighting in the context of Clause 25 is the operation of the knock-for-knock regime in circumstances where a tug and tow part and the tow is subsequently successfully salved. An argument could be made that on the wording of Clause 25, liability for the salvage operation will not be covered by the knock-for-knock regime and the tug owners may be liable. Such an eventuality assumes that the situation has arisen as a result of a breach of contract by the tug owners. If a successful claim is made, then this will be subject to applicable limitation provisions in the usual way.
While TOWCON is a contract for a specific voyage, TOWHIRE is used for the hire of towage services for a certain period of time. The TOWHIRE 2008 form follows the same format as the TOWCON 2008, save that the basis of remuneration is a daily rate of hire rather than a lump sum payment. There are no demurrage provisions, as the daily rate continues to be payable while the vessel is in service.
This charter party form is specially designed for the transport of large project cargoes, often loaded either by a roll-on, roll-off method or using a semi-submersible barge. The form is generally used to cover a single venture involving the use of a barge and tug to transport special or project cargo (such as project components and other complex cargoes that cannot be containerised). It was produced in an attempt to avoid the difficulties of amending and adapting existing offshore shipping contracts, which are not suitable for this specialised service.
VI HEAVYCON 2007
There are many similarities between the PROJECTCON form and the HEAVYCON forms, but their primary uses differ. HEAVYCON has been adapted for use in the heavy-lift sector. The HEAVYCON form is used almost exclusively for the carriage of deck cargoes on semi-submersible vessels with a single cargo. Again, as with most prominent contracts in the offshore sector, the HEAVYCON form contains a knock-for-knock risk allocation provision specific for its intended use.
HEAVYLIFTVOY is drafted for the carriage of multiple heavy-lift shipments carrying cargoes both above and below deck. Unlike the other contracts discussed here, liability is not allocated on a knock-for-knock basis but according to the Hague Rules and the Hague-Visby Rules. BIMCO advised in its explanatory notes to HEAVYLIFTVOY that the form is drafted to be sufficiently flexible to cover 'various loading and discharging methods, single or multiple loading and discharging ports, on or under deck stowage'.
A BIMCO contract – currently named DISMANTLECON – is in the process of being drafted, with a view to producing a decommissioning contract that is appealing to both the decommissioning company and contractors. The contract is intended to reflect the greater responsibility of a contractor in the planning and methodology of the decommissioning project, and will therefore allocate the contractor a greater share of risk. As such, it may contain limited carveouts from BIMCO's usual knock-for-knock regime. For further details in relation to this contract, see the Decommissioning chapter.
The most recent addition to the LOGIC suite of contracts, which has been a long-standing feature of the offshore industry, is the LOGIC decommissioning standard form contract. The LOGIC decommissioning contract has been drafted for use in the dismantling, removal and transport to shore of offshore facilities and infrastructure. For further details in relation to this contract, see the Decommissioning chapter.
X RECENT DEVELOPMENTS
i MT Højgaard v. E.ON
The Supreme Court has handed down a significant judgment in MT Højgaard v. E.ON,5 which concerns the interpretation of offshore construction contracts. The ruling affirms the importance of complying with technical requirements incorporated into a contract, even if these are more onerous than general legal standards of design and workmanship.
MT Højgaard (MTH) was engaged by E.ON to design, fabricate and instal the foundations for 60 wind turbines comprising the Robin Rigg offshore wind farm. The contract required MTH to carry out this work in accordance with the international design standard DNV-OS-J101 (J101). The contract also required that in complying with J101, MTH had to ensure that (1) the design of the foundations had a lifetime of 20 years (the 'design life warranty'), and (2) the work was to be carried out with reasonable skill and care.
MTH carried out the work in compliance with J101 without negligence. Despite this, shortly after completion, grouted connections within the foundation structures failed. It was later established that J101 contained a serious design error that resulted in an axial capacity of the grouted connection being overestimated. This error meant the design life of the foundations was significantly less than 20 years, even when constructed exactly according to J101.
A schedule of remedial work was approved, the cost of which was €26 million. Litigation was commenced to determine which party should bear that cost. The Technology and Construction Court found MTH liable as J101 was not fit for purpose. Although MTH had reasonably relied on an international standard, its significant underlying error meant that MTH failed to install wind turbines that satisfied the design life warranty.
The Court of Appeal allowed MTH's appeal. It considered that the contract contained no enforceable design life warranty. Its reasoning for this was that reference to a 'lifetime of 20 years' was tucked away within two lines of the technical requirements, thus constituting 'too slender a thread' upon which to find a design life warranty. In any event, the Court of Appeal considered that MTH had fulfilled its obligations under the contract by carrying out the work with reasonable skill and care by complying with the requirements of J101.
E.ON appealed to the Supreme Court, which unanimously overturned the Court of Appeal's decision. Lord Neuberger considered the inconsistency between the design life warranty and the obligation to comply with J101. He considered that the courts were generally inclined to give full effect to the design life warranty, even if this was inconsistent with a specified design standard, as it is the contractor who takes this risk upon commencement of the work. The Supreme Court also disagreed that the brief reference to a 20-year lifetime in the technical requirements was 'too slender a thread' upon which to establish a design life warranty. The requirement was clearly stated in the contract, it was clear in its terms and should be given contractual force.
ii Seadrill Ghana Operations Ltd v. Tullow Ghana Ltd
The Commercial Court handed down a significant decision in Seadrill Ghana Operations Ltd v. Tullow Ghana Ltd, which addresses important questions relating to competing force majeure clauses and considers the meaning and effect of a reasonable endeavours obligation to avoid, overcome or to circumvent a force majeure event in the context of the employment of an offshore rig for drilling operations.
The dispute in this case concerned a long-term contract for Seadrill's West Leo semi-submersible drilling rig. The contract area was Ghana and Tullow intended to use the rig to carry out drilling and completion operations in the TEN and Jubilee fields, offshore Ghana, although primarily in the TEN field to execute work approved by the Ghanaian government under the long-term TEN Plan of Development.
Ghana referred the longstanding dispute concerning the position of its maritime border with the Ivory Coast to the International Law of the Sea Tribunal. The disputed area covered the entirety of the TEN field but not the Jubilee field. During the arbitration the Ivory Coast made an application for a provisional measures order (PMO) to stop any new drilling in the disputed TEN field. Ghana directed Tullow to comply with the PMO and prohibited the spudding of new wells but allowed for the completion of pre-existing wells and for well workovers.
The Commercial Court found that the PMO was a 'drilling moratorium imposed by government', which was a force majeure event under the contract. However, the Commercial Court also found that Tullow was not entitled to terminate the contract for a force majeure event as the force majeure did not cause the ultimate lack of work of the rig or Tullow's inability to comply with its contractual obligation to provide Seadrill with a drilling programme for the rig prior to termination.
Tullow was planning to drill and complete a well in TEN then to move the rig to Jubilee, where it had expected the Ghanaian government to approve in Jubilee a plan of development. The Jubilee plan of development was not approved for reasons the Court found to be beyond Tullow's control. In short, the force majeure event in TEN and the planned work in both TEN and Jubilee ran out. Tullow declared force majeure and terminated the contract saying it had discharged a contractual obligation to use reasonable endeavours to avoid, overcome and mitigate force majeure.
The Commercial Court found that there were two reasons why Tullow was unable to provide the contractual drilling programmes to Seadrill. The first was the TEN related force majeure event and the second was the lack of government approval of the further Jubilee plan of development. The Court found that the effective cause was the latter as Tullow could not show that it was delayed or prevented by force majeure. This was found by the Court even though the approval for the further plan of development had never existed and the failure to obtain approval was not attributable to Tullow. The Court decided that it was enough that Tullow had expected to get approval (although the basis for that expectation was not analysed in evidence).
Rig scheduling in the offshore industry is speculative and subject to change and like the majority of contracts of this nature, Tullow was given the discretion to use the rig wherever it liked within the contract area.
The Commercial Court's decision in respect of causation places emphasis on Tullow's long-term plans for their rig schedule from immediately before and after the PMO. The judgment does not address evidence that was advanced by Tullow at the trial that were it not for the PMO, Tullow would have used the rig in the TEN field to drill new wells even if the Jubilee plans were not approved. The Court also found that Tullow had not exercised reasonable endeavours to avoid, overcome or mitigate the force majeure. The Court said that the rig should have been used to workover two other water injector wells in Jubilee by way of mitigation.
As to the Jubilee workovers, the Court said that although Tullow had acted reasonably when making the decision not to do the work when considering its own safety and commercial interests, the reasonable endeavours obligation meant that Tullow had to take Seadrill's interests into account when deciding whether or not to do the work. The Court placed emphasis on the fact that the rig had no other work to do after the time the force majeure event had taken place in assessing what was reasonable when considering Seadrill's interests.
An added issue was that even if the Jubilee workovers had been done (at significant cost), they would not have had any near-term impact on production from the field and there would be no return on investment for a significant time.
This finding has potentially serious ramifications. There are always works that can be carried out on an oil rig. Oil companies make decisions on the basis of business need, safety, costs of the works, return on investment and other factors. The Commercial Court's decision imposes a higher standard as well as additional issues that must be considered in the decision-making process when there is a force majeure event and a reasonable obligations endeavour to mitigate or avoid it.
Although the Court focused on the fact the rig was not doing other work to support its decision on reasonable endeavours, significant costs in addition to the rig rate would have to be incurred in doing workovers, completions and drilling. This judgment means an oil company has to do work and incur those costs, even when it is neither necessary nor in its interests, to be said to exercise reasonable endeavours.
There are a number of situation-specific offshore charter parties, each with its own unique set of situation-specific provisions. As the industry continues to develop, these contracts will likewise evolve to suit the needs of the contracting parties. This is a growing body of law and users of these contracts should ensure that they are aware of changes to the legal environment around the chartering of offshore support vessels.