Saving Money With Smarter Contracts

The oil and gas industry is something of a quandary, on one hand, it requires the highest level of technical and intellectual skill but on the other demonstrates a surprisingly “forgiving” attitude to poorly drafted contracts.

The oil and gas industry is driven by contracts, from procurement, to purchase agreements, to turnkey arrangements across all sectors of the industry. Contract negotiations frequently require the input of a number of functions most notably commercial, technical, operational, financial, credit and legal teams, each bringing with it a specific set of skills and knowledge. Often however, these teams are disjointed and this is reflected in the contracting process and resultant contracts.

As a consequence, contracts are drafted with undesirable practical implications, particularly where standard “one size fits all” approaches are adopted- for instance a Master Service Agreement which was drafted for a particular type of product supply that is then subsequently used for the supply of services, without any adaption of the contract for the same, which in turn can give rise to significant legal and commercial consequences that could have been managed had thought been given in respect of how the contractual terms fit in around a new scenario. 

In addition to the problems associated with adopting a one size fits all contractual approach, there are a number of other poor contracting practices that are often seen across the industry. This includes:

1. Disconnects between quotes, orders and terms and conditions leading to discrepancies in the contract, poorly defined terms (very often demonstrated by inconsistent use of defined terms) and legal uncertainty;

2. Issues surrounding a “Battle of the Forms” scenario where each party (particularly in the purchase of goods or services) attempt to impose their terms and conditions on the other with the last “shot” typically being successfully incorporated, without the same being explicitly rejected which can cause far reaching consequences for the party whose terms are not incorporated, particularly where there is a misconception that the same have been; and

3. Adopting “standard” terms without consideration of context. A common example here will be to choice of law and jurisdiction. Does it make sense (for instance) to have a contract where all parties (and their assets) are in the UAE to adopt the jurisdiction of the English courts.

Given these problems, it is vitally important that contracts are subject to review (legal, commercial and technical) at the time at which they are entered to ensure that the same are fit for the purpose for which they are entered. As important is ensuring that all stakeholders (not just the legal team) are acutely aware of the issues surrounding contracts and that there is a joined up approach between them all. For instance it is of no use having a well drafted legal contract and process if the surrounding implementation is poor or as part of commercial negotiations important protections are simply given away or amended without legal input. This joined up way of thinking and knowledge sharing amongst all stakeholders in the contract process will ultimately alleviate many of the problems noted in this article and lead to smarter contracting and the financial benefits that the same brings.

Contact us for your contract related questions and concerns: [email protected]

9-10 May 2018 - Training "Understanding Contractual Terms and Conditions"