IMCA: Making contracting fair
Posted: 25 February 2005
Contracting conditions around the world are complex and numerous. Service contracting is a high-risk activity and risk exposure can be very large and bear no relationship to contract value. The world of risk management has changed following such major incidents as 9/11, and offshore industry-specific ones like the capsizing of the Petrobras platform in 2001. Insurance companies and financial institutions have become more risk aware and as a result, insurance has become more restrictive and expensive and clients are attempting to transfer increasing levels of risk to contractors.
IMCA, the International Marine Contractors Association, has responded to this challenge by working with its members to come up with a fair solution — a solution with the relevant document appearing on the IMCA website at www.imca-int.com/contracts
In 2002, one oil company commissioned a study of the business environment in offshore contracting. The study included interviews with 15 major contractors and a dozen oil companies and summary results were shared with the contributors. The feedback identified some bad experiences and an inequitable balance of risk and reward for contractors. The root of the problem was almost always in the conditions of contract.
“This is not an isolated event, but one which reflects views expressed by several contractors, clients and industry observers in recent years,” explains Hugh Williams, Chief Executive of IMCA, the international trade association representing offshore, marine and underwater engineering companies. “Often the risks and rewards have become imbalanced – a position which is not sustainable for the industry generally.
“IMCA has several roles but a key one is communication and promoting dialogue amongst the various companies, both clients and contractors, for the benefit of the whole industry, and that is why we have published “IMCA Contracting Principles” a discussion document that we believe will serve the long-term interests of all participants in the oil and gas industry by encouraging an equitable contractual balance based on the parties’ respective risks and rewards. This, in turn, will improve relations, increase efficiency and reduce overall costs.”
As IMCA’s newly-elected President, Frits Janmaat, VP Finance, Legal & Commercial of the Allseas Group, explains in a message to members: “IMCA has reached a significant milestone – the launch of its Contracting Principles. After more than twenty years of discussions with various partners and on different platforms IMCA is almost there. A serious effort to jointly work out these principles with normal contracting parties has, unfortunately, not been successful. IMCA has therefore taken the initiative to produce what it considers to be a well-balanced result.
“The present market situation is beginning to help contractors to get a better balance between risk and reward. Operators achieve rapid ‘pay back’ on their project investments but this does not compare well with contractors working hard and needing all the luck in the world to depreciate their investments over a 15 to 20 year period.”
FAIR lies at the heart of the Principles
Risk allocation goals with the very apt acronym ‘FAIR’ lie at the heart of the newly published “IMCA Contracting Principles”:
- Fair (not equal) and realistic distribution of risk in proportion to relative rewards
- Allocation of risk – to the party best placed to assume
- Insure – sufficient scope of cover
- Reasonable – avoid “duplicate” assumptions of risk and minimise potential for dispute
The eight-page “IMCA Contracting Principles” highlights fifteen principles with a legal definition being given followed by a comment more easily understood by the layman showing clearly how each principle measures up to IMCA’s FAIR risk allocation goals. The principles covered are:-
- Company group and contractor group property and personnel
- Project works (including both company and contractor supplied items)
- Third parties
- Consequential losses
- Warranty obligations
- Limitation of liabilities
- Minimum insurance requirements
- Force majeure and suspension
- Variation orders
- Free access to worksite
- Intellectual property rights
- Termination by company for convenience
- Company’s obligation to pay contractor
The final page of “IMCA Contracting Principles” is devoted to IMCA Guidelines on Competition Law Compliance.
The Principles are not intended to represent a complete analysis of all risks, which are covered by contracts in the oil and gas industry. In general, they reflect well-established industry custom and practice in addressing certain risks, such as the knock for knock indemnity regime. They are not contractual clauses. They do not in any way form a standard contract, nor is their adoption in any way mandatory – indeed, every page of the document carries a reminder that ‘The publication of these Principles by IMCA is intended to assist and promote industry dialogue and efficiency and their adoption is not mandatory’.
“We must reiterate that the Principles are published as a discussion document and as an aide for clients and contractors alongside their in-house standard contracts and industry published standard contracts,” explains Hugh Williams. “Each IMCA member is, of course, free to negotiate their own terms, qualify such contracts and to make use of the Principles should it wish to do so in order to achieve a contract satisfactory to both parties.”
IMCA is an international association with its 260+ members in more than 35 countries representing offshore, marine and underwater engineering companies. IMCA has four technical divisions, covering marine/specialist vessel operations, offshore diving, hydrographic survey and remote systems and ROVs, plus geographic sections for the Americas Deepwater, Asia-Pacific, Europe & Africa and the Middle East & India regions, as well as a core focus on safety, the environment, competence and training. IMCA seeks to promote its members’ common interests, to resolve industry-wide issues and to provide an authoritative voice for its members.
IMCA publishes over 170 guidance documents and technical reports. These have been developed over the years and are widely distributed. They are a definition of what IMCA stands for, including widely recognised diving and ROV codes of practice, DP documentation, marine good practice guidance, the ‘Common Marine Inspection Document’, safety recommendations, outline training syllabi and the IMCA competence scheme guidance. In addition to the range of printed guidance documents, IMCA also produces safety promotional materials, circulates information notes and safety flashes
For more information see www.imca-int.com