FPSO case study

• 1. A high-profile dispute concerning delivery of a newbuild FPSO, illustrating the risks for an FP Contractor facing its oil company client (the ‘Company’) on the one hand, and its construction contractor on the other.
• 2. The FP Contractor entered into a contract with a major oil company to procure a newbuild FPSO to be delivered on location in the Norwegian sector of the North Sea, and to operate the FPSO under the Company’s instructions. The contract was governed by Norwegian law and subject to the jurisdiction of the Norwegian courts. The FP Contractor subcontracted the construction of the FPSO to a shipyard in Singapore. It was agreed that the hull would be built in Singapore, but, as it was necessary for the FPSO to conform to the standards of the Norwegian authorities (at that time the Norwegian Petroleum Directorate (NPD)), the construction contractor agreed to undertake the installation of processing equipment at its Norwegian yard. The FP Contractor agreed to take delivery of the hull and accommodation in Singapore, transport to Norway, redeliver to the construction contractor, and then take delivery of the complete FPSO ex-works in Norway. The FP Contractor would then be responsible for transporting the FPSO to the offshore location, for delivery to the oil company following acceptance tests, and to manage production on O&M terms.
• 3. The hull was duly built, approved by the classification society, and delivered in Singapore then transported to Norway and inspected by the NPD. The design and construction of the accommodation was rejected, as it failed to satisfy Norwegian standards. The Company insisted on immediate rectification of the rejected work, including other defects that were discovered on arrival at the Norwegian yard
• 4. The FP Contractor called upon the construction contractor to rectify all defects immediately, in order to deliver a fully functioning FPSO. The construction contractor refused on the grounds that the work alleged to be defective had already been accepted by the FP Contractor in Singapore, and accordingly the construction contractor’s obligation to rectify defects was limited to its contractual warranty, which did not take effect until after the delivery of the complete FPSO, which had not yet occurred. The Company alleged that the FP Contractor’s failure to rectify was a deliberate breach on the part of the FP Contractor. Therefore, it exercised its contractual right in the FPSO charter to take possession of

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  the incomplete FPSO, and to terminate its charter with the FP Contractor. The Company transported the unit to an alternative yard, rectified the defects, and claimed against FP Contractor costs running into hundreds of millions of dollars.
• 5. The FP Contractor defended the Company’s claim on the grounds that the work had been accepted by the Company on delivery in Singapore and had been approved the Classification Society. Therefore, insofar as there were defects, these were to be rectified under the charter post-delivery, in accordance with the construction contractor’s warranty obligations, thus treating the charter and construction subcontract as being back-to-back.
• 6. In parallel, the FP Contractor sought an indemnity under the construction sub-contract, which was subject to English law and London arbitration. The grounds of the claim were that it was the construction contractor’s responsibility to deliver an FPSO in conformity with NPD requirements, and to rectify all defects once discovered in order to meet its delivery obligations, including defects in work already accepted in Singapore.
• 7. There were ancillary disputes, as consequence of which the Norwegian claim occupied the Stavanger City Court for a year. Following the court’s decision, agreement was reached between the FP Contractor and the construction subcontractor.
• 8. The principal legal issue before the Norwegian court was whether the obligation to satisfy NPD requirements was an overriding condition resting on the FP Contractor under the charter, irrespective of whether the work had been approved by the Classification Society or accepted by the Company on delivery in Singapore.
• 9. The secondary main issue in the Norwegian proceedings was whether the refusal to rectify defects immediately was a repudiatory breach, giving rise to a right to claim termination losses. The Norwegian court found that it was, although, thankfully for the FP Contractor, the claim was held to be subject to an overall cap on liability.
• 10. The difficulties encountered in this dispute by the FP Contractor were complex, and are only summarised briefly here, but there is one simple theme: once the defects were discovered, there was little the FP Contractor, sitting in the middle, could achieve without co-operation from the Company and the construction contractor, both of which preferred to insist on strict adherence to what they considered to be their legal rights. The risk of that exposed position needs to be considered at all times during the negotiation of FPSO charter terms and related subcontracts.