Offshore Floating Production

Edited by Stuart Beadnall; Simon Moore; Max Lemanski

Document

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CHAPTER 6 Contractor remuneration

Stuart Beadnall and Max Lemanski

A Introduction

6.1 Remuneration for services provided under an FPSO charter may vary considerably. There are three main elements. The first is the value of the FPSO itself. The second is the value of work and materials provided by the FP Contractor, which may vary from reimbursable costs through to day rate payments similar to a conventional time charter. The third is the adjustment of remuneration taking into account productivity – a form of incentivising the FP Contractor to maximise performance and to match remuneration to oil or gas production. 6.2 The computation of the daily amount payable under a conventional long-term charter of a newbuild vessel, ordered for a particular purpose, may include a fixed daily figure representing the capital cost of the vessel – ‘CAPEX’ – usually calculated on the newbuild cost spread across the charter period, and operating expenses, ‘OPEX’, which may be divided into fixed expenses representing overheads and variable expenses, such as crew costs and consumables. 6.3 The computation of rates payable under a typical FPSO charter follows a similar pattern. If the charter is split into a lease and O&M agreement, the division between CAPEX and OPEX becomes clearer. The CAPEX is payable under the lease, usually including a margin for the FP Contractor’s profit. The rates payable under an O&M agreement vary according to the fixed overhead costs and the services the O&M contractor is instructed to perform, with daily running and maintenance costs being reimbursed. 6.4 It is important in these contracts to be clear what costs are included within OPEX. In a dispute concerning costs payable under a services agreement, which included the operation of an FPSO, the High Court was asked to decide whether OPEX as described in the contract included all direct and indirect costs incurred in providing the services, including any costs payable to third parties.1 The reason for the dispute was that the third-party costs were greater than the Company had expected, due to changes to the identity of the third-party contractors. The court concluded that the definition of OPEX was wide enough to include all these costs. 6.5 The subject of this chapter is to consider the legal implications of remuneration on a ‘day rate’ basis, either under the lease or bareboat charter, or under a time charter format. Day rate remuneration mechanisms are often transposed from other offshore

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operating contracts, such as those for a drilling vessel. The FP Contractor’s remuneration will vary according to the service being provided on any day and adjusted according to the reasons for any suspension or shortfall in the service being provided. This may appear to duplicate the adjustment of day rate provisions which are related to time-based production performance. However, if well drafted, those adjustments apply to periods when the full operating day rate would be payable, not the periods during which a reduced day rate may be applicable. To be effective, and to work as intended, it is obviously important that there is clarity on when the reduced day rates are payable, and their exclusion from any performance adjustment. The FP Contractor would wish to avoid at all costs being penalised by payment of a reduced day rate and also a reduction in performance related bonuses. 6.6 The most common of the reduced day rates is the Company’s right to pay only a ‘standby rate’ when it requires services to be suspended. There is an assumption here that, during periods of standby, the FP Contractor will not be incurring its full costs, although the dominant commercial purpose behind the standby rate is that the Company would not wish to pay the full operating rate when services are not being provided, for whatever reason. As the opportunity for the FP Contractor to reduce its expenditure may be minimal, it would expect the standby rate to be a substantial percentage of the normal operating day rate. If the Company should want the right to pay a lower rate during periods of suspension, this would be dealt with by way of a ‘lay-up’ rate, which would also require the Company to pay for the costs of laying up and returning the vessel to a fully operable state. 6.7 A further protection for the FP Contractor against loss of income during periods of downtime would be the right to claim the force majeure day rate in event of circumstances outside its control preventing performance of services. It would be necessary for the charter expressly to include this right; a typical force majeure clause would protect the FP Contractor against liability for events outside its control but would not entitle it to payment when no service is being provided. The force majeure day rate may be substantially below the full operating day rate, but nevertheless it provides the FP Contractor with compensation for its capital expenditure and fixed operating costs. 6.8 In return for the Company agreeing to remunerate the FP Contractor by way of day rate payments, it is usual to stipulate that the rate is deemed to cover all labour and materials, consumables, equipment, management and all overheads that the FP Contractor may be obliged to provide. Often this is done by reference to a responsibility matrix identifying all the services to be provided. Thus, the FP Contractor takes the risk of actual costs being in excess of the applicable day rate.2 6.9 It is usual for day rates to be fully inclusive, with the burden of any taxation relating to performance of the FPSO operations resting on the FP Contractor. Thus, if an unforeseen tax is incurred, the FP Contractor will be liable to pay without being able to pass the cost to the Company. If a reimbursable payment mechanism is used, but the list of reimbursable expenses does not include payment of taxes, the outcome is the same;

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the tax burden rests on the Contractor. Therefore, the taxation regime in the place of operations may have a significant effect on the profitability of the FPSO operations and of the FP Contractor’s performance. It goes without saying that full due diligence on applicable taxes is required at the earliest opportunity, even though in many jurisdictions the answers may not be entirely clear. Where there may be uncertainty on the incidence of taxation, the FP Contractor may require flexibility in the remuneration provisions. If the FP Contractor undertakes to pay all taxes, and ensure its subcontractors do the same, in relation to the performance of FPSO operations at the location, and unforeseen taxes arise, the FP Contractor may be obliged to continue to perform the charter, without being able to obtain at least a contribution from the Company to its additional costs. At the least, the FP Contractor may require a contribution from the Company where the taxation regime changes after the contract award. 6.10 The Company may be willing to agree to reimburse the FP Contractor any customs or levies on the importation of equipment and materials. The FP Contractor will take responsibility for the administrative formalities, perhaps with the Company agreeing to provide its assistance. One of the key issues to determine is the taxation treatment of the FPSO itself. The aim would be to allow the FPSO to be treated as a temporary import, given that sooner or later it would leave the jurisdiction once the operations are complete. However, compliance with the specific requirements to ensure this outcome are obviously essential. 6.11 The Company would usually reserve the right to require the FP Contractor to provide or procure additional services or materials not listed as the FP Contractor’s responsibility under the matrix. These may be compensated by way of a specific reimbursable provision or treated as payments under the variation regime. The advantage of the former is flexibility, as only a work instruction from the Company is needed. However, it risks the FP Contractor being exposed to having incurred additional costs and expenses without having the contractual mechanism to verify that all of these will be reimbursed. The variation mechanism may provide the FP Contractor with this additional certainty, although it may prove cumbersome where the additional service required is relatively minor. Given that the costs of additional services over a long operating period may be considerable, it is obviously important that the parties have a workable mechanism and that they ensure that it is properly followed during the period of operation.

B Deductions from monthly payments

6.12 Under a conventional time charter, deductions from hire each month are permitted according to reasons specified in the charter. The most frequent deduction will be for what are described as ‘off-hire’ periods, during which no service has been received. Deductions are allowed for any suspension of services, even when due to events outside a contractor’s control. In contrast, under an FPSO charter, the Company’s right to withhold payment of day rates will, ordinarily, be dependent on establishing that the relevant cause is within the FP Contractor’s control. This will usually be referred to as a period of ‘zero rate’, i.e. when nothing is payable, in the same way as for periods of off-hire. For example, if the cause of suspension is a force majeure event, the FP Contractor may be entitled to receive continued payment, albeit at a reduced rate. 6.13

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An additional complexity in FPSO charters is caused by the split between lease and O&M services. If deductions from the monthly day rate are allowed due to the FP Contractor’s underperformance, those deductions should, as a matter of logic, apply to payment under the O&M agreement. It is under that agreement that performance of services is due, the lease being the contract of hire, which will continue regardless of performance. Notwithstanding suspension of O&M services, payment of hire should continue for so long as the Company has the right to use the FPSO. Under many leases, this is so. However, the Company may consider that the right to withhold or reduce payment under the O&M services agreement would not be adequate compensation for the FP Contractor’s underperformance. Although, technically, the O&M contractor may be a different company from the contractor providing the vessel under the terms of the lease (the FP Contractor), the two will normally be affiliated. Therefore, the Company may wish to negotiate a withholding or reduction in payment of hire under the lease owned by the FP Contractor due to causes attributable to the O&M contractor. In certain jurisdictions, for example Brazil, this outcome is achieved by inserting the O&M contractor’s performance obligations into the lease. Under English law, which interprets contractual obligations literally, this produces an unhappy graft. The same default of performance could give rise to a breach both of the terms of the lease and of the O&M services agreement, allowing the Company to have two rights of claim for the same default. Therefore, in contracts of this nature it is doubly important that the FP Contractor should ensure that in the event of any default, the Company’s remedies are limited exclusively to the agreed permissible deductions from hire or O&M day rate. 6.14 For FPSO leases that do not include performance obligations taken from the O&M agreement, the right to deduct from monthly payments will normally be based on detailed performance targets. The lease will usually provide, often by way of complex calculations in the appendices, that the monthly hire will be payable according to achievement of the specified targets.3 Thus, the payment is not dependent upon performance by the FP Contractor (given that that performance has already been discharged by the provision of the FPSO in accordance with the specification) but simply by an objective standard, which would, in practice, be achieved by the performance of services by the O&M Contractor. This may appear contorted from a legal viewpoint, but it works in practice. The FP Contractor may wish to object to the deductions on the ground that, under English law, these are unenforceable penalties;4 the reason is that the Company has no legitimate interest to protect in ensuring the FP Contractor’s performance of the lease, when the relevant default the deductions are intended to deter are those of the O&M contractor under a different contract. However, whether or not the Company has a legitimate interest to protect under the lease would be irrelevant; the payment of hire is a primary obligation which, under English law, the parties are free to adjust as they think fit. If one party agrees to accept US$100 a day in payment for the use of an asset worth US$1,000 a day, it is free to do so.5

C

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Applicable day rates

6.15 Under a conventional maritime time charter, a charterer’s right to make deductions from the monthly hire payment is conditional upon the charterer establishing that one of the permitted exclusions to the obligation to pay hire has occurred, and for what length of time. This is often described as ‘presumption in favour of payment of hire’. In other words, the charterer’s obligation to pay hire on a daily basis continues throughout the charter period, unless it can establish a relevant exception. It is not enough for a charterer to allege that a relevant event has occurred, and then for the owners to establish that a service has been provided for which hire should be paid. The charterer must continue to pay hire unless it can prove an exception, and is at risk, if hire is not paid, of the owner withdrawing the vessel and terminating the charter. Further, under maritime time charters the test of whether a service has been provided for which the charterer must pay hire is based entirely on the nature of the charterer’s instructions for employment at the time the event occurs. It is not an objective assessment of whether the charterer has received a service of any value. For example, the charterer may have no cargo for the vessel, and accordingly instructs the vessel to wait at anchorage pending further orders. During the period of waiting, ship owners undertake repair work to the vessel, during which time the vessel is not fit for the charter service. Charterers may complain that the vessel during this period should be treated as off-hire, because it is not ready for the service required. However, the owners would be entitled to recover hire for the full period of waiting, as during that time the owners were providing the service immediately required i.e. waiting for the charterers’ voyage orders.6 6.16 As usual, the position is more complex for FPSO operations. As mentioned in paragraph 6.12, the Company may have the right to withhold payment of hire or day rates, or to pay a reduced rate for the period concerned, depending on the service provided. 6.17 Thus, if an event occurs which affects the FPSO providing a full production service, there may not be a binary choice between continuing payment of day rate and the right to make deductions for lost time. There is likely to be a choice of applicable rates, depending on the cause of delay or underperformance. When an event occurs which affects FPSO operations, the question will be not whether there is a right to withhold payment, but which of the various rates should apply in these circumstances. For that reason, it may be difficult for the FP Contractor to establish an equivalent of the presumption in favour of payment of hire i.e. that the Company must continue to pay full day rate unless it can first establish that an alternative reduced rate should apply. As always, the answer will depend on the precise wording of the charter terms. The FP Contractor will ideally wish these to state that the full day rate is payable unless one of the other rates applies. However, if the charter states simply that the FP Contractor’s remuneration for the provision of services is determined by the list of applicable day rates, usually set out in an appendix, it would be more likely that the FP Contractor faces the burden of establishing which of those rates it is entitled to receive. 6.18 An illustration of uncertainty concerning which day rate applies where operations are suspended is found in the decision of the English Court of Appeal in a dispute

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between Bluewater and Amerada Hess.7 There, the FPSO contract provided that during periods of downtime due to repair work being undertaken, a reduced day rate was payable. Following a defect, the FPSO was taken off site for dry docking for four months. The FP Contractor’s assignee, to whom the rights of payment under the FPSO contract had been assigned, claimed payment of the repair rate during the dry docking period, on the grounds that work was being performed, albeit no actual service was being provided at the FPSO site. 6.19 The Court of Appeal found that on a proper construction of the agreement, there was no intention for payments to continue to be due whilst the FPSO was in dry dock, as this did not constitute ‘downtime’ during which the reduced rate would continue to be paid. In coming to this view, the court found that, under this agreement, downtime referred only to a period of non-operation when the FPSO was onsite. The court could have come to a different view if the contract had been worded only slightly differently, so that downtime included any period when the FPSO was not operating as required. 6.20 In the same way as for conventional charters, the nature of the Company’s instructions at any given time will be relevant to which of the day rates are applicable. Although the FP Contractor’s performance may be assessed by reference to achieving specified targets for production and other activities (as described in more detail in Section I), the general nature of the charter is the same as for conventional charters i.e. the FP Contractor’s essential obligation is to follow the Company’s instructions, insofar as permitted by the charter terms. 6.21 For example, in the same way as a charterer who has no cargo, the Company may wish to shut-in the reservoir operations and instruct the FP Contractor to suspend production. During that time, no useful FPSO service is being provided, save that the FP Contractor is doing what is expressly required, awaiting the Company’s further orders. It would follow that full day rate is payable unless the charter provides otherwise. In many cases, the charter would indeed provide that in such circumstances the FP Contractor remains entitled to receive the payment, but at a reduced level, often described as standby rate. 6.22 The FP Contractor’s right to be paid during a period of suspension of production may also be expressly subject to the FPSO during that period remaining ready, able and willing to perform. If the FP Contractor chooses to perform maintenance work during that period, which would prevent the FPSO continuing production, the charter may expressly provide that, once a specified allowed period for maintenance has expired, a zero day rate is payable. The question then would be, if the charter provides that during the period the Company has chosen to shut down production for work on the reservoir, the standby rate should be payable, which is the correct rate payable for the period of shutdown during which FPSO maintenance work is being performed? If the presumption in favour of hire were to apply in these circumstances, and if the FP Contractor were to be treated as providing a service if it is instructed to suspend performance due to the Company’s convenience, perhaps the answer would favour payment of the standby rate during that period. However, if it is simply a question of deciding which is the applicable rate, the answer would depend on the detailed wording. For example, whether payment

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of the standby rate is conditional upon the FPSO being at all times ready for operations, or whether the zero day rate applies only if the repairs would prevent the operation of the FPSO, or whether the repairs cause the shutdown. 6.23 Which rate is applicable may be further complicated if force majeure events have occurred. The charter may provide that if operations are suspended due to force majeure events, a reduced force majeure rate is payable. This may place the FP Contractor in a better position than under a conventional charter, as at least some rate is payable, even though no service is provided. By way of illustration: a force majeure event causes damage to the FPSO, for example a collision with a supply vessel operated by a third party. There is no production during the period of repair, but a valuable service of repair work is still being provided. But if the charter provides for a repair rate, which is greater than the force majeure rate, the FP Contractor would argue that such rate is applicable during the period of repair caused by force majeure. Where there is no repair rate, the FP Contractor may perhaps argue that the full rate is applicable, in terms of the service provided. In contrast, the Company would argue that once the period allowed for maintenance and repair has been exceeded, the zero rate applies for any period of shutdown. 6.24 Whether a force majeure event is the true cause of the suspension of operating services may be the subject of dispute. This was illustrated in a high-profile case concerning the operation of a drilling vessel, where day rates were payable at variable rates.8 The Contractor claimed payment of day rate during a period when operations were suspended due to a government moratorium on drilling in a particular jurisdiction. The Company argued that, as this was obviously a cause outside its control, it was relieved of the obligation to perform, and entitled to terminate the contract due to force majeure. However, the High Court found that the area of operation for the drilling vessel was not limited to that particular jurisdiction, and the Company had the option of employing the vessel elsewhere. The reason it chose not to do so was the economic consequence of operating elsewhere, not the legal moratorium on its operating in the jurisdiction where the drilling vessel had previously been employed. Therefore, the Company could not terminate, and the FP Contractor was entitled to payment. This case illustrates the requirement to show causation if a force majeure event is to be relied on.9 However, if similar circumstances had occurred relating to the operation of an FPSO, the outcome may have been different. Unlike a typical drilling vessel, the FPSO cannot be redeployed to a different jurisdiction without substantial modifications being undertaken.

D Maintenance allowance

6.25 It is usual for an FPSO charter to provide that a maximum period of time is allowed for the performance of planned maintenance and repair to the facility. Often this allowance is for an agreed period of days for each year, with unused periods being carried over to the following year. The period of the allowance may match the setting of a performance target for the availability of production services, as described in Section I concerning adjustments to hire. In addition, once the agreed period of time has been

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exceeded, the charter may provide that no day rate is payable for any period of downtime until the FPSO is once more fully operational.10 6.26 These provisions vary considerably, but the substance of the provision is not that the FP Contractor agrees that all planned maintenance and repair must be performed within the agreed period, but that it has the Company’s permission to shut down production services for the purpose of maintenance and repair up to the agreed maximum period. It follows that where production is discontinued for the Company’s purposes, during which time the FP Contractor chooses to perform maintenance works, that time will not count towards the use of the agreed allowance. Often, a provision is included in the charter confirming the FP Contractor’s rights to undertake maintenance and repair work during periods of shutdown by the Company. 6.27 However, it should be noted that the allowance does not usually grant an absolute right to shut down production services whilst maintenance and repair work is being performed. The charter would often expressly provide, or it may be implicit in the allowance wording, that its purpose is only for such time as may be needed. If all required maintenance and repair can be performed within a shorter period, the FP Contractor is obliged to ensure that production services continue even if there is a balance of maintenance and repair time remaining. This is a reflection of the FP Contractor’s general obligation to exercise due diligence to continue production services throughout the charter period, subject only to the express exceptions. 6.28 Arguments may occur concerning unplanned maintenance or repair, which may arise where the FP Contractor has failed to undertake sufficient preventative maintenance, leading to an unforeseen breakdown. The Company may argue that the unplanned downtime is not covered by the maintenance allowance, and therefore any lost time would automatically attract a zero day rate, even though there may be a balance of the maintenance allowance available at that time. Whether or not this argument is correct would of course depend on how the allowance is defined. Quite often it is described as being for the purposes of planned maintenance and repair, leading to the inference that it cannot be used for unplanned works. Insofar as the planned maintenance allowance is in fact exceeded, additional downtime for unplanned maintenance work would make no material difference to the legal position; in both cases the FP Contractor would suffer the imposition of zero day rates for the additional lost time. However, it does highlight the importance to the FP Contractor of ensuring that in each case, whether the downtime is due to planned or unplanned work, the Company’s maximum remedy is the right to withhold payment of day rate. 6.29 There may also be disputes concerning when the maintenance shutdown has begun and ended. Again, it may be important to consider precisely how the maintenance allowance period is described in the charter. If it is done by reference the FP Contractor’s right to shut down the production train, the period would be determined by the precise point at which that shutdown began and ended, regardless of the precise point at which, as a consequence of the shutdown, the FPSO recommenced production (although this may of course have an effect on adjustments of day rate calculated by reference to achieved production). Thus, if there is delay in the commencement of production due to

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work required to achieve continuous flow of hydrocarbons from the well, the Company may argue that all time lost as a consequence of the shutdown should be deducted from the FP Contractor’s maintenance allowance. However, if this is correct, the description of the allowance would need to be drafted to encompass this loss of time. In other words, drawing once more on maritime charter analogies, the downtime provision would be written as a net loss of time, effectively putting the Company in the same position as if the shutdown had not occurred, as distinct from a period downtime provision, which would be calculated only by reference to the period during which the vessel was unable to provide the required service. 6.30 If repair work requires the FPSO to be taken off location for a period of dry docking, it is usual for particular day rates and cost allocation to apply.11 This is a reflection of the obvious severe consequences of the cessation of production. The FP Contractor is often required to warrant that the FPSO will not require dry docking during the initial charter period; sometimes this may extend for 20 years, which far exceeds the dry docking schedule of a conventional vessel. 6.31 The applicable day rate for a dry docking suspension would usually be determined by the reason for dry docking, although payment of day rates would often be subject to a cap; if the FPSO does not return to the location within a specified maximum period, zero day rate applies. The Company may also be granted a right of termination, qualified only by the obligation to consult the FP Contractor on reasons for continuing suspension and expected recommencement of operation. The risk of termination from the FP Contractor’s viewpoint is akin to the risk of termination for prolonged force majeure suspension.

E Invoicing procedures

6.32 Due to the complexity of ascertaining the hire and day rate payable to the FP Contractor, whether under a time charter or combination of lease and O&M agreement, it is usual for the parties to agree a procedure for approval of each monthly payment before it is payable. Given the close and long-term relationship between the FP Contractor and the Company, quite often the approval process is performed through consensus, rather than strict adherence to procedures contained in the contract payment terms. For example, the FP Contractor may be entitled to submit an invoice each month, which would oblige the Company to pay undisputed amounts, and refer disputed amounts to be resolved in accordance with the contractual dispute resolution procedures. However, given that neither party would in truth wish to have to resort to the dispute resolution procedures if reasonably avoidable, they may prefer in practice for the monthly invoice to be discussed in draft before the invoice is formally submitted. If there are items in dispute, the parties would then continue to discuss, with no invoice having been submitted in accordance with the contractual procedures. Alternatively, allowing for such discussions, the charter may provide that at the end of each month a draft invoice is submitted for the Company’s approval. Again, there may be items in dispute which the parties continue to discuss, perhaps for a considerable time. The charter may provide that at the end of

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the following month, the FP Contractor should submit its final invoice for the previous month. However, the FP Contractor may fail, or be reluctant, to do this while discussions on the draft invoice continue. As a consequence, the contractual invoicing procedures are often not complied with. 6.33 The consequences of the FP Contractor not following the invoicing procedures may in many cases be only that the FP Contractor’s right to payment of undisputed amounts is postponed. Obviously, if the parties are subsequently able to reach agreement, little harm is done other than to the FP Contractor’s cashflow. However, if the parties fail in due course to reach agreement, the FP Contractor would then wish to apply retrospectively the contractual dispute resolution procedures to recover amounts it claims. The difficulty here is that in such event no amounts have become payable, as the invoice has not been provided in accordance with the contractual mechanism. The question then arises whether the FP Contractor may nevertheless submit its contractual invoice many months, or possibly years, after the costs and expenses to which it relates have been incurred. In such circumstances, the Company may well argue either that the right to payment under an invoice is conditional upon the contractual procedure having been followed, or that, by failing to follow that procedure, the FP Contractor has waived its right to payment. Again, under a long-term relationship, the prospect of the Company taking this legalistic approach may seem remote, but if the Company is experiencing cashflow difficulties itself, it may nevertheless be under pressure to reduce expenditure, and to pay only claims that are legally enforceable. 6.34 If the charter requires the issue of an invoice in a prescribed form with supporting information as a condition of the Company’s obligation to pay, failure to follow the procedure would, at least temporarily, prevent the FP Contractor from enforcing the dispute resolution procedures, if the Company has refused to pay. Again, this may only be a cash flow difficulty, as the FP Contractor would be obliged belatedly to provide invoices in accordance with the contract requirements before being able to access the dispute resolution procedures. The notice of appointment of an arbitrator may often be sufficient to encourage the Company to settle an outstanding claim. However, the FP Contractor may face the risk of being unable to commence arbitration, due to the contractual invoicing and any informal dispute resolution procedures not having been previously followed. 6.35 There may be a risk also that in failing to follow the contractual invoicing procedures, the FP Contractor has waived its right to payment. A waiver occurs under English law if a party makes an election which the other is entitled to rely upon as indicating the abandonment of an entitlement.12 For example, this may occur if the parties agree a figure for payment of the FP Contractor’s outstanding claims, after which the FP Contractor subsequently presents a claim for additional sums. The Company would say that in agreeing the settlement figure, the FP Contractor has waived its claim for any amounts not having been invoiced by that date. Whether that is so will depend in each case on the facts, and the state of each party’s knowledge. However, the key point in this context is that if the FP Contractor has not strictly followed the contractual invoicing procedures and has preferred to work informally in a consensual fashion before an invoice, or a final invoice, is issued, the prospect of waiver is greater. 6.36

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More difficult for the FP Contractor may be where the charter includes an invoicing time bar, by which the FP Contractor expressly waives its claim to amounts due under the charter if an invoice, or final invoice, has not been submitted by a specified date. Whether such time bar is enforceable depends on whether it is written as a condition. This may provide either that the FP Contractor’s right is conditional upon receipt of an invoice in the contractual form by a specified date, or a provision that where such invoice is not provided, the FP Contractor’s right to payment is thereby lost. The effectiveness of these provisions depends entirely on how clearly they are worded. However, if the time bar is clear, as a matter of English law, it will be enforced, no matter how harsh the consequences may be.13 6.37 Nevertheless, a time bar is a form of exclusion of liability. Therefore, under English law, to be effective or effective in the circumstances under dispute, the wording of the exclusion must be clear and unequivocal.14 In many cases, although it is clear from the contract terms that the parties intend that a time bar should apply to the provision of claims for hire and services, it may not be entirely clear from what date the relevant time bar period should start to run or whether the time bar would apply to the actual method of invoicing that the parties have adopted for the project.

(a) Illustration 1 – time bars and draft invoices

6.38 The scenario: The charter requires the FP Contractor to provide a draft invoice for the Company’s approval before submission of its final invoice for payment. It is clear from the contract wording that the Company is not obliged to pay until the final invoice is received. Due to lengthy consultations on various items in the monthly draft invoices, these are not approved. As a consequence, the FP Contractor does not submit final invoices, hoping that in due course the various disputes concerning the draft invoices may be resolved by agreement. The charter provides that the FP Contractor’s right to payment is lost if an invoice is not submitted for payment within 90 days of the relevant costs having been incurred. 6.39 The potential issues/arguments arising: The Company argues that in this case ‘invoice for payment’ means the final invoice, not the draft invoice submitted for its approval. Arguably, this may be correct. However, given that the purpose of the time bar is to allow the Company to track expenditure against budget, and to avoid being taken by surprise, it would seem odd that it should take effect to deprive the FP Contractor of the right to payment of amounts it has included in the draft invoice already submitted for the Company’s approval. Therefore, the court or tribunal would need to determine whether ‘invoices for payment’ in these circumstances should be interpreted as including a draft invoice for the Company’s approval.

(b) Illustration 2 – time bars, completion of work, payment information given but not invoiced

6.40 The scenario: The charter provides that a time bar applies if the FP Contractor has not submitted its claim for payment within 90 days of the relevant work to which the claim relates having been completed. The FP Contractor provides information and

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supporting documentation on a monthly basis for the Company’s approval relating to various ongoing works. Until the expenditure is approved, no claim for payment is made. 6.41 The potential issues/arguments arising: Again, the FP Contractor argues that the provision of expenditure information is equivalent to a claim for payment for the purpose of the time bar. The FP Contractor also disputes the meaning in this context of work having been ‘completed’. As far as this is ongoing work, it would say the intention is only when the work is finally completed. Further, it would argue, for the purpose of the time bar, that completion requires a formal step, for example the issue of a certificate by the Company confirming all work is complete to its satisfaction.

(c) Illustration 3 – time bars and course of dealing

6.42 The scenario: Throughout the project, the FP Contractor submits its monthly account and supporting documents for the Company’s approval, and routinely submits invoices for payment only following approval, often several months after the work is performed. The Company pays, notwithstanding that arguably the contractual time bar would apply to these invoices. The Company’s cash position deteriorates and it looks more closely at the contractual invoicing procedures. It invokes the time bar for expenditure incurred outside the time bar period for which no invoice has yet been submitted. 6.43 The potential issues/arguments arising: Two questions arise. First, does the payment by the Company on previous occasions, notwithstanding the possibility of invoking the time bar, create a ‘course of dealing’ by which the right to rely on the contractual procedure has been abandoned? The legal position, taken from conventional maritime contracts, is that such a possibility does exist, although whether a course of dealing which changes the contractual obligations has truly arisen will depend on the facts.15 6.44 The second question is whether the Company can rely on the time bar if the reason for delay in submission of an invoice is its own reluctance to approve the FP Contractor’s costs and expenses. The FP Contractor may wish to rely on an English law principle of ‘prevention’ whereby the Company may not be allowed to enforce its contractual remedies if Company itself has been the cause of the relevant delay.16 However, the Company would no doubt argue that it has not prevented the FP Contractor from submitting its invoices, this is a choice the FP Contractor has made, notwithstanding the existence of the contractual time bar. It would be necessary also to consider whether the Company has waived its right to rely on the time bar, applying the principles set out in paragraphs 6.35 to 6.36.

F

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Enforcement of claims for non-payment

6.45 It is obviously important for the FP Contractor to receive its contractual remuneration on a regular basis in order that it may service its capital commitments, having incurred considerable expense in procuring a vessel for FPSO operations at the location, and also to cover its substantial outlay in providing operating services to achieve continuous production. If the Company is unable to pay, or chooses not to pay, the FP Contractor faces substantial risk. It cannot continue operations at the field without the certainty of a continuing income stream. This may also be essential for the FP Contractor to comply with its covenants to its financiers. 6.46 Under a conventional maritime charter, the owner’s remedy would be to terminate and recover possession of the vessel (under a bareboat charter) or withdraw services of the vessel (under a time charter). The vessel may then be redeployed relatively quickly, depending on market conditions. The owner faces the risk of the market having fallen, and accordingly replacement hire rates may be lower. Indeed, this may the reason for the charterer having failed to pay. Notwithstanding, an alternative income stream will be available. 6.47 In contrast, if the owner of an FPSO terminates the charter for non-payment, its options are more limited. It will have procured or modified the vessel for the purposes of the particular field and the requirements of the particular Company. It will be out of pocket for major capital expenditure but cannot realistically achieve an alternative income stream under a replacement charter without first incurring additional capital expenditure in modifying the vessel for the purpose of new employment. 6.48 If the reason for the Company’s non-payment is its insolvency, the FP Contractor may wish to negotiate continuing employment at the location by agreeing a new charter, or a novation of the existing charter, either with the Company’s financiers, or another company with an interest in the field.

G Contractual liens

6.49 The charter may provide the FP Contractor with particular remedies for the Company’s non-payment, for example, the right to exercise a lien over the produced oil.17 6.50 The FP Contractor faces two considerable difficulties in attempting to enforce its lien for non-payment. The first is practical. The lien can be effectively exercised only if the Company wishes to provide an offtake vessel to receive offloading of the produced oil. This may not be the case if the Company is insolvent, in dispute with its co-venturers, or otherwise unwilling to continue production from that field. 6.51 The legal difficulty may be that, given that the FPSO is operating in the jurisdiction of the defaulting oil company, there is a risk that the Company will apply to the local courts to prevent the FP Contractor exercising its lien. If the court grants such an application, and the FP Contractor nevertheless continues to withhold possession of the oil pending payment, there is a risk the FP Contractor would then be in contempt of the courts of the jurisdiction in which it is operating. 6.52

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If the Company is in default and the FP Contractor has been unable to negotiate a replacement FPSO charter for the location with a financier or alternative company operating on that field, the FP Contractor may consider its best option is to cut its losses and leave. This option is fraught with difficulty. The first is that where the Company has not received offtake, the produced oil would remain on board as the property of the Company, and not the FP Contractor. If the FP Contractor deals with the Company’s oil, either by selling to a third party, or leaving the jurisdiction with the oil still on board, it risks either a claim in conversion for appropriating the Company’s oil, or again being in contempt of the local court.

H Limitation of liability for downtime

6.53 If the FP Contractor causes a suspension of production operations, the Company may be expected to suffer a considerable loss, both in terms of its lost production and also the expense of providing field support services. The obvious question then is whether, in addition to the right to withhold payment of day rates for the period of downtime, the Company may also recover its loss if responsibility for the downtime rests with the FP Contractor’s performance. The simple position under English law is that where one party suffers a loss due to default in performance by the other party, its loss is recoverable, insofar as that loss follows directly from the breach.18 6.54 This potential liability is often overlooked, as there may be an assumption that where the consequences of a failure are specifically dealt with in the contract terms, for example a provision saying that in such event the Company is entitled to withhold payment of day rate, that deduction is the Company’s exclusive remedy for the breach. However, as mentioned in paragraph 6.37, an exclusion of liability is achieved only with clear and unequivocal wording. A provision which specifies only that the Company has the right to deduct from payment of day rates would be insufficient to achieve that purpose. The FP Contractor would require a specific statement in the charter terms saying that the right to deduct from the monthly day rate payment is the Company’s exclusive remedy for any breach. Without a limitation of liability of this type, the FP Contractor would then have to consider whether the Company’s claim is excluded or limited by other means. Loss of production may often be seen as a form of consequential loss, i.e. economic loss which arises from circumstances not concerning directly performance of the contract under which the breach has occurred. However, in short, the Company’s loss of production is clearly a consequence following directly from the FP Contractor’s failure to operate the FPSO, and accordingly would not be a form of consequential loss unless specified so in the charter terms. In the same way, the Company’s wasted expenditure such as the field support service would be a direct consequence of the FP Contractor’s default. Therefore, if the FP Contractor wishes to exclude the Company’s right to recover such loss, explicit contract terms would be required. 6.55 For example, in the Transocean Drilling UK Ltd v Providence Resources PLC 19 dispute the expression ‘loss of use’ was considered sufficient to exclude liability for

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Company’s marine spread vessels being held on standby. If that wording had not been included, the Contractor would have been liable for Company’s wasted expenditure.

I Performance adjustments to hire

6.56 One key area where conventional vessel hire agreements and FPSO projects are different is in the complex adjustment mechanisms relating to the FP Contractor’s remuneration. There are a number of reasons for this. For example, we have described in Section D, the FPSO may have a certain amount of permitted downtime for maintenance each year. If there is any downtime over and above that allowance, the Company will not want to pay for it. Perhaps for some reason the asset cannot produce in accordance with its promised production capability (or ‘nameplate’ capability, as it is known in the industry). If production drops, the Company will want to pay less, by way of hire being adjusted downwards. Conversely, if the asset exceeds performance expectations, the FP Contractor will want hire to be adjusted upwards – effectively a performance bonus. 6.57 Whatever the reason for the adjustment, the relevant contracts usually contain detailed provisions setting out how the hire will be adjusted. These provisions are likely to be bespoke to the particular contract. That said, there are common themes running through them. For example, it is not unusual that full daily hire is payable if the FPSO achieves 95% of the agreed contractual availability. In those circumstances, the charter will likely provide that the FP Contractor receives a bonus if the FPSO achieves more than 95% availability or a malus (i.e. a deduction) if the FPSO achieves less than 95% availability. 6.58 The adjustment provisions, often found in an appendix to the main contract, may be beautifully drafted and work perfectly with the other provisions. Equally, however, they may not; they may even have been drafted by different people to those drafting the main contractual provisions. It is not difficult to envisage a situation where contractual provisions (such as limitation and exclusion clauses) are drafted by a team of lawyers, whereas hire adjustment clauses are drafted by commercial teams. And of course, sometimes contracts are novated or assigned and the original parties may be long gone, leaving the present parties with no corporate memory of how a particular clause was supposed to work. 6.59 It was issues such as these that the English High Court had to wrestle with in Altera Voyageur Production Limited v Premier Oil E&P UK Limited 20

(i) Altera Voyageur – the facts

6.60 Premier Oil, an oil exploration company, bareboat chartered the FPSO Voyageur Spirit from Altera Infrastructure (who separately entered into an operations and management, or O&M, agreement with Premier) for the purpose of developing and producing the Huntington Field oil reserves in the North Sea. 6.61 Under the terms of the charter, Premier was to pay Altera “daily base hire” in the first instance, which was then subject to later adjustment on an annual basis. The parties disagreed as to how this adjustment was to be effected. The dispute turned on

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two worked examples contained in Appendix M of the contract (which governed the hire adjustment process). 6.62 In a number of places in the charter, there was a reference to a “target availability” of 95%, although in some parts of the charter this 95% was in respect of time (i.e. days in a year), and in others by reference to a production target (i.e. barrels of oil):

• Section 1 of Appendix M defined “target availability” as
An availability factor (expressed as a percentage) for the [asset] and its Systems of ninety-five percent (95%). This percentage is calculated on the basis that [Altera] is entitled to full payment of Daily Base Hire provided the [asset] does not exceed 438 hours (equivalent to eighteen point two five (18.25) Days) of permissible shutdown time per year for planned and unplanned maintenance;
• Section 4 of Appendix M (headed “Determining Actual Availability (%)”) stated that:

Actual Availability (%) for each System and the [asset] shall be determined as follows:

Target Availability:	95% of Production Target
[Asset] Availability:	Actual Production + Company Underproduction
Actual Availability (%):	[Asset] Availability × 100/Production Target
(Actual Availability shall not exceed 100%.)

6.63 The two worked examples in Appendix M contained a detailed formula which took into account the availability of two of the FPSO’s defined “Systems” (oil/gas process and water injection), applied a different adjustment formula if the availability was less than or greater than 95%, and applied a weighting factor to the results of the two systems, resulting in an “annual hire adjustment formula” (“AHAF”). The two worked examples (see Table 6.1 and Table 6.2) then took the further step of dividing the AHAF by 95 (the “95 Division”), to result in the final hire adjustment (in the first worked example this resulted in a bonus payment to Altera, in the second it resulted in a refund to Premier). The effect of the 95 Division was the key part of the dispute. It meant that the key pivot point (i.e. the availability percentage that determined whether a malus or a

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bonus (or simply payment in full) would apply) was not 95% availability, it was 90.25% availability (i.e. 95% of 95%). The effect of this was:

• if Altera failed to achieve 90.25% availability, Altera would have to refund monies to Premier;
• if Altera achieved 90.25% availability then all of the hire was payable; or
• if Altera exceed 90.25% availability then Altera would be entitled to a bonus payment.
• Annual Hire Adjustment Factor is > 95%
• Expressed as a percentage this entitles [Altera] to:
• (97.8/95.0) = 1.029474
• i.e. a 2.9474% bonus payment
• Annual Hire Adjustment Factor is 95%
• Expressed as a percentage this entitles [Altera] to:
• (92.7/95.0) = 0.975789
• i.e. a 2.42105% reduced annual payment

Table 6.1 Worked Example (Based on Example 1 of [Appendix M])

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