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LOGIC General Terms & Conditions Edition 3: Our considerations

Insights / / London

LOGIC has recently published Edition 3 of the LOGIC General Terms & Conditions (Including Guidance Notes) of Contract for Marine Construction (referred to herein as the “Contract”). This Contract belongs to a series of standard form contracts for the United Kingdom’s oil and gas industry, covering a range of services and operations in the United Kingdom Continental Shelf but which are often used as the basis for contracts worldwide. In this article, we consider the most significant changes made to the Contract in this third edition.

1. Contractor’s General Obligations

Clause 4 of the Contract covers the general obligations under the Contract and has been updated to include a new clause 4.7 which says that a Company may engage other contractors in connection with its operations at the worksite, while the works are being carried out, in which case the Contractor is required to permit free access to the worksite and to co-operate with them, affording them access to all reasonable facilities. If compliance with this causes the Contractor delay(s) or additional costs that could not have been reasonably foreseeable by an experienced contractor (which it must prove), the Company will, subject to the Contractor’s provisions on variations under clause 13, issue a variation notice.

This clause encourages the parties to work collaboratively to complete the works whilst also taking into account the impact that additional resources can have on operations, and providing measures for protecting the Contractor’s position under the contract, particularly liability for liquidated damages, in the event that the engagement of more contractors (and likely, congested work areas as a by-product of this decision) impacts productivity and causes delay.  It is a sensible attempt at finding a practical balance between the parties’ priorities.

2. Terms of Payment

Clause 16.4 of the Contract now stipulates that all payments contemplated under the Contract are exclusive of Value Added Tax (“VAT”), which shall be charged by, and accounted to the relevant tax authority by the relevant party, under prevailing legislation, and that all invoicing requirements regarding charging and accounting of VAT must be complied with by the Contractor. Addressing VAT separately makes it easier when dealing with contractors, subcontractors, suppliers, and manufacturers, etc., that aren’t VAT registered, or where a business is eligible for tax deductibles. By carving this cost out of the Contract prices, it reduces the risk of doubt.

3. Taxes and Tax Exemption certificates

Former clause 18.3 is now clause 17.3 and has been updated to include a reference to compliance with the Taxes Management Act 1970, Income Tax (Trading and Other Income) Act 2005, the Income Tax Act 2007, the Corporation Tax Act 2009 & 2010. It also addresses the use of exemption certificates as provided by HM Revenue and Customs.

The amendments make it clear that where any of the work involves the performance of construction operations, as defined under the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005 (together referred to as the “Construction Industry Scheme”), compliance with the Construction Industry Scheme is mandatory. This update ensures the Contract is in accordance with legislation and current industry practices that have been in place since January 2014.

The Contractor is also now obligated to provide the Company with as much information as required to verify with HM Revenue and Customs that the Contractor is registered for gross payment, or payment under deduction, or alternatively, that it is not registered for the purposes of the Construction Industry Scheme, and that it will provide the Company with as much information as needed to calculate accurately any deductions applicable under the Construction Industry Scheme. Again, this change ensures compliance with regulatory requirements.

Lastly, in the event of any over-deductions, or any tax arising as a result of the Contractor’s failure to provide sufficient information in a timely manner, the Company will not be held liable for reimbursement. This change puts ownership on to the Contractor to ensure that all taxes are properly calculated and any errors are promptly dealt with. What is understood to be acting in a timely manner may be subject to interpretation from an objective viewpoint, which could result in a dispute amongst the parties, so addressing these issues at the earliest convenient moment is always advised.

4. Indemnities

Indemnities are provided for in clause 21. While these largely remain untouched, a new clause 21.9 has been introduced to make it clear that the indemnities given by the parties under the Contract are full and primary, and apply irrespective of whether a party has insurance in place to protect itself from any claim, loss, damage or cost. A new clause 21.10 has also been introduced to stipulate that all indemnities set out in clause 21 will not extend to criminal sanctions imposed upon it arising out of, or in connection to, any performance, or non-performance, of the Contract.

The pollution indemnity in Clause 21.4 has also been amended to make it clear that a Contractor is only responsible for pollution which originates from its own property and equipment, removing liability for any pollution that may emanate through its property or equipment, but that originates from any reservoir or Company Group property.

5. Consequential Loss

Clause 24 of the Contract sets out a two part meaning of consequential loss, namely:

(a) consequential or indirect loss under English law; and
  (b) loss and/or deferral of production, loss of product, loss of use, loss of revenue, profit or anticipated profit (if any), in each case, whether direct or indirect to the extent that these are not included in (a), and whether or not foreseeable at the EFFECTIVE DATE OF COMMENCEMENT OF THE CONTRACT”.

While the definition remains untouched from the second edition, the relevant supporting explanatory notes have been developed to explain that despite the impact of the decisions in Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372 and Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm) on whether the Courts will continue to interpret “consequential loss” and “indirect loss” as meaning losses recoverable under the second limb of Hadley v Baxendale [1854] EWHC J70, Clause 24 (a) of the Contract is intended to refer only to losses recoverable under the second limb of the test, and Clause 24 (b) refers to the specific types of loss listed, irrespective of whether the loss is recoverable under the first and / or the second limb. This clarification may help reduce the number of disputes around consequential loss, making it clearer what is intended in circumstances where the English Courts’ for the most part continue to interpret consequential loss exclusions in a way that many business people would think is narrow, artificial and uncommercial.

Clause 24 has also been further developed to include a provision to make it clear that all exclusions and indemnities shall apply irrespective of cause, notwithstanding negligence or breach of duty, and irrespective of any claim in tort, under contract or otherwise at law, to remove any arguments that the exclusion does not apply to exclude negligence. 

6. Confidentiality

The parties’ obligations in respect of confidentiality remain the same overall, but the LOGIC drafting group has made it clear that the Contractor must seek out written permission before making public announcements or issuing releases.

Clause 25.2 sets out the provisions when a Contractor’s obligations in respect of confidentiality does not apply. This has been updated to include a new clause (f), as set out below. For those that have not come across previous editions of the Contract before, a Contractor’s confidentiality obligations will not apply to any information that:

  1. is part of the public domain;
  2. was in the Contractor's possession prior to the contractor being awarded (which was not subject to any other confidentiality obligations);
  3. received from a third party who had lawful possession and was not under a non-disclosure obligation;
  4. required by law, rule, or regulation of any governmental or regulatory body with jurisdiction over the work, the contractor, or any relevant stock exchange;
  5. was disclosed by the Contractor  five or more years after completion or, as newly added in the third edition of the Contract; and
  6. is the type of information set out in Regulation 2(3) of the Business Contract Terms (Assignment of Receivables) Regulations 2018, and which is being disclosed for one or more of the purposes envisaged by the Regulations.

7. Termination

Termination rights are addressed in clause 29 of the Contract where it is stipulated that the Company has the right to give notice to terminate all, or part of the work, or the Contract itself in the event of (a) convenience; (b) default; or (c) events affecting the Contractor. Previously, item (c) addressed bankruptcy or a voluntary arrangement, but this has been further defined to include: (i) a winding up resolution; (ii) if a receiver, administrator, or liquidator is appointed; (iii) a voluntary arrangement is proposed or negotiated; or (iv) any anything else of similar effect.

The parties’ position in the event of termination has been further developed at clause 29.7(b), particularly to state that the whole of the Contract will remain in full force and effect for the performance of the work that has not been terminated.

8. Anti-bribery & Corruption

One of the most notable changes to the third edition of the Contract is the introduction of a new anti-bribery & corruption clause at clause 33. This new provision stipulates that each party shall warrant that it has complied with its obligations under the Contract to comply with all applicable anti-bribery laws, which is newly defined under the Contract to include both, but not limited to, the Bribery Act 2010 and the Foreign Corrupt Practices Act 1977.

Clause 33 stipulates that the contractor warrants that it has an “ABC programme” that sets out adequate procedures to ensure compliance with the above-mentioned laws, and that it will comply with its ABC programme in respect of the Contract.

An ABC programme is defined as an:

anti-bribery and corruption policy and any related procedures as amended, varied or supplemented from time to time, which (without limitation) may include policies, procedures and controls relating to recording of financial transactions; anti-bribery and corruption risk assessment and mitigation; training of personnel; whistle blowing facilities; due diligence on third party engagements/contracts; gifts and hospitality, promotional expenditures, sponsorship and charitable donations; and promoting and monitoring compliance.”

The new provisions enable a Company to undertake an audit (at its own costs) of the Contractor’s ABC programme, but it should be noted that this right does not extend to any privileged document(s) or those relating to any on-going investigations.

In the event of an investigation by a “Competent Authority”, which is widely defined in the Contract as:

“(i) any person having legal, executive and/or regulatory authority and/or enforcement powers (including any public body or authority responsible for the investigation and/or prosecution of criminal offences) over either or both of the PARTIES or any of their AFFILIATES providing services in connection with the CONTRACT; and/or (ii) any court of law or tribunal with jurisdiction over either or both of the PARTIES or any of their AFFILIATES providing services in connection with the CONTRACT”,

the affected party must provide written notice of the investigation, at the earliest possible moment and is furthermore obligated to use reasonable efforts to keep the other party informed on progress and/or any findings and any subsequent remedial measures that need to be implemented.

The Contract stipulates at clause 33.5(a) that if the Company has a reasonable belief that the Contractor has breached its obligations of complying with anti-bribery laws that it may give formal notice of its intention to suspend payments under the Contract. In this instance, the Contractor has seven days to refute any allegations, failing which the Company may give forward notice to suspend the contract. A Company will not, however, be entitled to suspend payment for any sums due for work already performed, so long as said work is not connected with the suspected breach.

The Contract also provides that in the event of a suspension, the parties should meet at seven-day intervals to agree on an appropriate course of action during this suspension. On the expiration of the suspension period, full payment for any sums retained that are due should be made within 30 days unless a reasonable belief remains, in which case a formal notice should be issued within 30 days giving notice to terminate the Contract.

In the event of termination, Clause 33.6 provides that payments due up until the date of termination shall be payable (such payments to be made within 30 days) unless these are connected to the alleged breach of the relevant anti-bribery laws. Any additional costs incurred by the Company as a result of the Contractor’s breach are recoverable, subject to evidence of the alleged breach being provided by the Company. Lastly, so long as there was a reasonable belief to suspect a breach of the anti-bribery and corruption laws, the termination will be valid even if the allegations of wrongdoing are proven false, and the Company will not be in breach of the Contract for terminating. Nevertheless, if the Contractor can prove it did not breach Clause 33.1 – even at a subsequent date - then it is entitled to payment for any sums retained.

The explanatory notes advise that Clause 33 has been drafted “to enhance communication and co-operation between the Parties” making it clear that it may not be for the Company to make a decision on whether the Contractor’s procedures are adequate; placing more emphasis on the Contractor’s warranties that the procedures are in place, and will be complied with. It encourages parties to work together to find an effective and appropriate way to move forward in the event of a concern and/or incident, and a need to suspend the works.

A draft indemnity provision is provided in the explanatory notes. The LOGIC drafting group could not agree whether an indemnity was currently industry standard practice, and due to the differences in opinions, it was decided that it should not form part of the standard Contract. However, they did acknowledge that in some instances parties to a contract may find it appropriate to include such a provision, and as such, a draft clause is provided at Clause 33.7 in the notes.

While providing a disclaimer that the drafting notes are for guidance purposes only and not to be interpreted as giving legal advice, the notes explain that an indemnity provision should be mutual. Parties considering to include an indemnity are advised to consider how this will interact with the Limitations of Liability, and Consequential Loss clauses and any decision made on whether or not to give an indemnity should be based purely on their parties’ own circumstances.

9. General Legal Provisions

Clause 34.5, which addresses proper law and language has been amended to stipulate that any non-contractual rights and obligations that arise out of, or in connection with the Contract and its subject matter shall be governed and construed in accordance with English law.

10. Liquidated Damages

Clause 35.2 previously stipulated that liquidated damages could be recovered in the event that a Contractor fails its respective obligations under the Contract; such sums to be a “genuine pre-estimate of the losses, which may be sustained by the Company”. This has been replaced with a new provision that stipulates that liquidated damages are eligible as:

"the sole and exclusive financial remedy of a Company, in the event that the items listed in Appendix 1 to Section I – Form of Agreement are not completed pursuant to the relevant dates listed in the Schedule of Key Dates, and/or the Contractor’s failure to achieve the contract in respect of any other items listed under the heading, clause 35.1 – Liquidated Damages in said Appendix 1 to Section I – Form of Agreement".

It further provides that payment of liquidated damages will not relieve a contractor of its obligations to perform the contract.

The form provided in Appendix 1 to Section I – Form of Agreement enables the parties, amongst other things, to clearly specify the effective date of commencement; the scheduled completion date; where there are any restrictions to free and unrestricted access; what the period of force majeure delay is, based on the number of days at zero date and a further number of dates at a rate agreed by the parties; the dates of completion for the relevant part of work and any other phases as specified by the parties; the period of time for work involving vessels; any defects correction periods; and what the liquidated damages are, and how many “waiting on weather days” are permitted under the schedule of key dates.

The changes reflect recent case law as to the nature of liquidated damages and the specific references to Appendix 1, where time periods are clearly defined, attempts to provide clarity and structure to the process of claiming liquidated damages.

11. Resolution of Disputes

Clause 37 contains a tiered negotiation process; stipulating that parties should endeavour to discuss the matter, first by a party appointed representative (whose details can be listed in Appendix 1 to Section I) and thereafter by an appropriate senior executive (rather than a managing director, thus taking into account that non-UK entities may not have a managing director) within respective time periods. The party representatives have forty days from receipt of the formal notice of dispute to seek a resolution, and the senior executives have a further twenty days.

 In the event that a resolution is not achieved, the dispute can be resolved by Alternative Dispute Resolution (which itself is not defined), as agreed amongst the parties, but that in the absence of an agreement the parties may take appropriate action in the courts. However, it will be a condition precedent to legal action that the various settlement discussion stages as laid out in clause 37.1 (a) – (c) have been followed.  

The Contract appears in favour of resolving the dispute amicably between the parties, without the need of embarking on costly litigation by providing a set process, with specific timeframes imposing a condition precedent, as well as specifying the seniority of those who must be involved in the dispute resolution discussions). In total, eighty days need to have passed from the date of service of the formal notice of dispute before Court action can be taken. While not extensive, a period of almost three months in which at least two rounds of settlement discussions must have taken place, as well as a mediation is a long time. On the other hand, it may facilitate more disputes being settled amicably.

12. Mutual Hold Harmless

The Industry Mutual Hold Harmless (“IMHH”) is considered by LOGIC as the most appropriate means of dealing with the allocation of liability for injury to persons, damage to property and consequential loss between the Company’s contractors, and LOGIC strongly encourages all contractors to join the IMHH. Accordingly, a clause addressing IMHH has been inserted at Clause 40. With reference to the 2012 IMHH Deed, the new clause provides that a Company must confirm its intention that all companies with which it contracts for Relevant Services (as defined in the IMHH Deed), including its subcontractors, are signatories to the IMHH Deed.

In return, the Contractor must confirm that it is a signatory to the IMHH Deed and that it will remain so for the duration of the Contract, as well as confirming its subcontractors are signatories too. The consequences for not being an IMHH member is not addressed in the Contract. On the contrary, the Contract simply requires a party to make it known to the other party if it, or its subcontractor, do not belong and the explanatory notes say that a Contractor is not expected to compel its subcontractors to participate. Nevertheless, the importance of, and encouragement to join cannot be denied.

Conclusion

This third edition of the Contract contains some useful amendments in light of recent developments but still continues to be a standard form which Contractors will find to be balanced in the Company’s favour such that they will want to amend it more in their favour. The Contract’s encouragement of a focused alternative dispute resolution process is striking, and the LOGIC drafting group appears in favour of ensuring that the parties have extensively explored all avenues before resorting to legal proceedings, giving a sense of collaboration and co-operation. It may however introduce too many tiers to the process which could in some cases prolong efforts to resolve disputes.

As with all standard contracts, terms can be negotiated, adapted, and amended, but care will be needed in making changes as even the slightest change can have a significant impact on the contract.

Should you have any questions in relation to the content covered in this article or wish to discuss adapting the Contract to meet your company’s needs, please do reach out to your usual Ince contact or email us at energy@incegd.com.

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

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