UK: Clyde & Co Research Shows Cancelled Contracts Expected To Be The Main Cause Of Energy Disputes
Last Updated: 26 April 2016

86% of international senior oil & gas executives and lawyers expect cancelled contracts to be the main cause of disputes this year

The majority (86%) of international senior oil & gas executives and lawyers expect cancelled contracts to be the main cause of disputes this year, according to research by global law firm Clyde & Co.

Clyde & Co says that current attitudes to litigation and arbitration in the oil and gas industry have changed significantly over the past 12 to 18 months.

As a result of the financial pressures faced by the industry, companies are far more bullish than they used to be. Consequently there is significantly more contentious correspondence between parties, some of which ultimately leads to the commencement of legal proceedings.

Clyde & Co explains that some of the most common flash points for disputes include termination of contracts (purportedly for cause but in fact for convenience), non-payment of invoices, declarations of force majeure and JV/PSA disputes.

David Leckie, International Arbitration Partner at Clyde & Co, says: "During this financial downturn oil & gas disputes are inevitably on the rise. We've seen an increase in contentious correspondence between parties and a far more bullish approach than in previous years."

"Clearly, any decision to commence proceedings must be carefully risk assessed. The direct costs of litigation and arbitration are significant, not to mention the hidden costs of extensive management time and reputational risks."

"The stakes are high, especially if the dispute is under English law, where the loser will almost always be ordered to pay most of the winner's legal costs."

"Businesses are often faced with the stark choice of having to write the amount in issue off, pay the sum demanded or litigate/arbitrate. In many situations, the only way forward is to commence proceedings and then seek to resolve the dispute by way of alternative dispute resolution, such as mediation."

Clyde & Co says that the most important issue to consider before commencing any proceedings is whether any judgment can be enforced. In international disputes, this is a very complex issue which needs to be addressed at the outset, to avoid pouring good money after bad. 

"There is nothing worse than a Pyrrhic victory," adds Leckie.

Changes to operational arrangements as a result of cost-cutting, the shelving of planned projects and lack of investment in existing operations, could all have a major impact on relationships across the supply chain.

David Leckie comments: "The oil & gas supply chain is built on an intricate network of inter-related supply agreements, JV partnerships and contractor relationships. If one business is unable to meet its contractual obligations it may have a knock on effect on another business's contractual obligations, potentially leading to a domino effect of disputes."

Clyde & Co's research shows that JV partners, contractors or suppliers becoming insolvent or unable to fulfil their contractual obligations is also a key concern for the industry. Four fifths (81%) of international senior oil and gas executives expect this to lead to increased dispute activity.

"A counterparty insolvency can cause real problems for businesses as it makes it much harder to get your money or assets back," says David Leckie.

"In this challenging and fast-changing environment, managing supplier and contractor relationships positively and pro-actively is vital."

How is the oil & gas industry managing its contractors and suppliers?

According to Clyde & Co, just a third of international senior oil & gas executives are already renegotiating contracts with suppliers and contractors.

A fifth (21%) appear to be positioning themselves for a similar move by pre-emptively reviewing contractual obligations and performance.

The research found that 42% of international senior oil & gas executives are taking a "wait and see" approach to supplier and contractor management, saying they are closely monitoring supply chain activities to ensure they are aware of stress points. 

David Leckie, comments: "It's surprising that such a large proportion of the industry is taking the potentially risky 'wait and see' approach to supply chain management. Taking a proactive stance is key to being on the front foot with supplier and contractor disputes."

"Businesses that are unable to renegotiate contracts should consider the choice of law and dispute resolution clauses and escalate the dispute resolution process sooner rather than later."

Clyde & Co's top ten legal tips: dispute resolution

Pre contract – carry out extensive credit checks and, if possible, obtain security
Be vigilant – keep a constant eye on unpaid invoices and the changing financial status of the debtor
Keep careful records – document all phone calls and meetings and preserve all emails and documents
Review contract termination provisions – in particular termination for cause – and follow the contractual notification process to the letter
Don't delay – consider the choice of law and dispute resolution clauses and escalate the dispute resolution process sooner rather than later
ADR – make sure you closely follow any contractual alternative dispute resolution procedures before commencing litigation/arbitration
Look carefully at enforcement before spending a lot of money on litigation/arbitration – there is nothing worse than a pyrrhic victory
If the counterparty is in serious financial difficulty, litigation/arbitration should be commenced as quickly as possible – it may be possible to obtain a judgment in default and enforce that (eg by a third party debt order or a charge over property or shares). Once enforcement is complete this may allow you to keep the recovery, as a secured creditor. However, if you do not complete enforcement before an insolvency process commences, you are usually part of the general body of unsecured creditors (and may make only a minimal recovery)
Consider using expedited procedures within the relevant arbitration rules or rules of court – consider interim remedies, such as freezing of assets and security for costs
Manage the litigation/arbitration carefully – through cost control and consideration of innovative litigation funding, such as third party finding or insurance backed products. Don't throw good money after bad

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