UK: Statutory Adjudication in the Oil and Gas Industry

Last Updated: 16 January 2003
Article by David Scott

The High Court in London issued its judgement on 4 December 2002 in an action brought by Amoco (UK) Exploration Company against Telephone Cables Limited, following a three day hearing in November 2002 and relating to a claim arising on New Year's Day 1995. Could this dispute have been referred to adjudication under the Housing Grants, Construction and Regeneration Act 1996 at a much earlier date and have been resolved within the obligatory 28 day period provided for in that Act?

The answer, very simply, is no, as the contract between Amoco and TCL out of which the dispute arose was made in March 1992. The 1996 Act only applies to contracts made after 1 May 1998. However, if a similar dispute arose under a more recent contract in the oil and gas industry, would statutory adjudication be an option? The throw-away remark is often made that the oil and gas sector is excluded from the operation of the Act; but is that correct?

Amoco was the operator of two platforms, Lomond and North Everest, in the Central Graben Field in the North Sea. TCL, a cable specialist, was the main contractor under a contract with Amoco for the supply and installation of a fibre optic cable telecommunications system linking the two platforms. On New Year's Day 1995, in the course of a severe storm, the cable parted at a design "weak link" at the approach to the Lomond platform. TCL carried out repairs for which Amoco paid, and the claim in the High Court action was for reimbursement of those costs (under warranty, alternatively for damages for breach of contract), in the sum of Ł1,236, 157.

The 1996 Act applies only to "construction contracts", defined in section 104, as, essentially, agreements (in writing) for "the carrying out of construction operations". Sub-section 105(1) defines "construction operations" extensively. That sub-section includes (at 105(1)(b)) the "construction... of any works forming, or to form part of the land, including... telecommunication apparatus...". It also includes (at 105(11)(e)) "operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this sub-section, including... earth moving, excavation, tunnelling and boring". The contract between Amoco and TCL obliged TCL to bury the sub-sea cable by laying it in a trench, and covering it by rock dumping and, in some areas (in particular to protect the weak link/conversion joints), with concrete matting. This, quite arguably, would involve the cable "forming... part of the land", and indeed at Committee Stage in the House of Commons, the Construction Minister expressed the view that the relaying of services by utilities would be included under sub-sections (b) and/or (e). The contrary argument would have to rely on the distinguishing factor (initially attractive, but not necessarily worthy of logical scrutiny) that in this case the "land" was several hundred feet below the surface of the North Sea.

On the face of it, therefore, a contract similar to that between Amoco and TCL might be covered by the Act. However, certain "construction operations" are expressly excluded from the ambit of the Act by sub-section 105(2). The exclusion includes the "drilling for, or extraction of, oil or natural gas". It is this provision that has mislead some people into thinking that the oil and gas sector is wholly exempt. However, this exception is very specific, and would not exclude ancillary works such as the installation of the telecommunications cable. Sub-section 105(2) also excludes the "... installation of plant or machinery... on a site where the primary activity is... the production, transmission, processing or bulk storage... of oil [and] gas...". The usual question to resolve first when considering this provision is "what is the primary activity?". Whilst it is perhaps clear, in the context of the contract between Amoco and TCL, that the " primary activity" is the production and transmission of oil, query whether in this case that primary activity can be said to have been carried out on the "site" where TCL was executing the bulk of its works. The distance between the two platforms, and over which TCL had to lay the telecommunications cable, was some 65 kilometres. Can the "site" really be argued to be, for example, the whole of the Central Graben Field, as opposed to the particular sites around the platforms where the production/transmission of oil actually takes place? There would be great scope to contest such a contention. In any event, it would also be arguable that the fibre optic telecommunications does not come within the term "plant or machinery". Whilst the Court of Session in Scotland in the case of Homer Burgess Limited –v- Chirax (Annan) Limited (1999) held that pipework connecting various items of machinery and equipment, and the High Court in England in ABB Power Construction Limited –v- Norwest Holst Engineering Limited (2000) held that cladding to boilers and other equipment constituted "plant", a dictionary definition would be unlikely to support such a finding in the case of a fibre optic telecommunications cable.

One final but important point. The 1996 Act only applies to construction operations being carried out in England, Wales and Scotland. The above discussion proceeds on the assumption that the works being undertaken by TCL were, at the least, on the sea-bed over which the UK is entitled to exercise sovereign rights in accordance with the relevant Continental Shelf Legislation. The nature of those rights and whether in fact, the shelf can be treated as being "in Scotland" is beyond the ambit of their article. There can be little doubt, however, that similar works being undertaken on the bed and subsoil of Scotland's territorial waters would likely have a stronger claim to being "in Scotland".

In short, therefore, a dispute similar to that between Amoco and TCL (the merits of which, incidentally were resolved by the Court in Amoco's favour) might well (in particular in relation to on-shore activities) be subject to the rigours of the 1996 Act. Those operating in the oil and gas industry should not be discouraged, or indeed comforted (depending on which side of a dispute they are sitting), by the title of the 1996 Act. Both the adjudication provisions as well as the all-important payment provisions (including in particular the critical requirement for withholding notices) are likely to apply to many contracts (sometimes perhaps unexpectedly as in the case of a contract like that between Amoco and TLC) entered into in the oil and gas sector.

David Scott is a Partner in McGrigor Donald and KLegal specialising in dispute resolution predominantly in the construction, engineering and oil and gas industries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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