UK: Andrews Kurth London Legal Briefing: TRANSOCEAN v PROVIDENCE

The recent case of Transocean Drilling U.K. Limited v Providence Resources plc, The Arctic III1 illustrates that even accepted industry-wide standard form contracts do not provide all the answers, and that disputes will never be too far away where the contract drafting is not completely watertight.

The case concerned the drilling of an offshore appraisal well (with a target depth of 7,645 feet TVD and water depth of 335 feet) in the Barryroe field off the south coast of Ireland.

Providence, the licensee of the Barryroe field, contracted with Transocean for the drilling of the well using the LOGIC model form drilling contract2 as the base contract. The following day rates were payable by Providence for the hire of the drilling rig:

Operating rate

US$250,000/day

(100%)

Standby rate

US$245,000/day

(98%)

Fishing rate

US$245,000/day

(98%)

Repair rate

US$245,000/day

(98%)

Waiting on weather rate

US$245,000/day

(98%)

Force majeure rate

US$225,000/day

(90%)

Redrill rate

US$225,000/day

(90%)

The well spudded on 20 November 2011 and completed on 25 March 2012. However, drilling delays occurred between 18 December 2011 and 2 February 2012. These delays were largely attributed to problems with a blow out preventer (BOP) stack on the drilling rig.

Transocean claimed remuneration of US$5.7m and Ł1.7m from Providence (in accordance with the day rates payable under the contract) for the period of the drilling delays. Providence argued that the drilling rig and Transocean's performance was defective, and that it should not have to pay for periods of delay in the drilling programme which were caused by Transocean's breach of contract. Providence also counterclaimed some US$10m against Transocean for the wasted costs of the wider marine spread which it was obliged to incur during those periods of delay.

In response, Transocean argued: (i) that it was entitled to be paid by Providence at the agreed day rates, regardless of whether it had breached the contract, because the contract described what Transocean called "a complete code" for remuneration. This meant that a particular day rate would always be applicable, irrespective of circumstances, which recognised an agreed allocation of risk between the parties; and (ii) that Providence's counterclaim for the wider marine spread costs should be irrecoverable because it amounted to a consequential loss, and the contract expressly excluded consequential loss liabilities.

The dispute between Transocean and Providence eventually came to be heard in the High Court in London in October 2014. The Court ruled as follows:

  1. several of the obligations to which Transocean was subject under the ‎contract (relating variously to provision of an adequate drilling rig, performance of the work and rig repair and maintenance) were not performed to the required standards, thus putting Transocean in breach of contract;
  2. as a matter of construction a party could not be allowed to take advantage of its own breach of contract, neither could a party ordinarily exclude liability for its own negligence, and a party which has paid for the provision of goods and services should be entitled to the remedy of abatement - and none of these principles would be disapplied just because they applied to a contract for the hire of a drilling rig. Consequently Transocean did not have an absolute entitlement to secure remuneration from Providence;
  3. the presence of an extensive knock-for-knock indemnity regime and the consequential loss exclusion clause in the contract would not operate so as to exclude Providence's claim for reimbursement of the wider marine spread costs which corresponded to the period of the drilling delays. Transocean, said the Court, was liable to Providence for these costs; and
  4. the exclusion of "loss of use" and "cost of use" by the contract's consequential loss indemnity was to be interpreted narrowly and against the party making the claim (i.e. Transocean), and in the context in which it was used in the contract to be limited to loss of income or benefit and the cost of hiring in equipment or services, or replacing property the benefit of which has been lost.

In particular, the Court rejected Transocean's argument that the day rate provisions represented a "complete code" which guaranteed payment to a drilling contractor.

The decision in Transocean v Providence, whilst particular to the facts of the contract and to the manner in which that contract was performed, illustrates a number of interesting points:

  • oil companies are not afraid to ‎dispute the wording of contracts which are perceived as having widespread industry acceptance, even where relatively modest amounts of money are at stake. This is a phenomenon which is likely to be encountered even more going forward, as collapsing oil prices impose greater cost consciousness and contract management rigour.
  • the LOGIC model form drilling contract is not perfect, and this is not only from the contractor's perspective. Careful modification of the standard terms of the contract could be necessary in order to preclude unexpected interpretations from being applied, and the contract could also be amended by oil companies keen to capitalise upon the findings of the Court in this case.
  • the drilling rig in question was on hire to Providence only until 1 April 2012. Consequently there was no claim by Providence which related to being able to get out of a long term contract commitment. It is interesting to speculate whether a combination of the wording of the contract, the facts of the situation and the findings of the Court could have combined to facilitate an early termination of the contract. ‎ This could be of relevance to parties looking for ways out of enduring contracts.

Footnotes

1 [2014] EWHC 4260 (Comm).

2 Available at www.logic-oil.com.

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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