Six Clauses Every Oil & Gas Professional Should Know

Tim Haïdar

The legal world governs everything that we do as an industry, yet even seasoned legal professionals fall foul of elemental mistakes in contract knowledge.

In this piece, we list six contracting terms of which everyone working in the oil and gas sector should have at least a partial understanding.

Penalty Clauses

In Anglo-Saxon law, the primary redress for a breach of contract is the imposition of damages to compensate the innocent party for losses suffered as a consequence of that breach.

Penalty clauses - clauses designed to dissuade parties from breaching contract terms through poor performance - are unenforceable in Anglo-Saxon Law, but commercial oil and gas contracts will include a clause which provides that the defaulting party pays a fixed sum in the event of a breach.

Such clauses are known as a liquidated damages clauses, and are based on a genuine approximation of actual damages and are largely enforceable in the courts. The parties designate the amount during the formation of a contract for the injured party to collect as compensation upon a specific breach.

Termination Clauses

The majority of contemporary commercial contracts contain detailed provisions for the termination of a contract by one party under specified circumstances if the other party cannot or does not comply with their obligations.

A simple termination clause will commonly consist of two basic elements:

  • Breach of contract

  • Insolvency or an event such as the appointment of a receiver

Termination clauses are usually written on a mutual basis, in which case either side will be able to bring the contract to an end. It is also advisable that the wording of a termination clause should allow for some discretion on whether to terminate.

Clauses that include an automatic termination, for example, after non-payment of money owed in a specific time frame may be overzealous when not business critical and leniency in the matter could save a usually profitable relationship.

Pollution indemnity clauses

After the Deepwater Horizon blowout and subsequent oil spill at the Macondo 252 well in the Gulf of Mexico, operators and contractors have put more emphasis than ever before on clauses that indemnify against pollution.

A pollution indemnity clause will set to allot the liability for any loss or damage arising from pollution and/or contamination caused in the process of a works contract.

In the fallout of the Gulf of Mexico spill, New Orleans District Judge Carl Barbier ruled that BP had to indemnify their contractor Halliburton, which provided cementing services at Macondo, for third-party compensatory claims under their contract.

Force Majeure Clauses

Translated from the French as "superior force", and also called casus fortuitus" or "chance occurrence" this is a clause embedded in contracts that frees both parties from liability or obligation when an unexpected event or circumstance beyond the control of the parties occurs that prevents them from fulfilling their contractually binding obligations.

Common grounds that would trigger a force majeure clause are the outbreak of war, perpetration of a crime, rioting and striking as well as Acts of God such as a raft of natural disasters including hurricanes, tornadoes, tsunami, flooding and earthquakes.

Recent examples of force majeure in the oil and gas arena are ExxonMobil vis-á-vis its Libyan E&P activity after violence exploded in Benghazi in 2011, and Shell’s declaring force majeure on deliveries from its 22 million tonnes per annum (mtpa) plant in the Niger Delta after violent third party interference in the region.

Knock for Knock Indemnity

"Knock for knock" agreements, also called reciprocal or mutual indemnity agreements, are frequently used in the oil and gas industry to allocate risk.

Under the agreement, each party agrees to take full responsibility for bodily injury or property damage claims made by its own employees, regardless of which party may actually be responsible for the injury.

Under Anglo-Saxon law, knock for knock indemnities are interpreted restrictively, meaning that inthe case of any ambiguity, the clause will be construed in the "manner least favourable to the party seeking its protection."

Third Party Indemnity

Under third party indemnity, damages are paid by one party in compensation for loss or damage suffered by another party as a result of the third party's actions or failure to act. However, it must be noted that one cannot unreasonably indemnify another for their breach of contract.