Contracts are often unnecessarily voluminous documents making them turgid and confusing. At Lex-Energy though we want to simplify things so for this short series I will be cutting straight to the key areas which deserve an investment of your time to enhance your understanding and risk management. After all, you don’t want to jeopardise the viability of your business on a contract which doesn’t go to plan.
Key areas to be discussed are:
(i) warranty;
(ii) contractual limit of liability for default;
(iii) liability and indemnity provisions;
(iv) intellectual property protection (if you own or create such);
(v) dispute resolution and governing law; and
(vi) payment terms and security of payment.
I will touch on (i) and (ii) here, and the others in following blogs:
Warranty
The warranty clause sets out:
- the standard your work shall be performed to;
- specifications to be met in respect of goods or equipment being supplied; and
- warranty period e.g. typically 1 or 2 years after completion.
Contracts, however, often “go to town” in this clause thereby unwittingly increasing your exposure e.g. (i) inserting subjective language such as “ all work shall be performed to the highest standards applicable”, and (ii) including all implied warranties, potentially extending the warranty period.
Failure to meet your warranty obligations will constitute a breach of contract, possibly giving your client rights of termination or to bring in another contractor (i.e. your competitor) to remedy the breach. The client’s costs incurred as a result of your breach can be recovered from you without any financial limit provided they have sought to mitigate. Accordingly, you want to consider the next area below in the context of this risk.
Contractual Limit of Liability for Default (“Cap”)
A Cap provides the contractor financial protection if it is in default which includes warranty breach or failure to comply with other material terms in the contract. This is usually an area under the contract which will not be insured hence its importance. The Cap should be enforceable in all situations (including your or your sub-contractors’ negligence) but perhaps excepting your wilful misconduct.
Without a Cap you will be liable for all your client’s direct losses resulting from your default. If your client is an operator or a major service company, given the nature of their operations and the types of equipment and facilities involved, their direct losses may be substantial. Such losses may be so great they could sink your business.
Clients in the oil and gas industry understand and accept the concept of Caps, despite many of them not voluntarily offering. So don’t feel shy about seeking a Cap. This also demonstrates your ability to manage risk effectively.
Look out for the next update, where I will discuss “liabilities and indemnities”.
