Things can go very wrong very fast when working offshore - Calum Crighton

I begin with a cautionary tale. A supplier signed a contract with an oil company to provide well casings. The supplier sourced these from a subcontractor who engineered the well casings in Eastern Europe then sent them to West Africa for use by said oil company while drilling ‘appraisal’ wells offshore.

Calum Crighton is a Partner, Gilson Gray

During the drilling, there was a substantial explosion. No-one was injured but there was serious damage to the surrounding infrastructure.

It was discovered the well casing had a flaw which almost certainly caused the explosion. What did that mean for the supplier? The contract allowed for subcontracting but, as should always be the case, the supplier was responsible for the performance of its subcontractor and therefore responsible for the damage caused by the explosion.

The direct loss to the oil company was approximately 60 times higher than the value of the casings contract but, crucially, there was no overall cap on liability in the contract. We are talking multi-million-pound liability against a six-figure sum contract, which could have led to the supplier’s demise.

This is a valuable lesson when supplying products offshore – oil, gas, or offshore wind. The unpredictable environment means consequences can quickly escalate, so it’s important to limit liability from the outset.

Another consideration is the move away from ‘mutual hold harmless’ regimes in offshore contracts. Until recently, it was normal practice for an oil company to indemnify a supplier and its respective ‘group’ of subcontractors against any damage to its own property and groups (and vice-versa) regardless of fault or negligence.

Had this been the case here, the supplier would have been ‘held harmless’ by the oil company and crucially, so would its subcontractor The oil company would have relied on its insurance policy to cover the damage, and everyone would have known where they stood from the outset.

Unfortunately, the offshore oil & gas sector has gradually moved away from this ‘knock for knock’ approach. In my view, this is a mistake, which shouldn’t be repeated by the offshore wind sector. The original provisions are designed to avoid lengthy, costly legal proceedings, ensure certainty and avoid double insurance.

A further area of focus is around consequential losses. The basis of ‘mutual hold harmless’ regimes is mutual acceptance that each party will be responsible for their own consequential losses. In our well casings example, the contract, thankfully, had well-defined consequential loss provisions, so the supplier was not responsible for the subsequent loss of production or opportunity.

A final lesson for offshore wind contracting, is the concept of no retrieval or recovery costs being passed onto the supplier. In the above example, had the supplier been on the hook for retrieval of defective goods, liability could have sky-rocketed to include vessel hire costs, etc.

Any company supplying products offshore should ensure their defects warranty provisions extend only so far as repair or replacement costs within the overall cap in the contract. For offshore wind, the Orsted/Tekmar cable protection systems (CPS) case demonstrates the points well. Power cables damaged by the CPS could result in liability for the damage, liability for the interruption/delay in getting power ashore and retrieval/recovery costs of the CPS if the contract doesn’t factor in these lessons.

The rising number of companies entering the offshore wind market should take legal advice before embarking on new contracts; things can go wrong very fast. A healthy, strong, supply chain, key to the success of the offshore wind industry, must be protected by following these key lessons.

Calum Crighton is a Partner, Gilson Gray