IMCA ContractingPrinciples

AB The International Marine Contractors Association

IMCA Contracting Principles

www.imca-int.com

February 2005

International MarineContractors Association

www.imca-int.com

AB

AB

The International Marine Contractors Association (IMCA) is the international trade association representing offshore, marine and underwater engineering companies. IMCA promotes improvements in quality, health, safety, environmental and technical standards through the publication of information notes, codes of practice and by other appropriate means. There are two core activities that relate to all members: Safety, Environment & Legislation Training, Certification & Personnel Competence The Association is organised through four distinct divisions, each covering a specific area of members interests: Diving, Marine, Offshore Survey, Remote Systems & ROV. There are also four regional sections which facilitate work on issues affecting members in their local geographic area Americas Deepwater, Asia-Pacific, Europe & Africa and Middle East & India.


These principles have been developed by the IMCA Contracts Workgroup, under the direction of the Overall Management Committee and IMCA Council.

www.imca-int.com/contracts

The information contained herein is given for guidance only and endeavours to reflect best industry practice. For the avoidance of doubt no legal liability shall

attach to any guidance and/or recommendation and/or statement herein contained.


February 2005

Introduction ........................................................................................................... 1

1 Company Group and Contractor Group Property and Personnel .................. 3

2 Project Works (including both Company- and Contractor-Supplied Items)........ 3

3 Pollution.................................................................................................................. 3

4 Third Parties .......................................................................................................... 4

5 Consequential Losses ............................................................................................ 4

6 Warranty Obligations ........................................................................................... 4

7 Limitation of Liabilities ......................................................................................... 5

8 Minimum Insurance Requirements ..................................................................... 5

9 Force Majeure and Suspension ............................................................................ 6

10 Delay ....................................................................................................................... 6

11 Variation Orders.................................................................................................... 6

12 Free Access to Worksite ...................................................................................... 7

13 Intellectual Property Rights ................................................................................. 7

14 Termination by Company for Convenience ....................................................... 7

15 Companys Obligation to Pay Contractor.......................................................... 7

Appendix 1 IMCA Competition Law Compliance Guidelines .............................. 8

The publication of these principles by IMCA is intended to assist and promote industry dialogue and efficiency and their adoption is not mandatory IMCA Contracting Principles 1

Introduction

IMCA, the International Marine Contractors Association, is the international trade association representing offshore, marine and underwater engineering companies. It has several roles but a key one is communication and promoting dialogue amongst the various companies, both clients and contractors, for the benefit of the whole industry.

In 2002, one oil company commissioned a study of the business environment in offshore contracting. The study included interviews with 15 major contractors and 12 oil companies and summary results were shared with the contributors. The feedback identified some bad experiences and an inequitable balance of risk and reward for contractors. The report identified this situation as being unsustainable. The root of the problem was almost always in the conditions of contract.

This is not an isolated event, but one which reflects views expressed by several contractors, clients and industry observers in recent years.

A variety of initiatives have been undertaken to address these concerns.

IMCA is pleased to publish this discussion document to help to promote dialogue and encourage equitable solutions for both contracting parties which will improve clarity and efficiency, avoid duplication and save money.

Contracting conditions around the world are complex and numerous. Often the risks and rewards have become imbalanced - a position which is not sustainable for the industry generally.

Service contracting is a high risk activity and risk exposure can be very large and bear no relationship to Contract value. The world of risk management has changed following a number of major incidents. Insurance companies and financial institutions have become more risk aware and as a result insurance has become more restrictive and expensive and clients are attempting to transfer increasing levels of risk to contractors.

FAIR, IMCAs risk allocation goals are as follows: Fair (not equal) and realistic distribution of risk in proportion to relative rewards

Allocation of risk - to the party best placed to assume

Insure - sufficient scope of cover

Reasonable avoid duplicate assumptions of risk and minimise potential for dispute

Thus, IMCA is publishing a set of Principles that it believes will serve the long-term interests of all participants in the oil and gas industry by encouraging an equitable contractual balance based on the parties respective risks and rewards. This, in turn will improve relations, increase efficiency and reduce overall costs.

The Principles are not intended to represent a complete analysis of all risks which are covered by contracts in the oil and gas industry. In general, they reflect well established industry custom and practice of addressing certain risks such as the knock for knock indemnity regime.

In addition, the Principles are not contractual clauses. They do not in any way form a standard contract nor is their adoption in any way mandatory. They are published as a discussion document and an aide for clients and contractors alongside their in-house standard contracts and industry published standard contracts. Each IMCA member is free to negotiate its own terms, qualify such contracts and to make use of the Principles should it wish to do so in order to achieve a contract satisfactory to both parties

IMCA is widely recognised for developing and publishing technical guidance which establishes industry good practice for many issues relating, for example, to safety and the environment. This good practice may become a contractual requirement if a client adopts it in a contract. Some clients look to IMCA membership, or compliance with IMCA guidelines as a prequalification for tendering. (IMCAs Competition Law Compliance Policy is attached as Appendix 1).

The publication of these principles by IMCA is intended to assist and promote industry dialogue and efficiency and their adoption is not mandatory 2 IMCA Contracting Principles

The document highlights fifteen principles each including a comment more easily understood by the layman and showing clearly how each principle measures up to IMCAs FAIR risk allocation goals. The principles covered are:

Company group and contractor group property and personnel

Project works (including both company and contractor supplied items)

Pollution

Third parties

Consequential losses

Warranty obligations

Limitations of liabilities

Minimum insurance requirements

Force majeure and suspension

Delay

Variation orders

Free access to worksite

Intellectual property rights

Termination by company for convenience

Companys obligation to pay contractor


1 Company Group and Contractor Group Property and Personnel

Each Party is best placed to grant reciprocal, unlimited indemnities for the costs of loss of or damage to the Parties respective Groups property and personnel of whatsoever nature, irrespective of cause (including negligence). The respective Groups should consider including all categories of parties which are involved at any point in time in the Work being performed relating to the Project.

Comment

The above principle ensures that each Party to the Contract has a clear and easily understood liability during the life of the Project for both people and property. Further, this allocation of risk could aim to avoid increasing either Partys liability levels as a result of involvement in the Project which would require additional insurance cover or an alternative risk management regime being required during the Project term. This principle meets all the requirements of FAIR risk allocation.

2 Project Works (including both Company- and Contractor-Supplied Items)

The Contractor is best placed to assume responsibility for loss of or damage to the Project Works if such loss or damage is caused by an act or omission on the part of the Contractor Group whilst the Project Works are in the care, custody and control of the Contractor Group. The Contractors liability could be subject to an agreed reasonable maximum limit per occurrence up to an aggregate cap beyond which the Company could indemnify the Contractor Group in full. In the event such loss or damage is not caused by an act or omission on the part of the Contractor Group the Company could indemnify the Contractor Group for any or all of the costs of or arising out of any such loss or damage (including both first and third party costs) in full. In addition, the Company could indemnify the Contractor Group for all of the costs relating to loss of or damage to the Project Works as a result of latent or inherent defects in the Company supplied items.

Comment

This principle takes due and reasonable account of each Partys reward as a result of participation in the Project. The Contractors level of liability should be commensurate with the Contractors reward and for the purposes of equity should be limited only to circumstances where the Contractor could and should have exercised control to prevent such damage occurring. Residual risks in the Project should probably be allocated to the Company. All costs relating to or arising out of such loss or damage should include, for example, wreck removal, remobilisation, standby, to name but a few. Such costs compared to relative rewards from such Contracts are not proportionate and therefore the FAIR allocation of these costs would probably be to the Company.

3 Pollution

Each Party is best placed to indemnify the other Party from the effects of pollution and contamination of whatever kind emanating from the Parties respective Groups property and facilities regardless of cause (including negligence).

Comment

Again, this principle ensures that the Parties to the Contract have clear, easily understood and distinct liabilities during the performance of the Project and, further, particularly in relation to the Contractor, it should not increase liability levels as a result of participating in the Project which would result in additional insurance or risk management being required during the Project term. A key aim is to avoid duplicate insurance which leads to extra costs and often to gaps in cover. Risk management undertaken by the Company prior to commencement of the Project should FAIRly include pollution risk.


4 Third Parties

Each Party is best placed to assume legal liability for third parties losses caused by such Party. However, in circumstances where a Contractor is required to perform work on, or in an area of close proximity to any existing facilities, the Company should reasonably be expected to indemnify the Contractor Group in full for all of the costs arising out of any loss of or damage to such existing facilities. Such indemnity would extend to cover the costs of existing facilities property, third party personnel, consequential losses and pollution effects.

Comment

Financial rewards to the Contractor are not increased as a result of undertaking work in an area which is in close proximity to existing facilities. Significant increases in risk of loss or damage occurring to such existing facilities and the Contractors own property and personnel, and additional risk in working in a congested area could therefore be FAIRly allocated to the Company who has the ability to mitigate such third party risk by seeking appropriate cross indemnity agreements with the third party owners prior to commencing the Project or obtaining sufficient insurance cover for these significant risks as part of the whole Project risk management.

5 Consequential Losses

The Parties should consider granting reciprocal, unlimited indemnities for each Partys Groups respective indirect or consequential losses howsoever caused or arising (including negligence) - whether or not foreseeable at the date of the Contract.

Comment

The above principle ensures that each Party to the Contract has a clear, easily understood and distinct liability as a result of their participation in the Project. The precise meaning of the words consequential and indirect could be clearly specified in accordance with the governing law of the Contract. Liability for another Partys consequential loss would not be a FAIR allocation in proportion to relative rewards of either Party.

6 Warranty Obligations

Warranty obligations and defective performance liabilities (including post termination for default) should be expressed in the Contract and could be limited as to time, remedy and financial cap. All other implied liabilities could be expressly excluded.

Specific remedies to be performed by the Contractor could include:

In supply only Contracts, liability could be limited to repair or resupply of defective products excluding costs of retrieval and reinstallation.

In engineering or design only Contracts, liability could be limited to reperformance only of defective engineering or design.

In Inspect, Repair and Maintenance Contracts (IRM), liability for defective performance could be re-performance and could cease immediately upon departure from the Work Site.

In lump sum offshore installation or EPIC Contracts, liability for defective work could be limited to reperformance or meeting the costs of reperformance (subject to a right of first refusal).

Comment

Warranty and product liability obligations should be reasonable in relation to both the specific scope and the financial rewards. As mentioned previously, the costs of retrieval and reinstallation as part of a warranty obligation on a supply only Contract could be prohibitive and would be an unFAIR allocation in proportion to the Contractors rewards. In an engineering or design only Contract, warranty obligations and product liability should reflect the Contractors obligations in the scope. Liability could be limited to reperformance of defective engineering or design and not any further works following on from implementation of such engineering.

In relation to IRM Contracts, by the nature of the work scope a guarantee can only be given that the Works are completed in accordance with the Contract and can be checked prior to departure from the Work Site. However, it should be considered whether further liability can be accepted after that point as no guarantee can


be given in relation to the length of time and effectiveness of a repair which is dependent on old materials that have not been completely renewed. Maintenance and inspection are limited by their nature, and warranties in this regard also could be limited.

In lump sum or EPIC Contracts, the Contractors obligation could be limited to reperforming the Contractors defective work only or meeting the costs of reperformance by a third party provided that the Contractor has been given the right of first refusal. It may not represent a FAIR allocation for the Contractor to be asked to perform the scope of others as well as his own considering relative rewards under a Contract.

7 Limitation of Liabilities

Consideration should be given to the Contractor Groups total cumulative liability under the Contract and at law, including liability for delay, damage, rework, reperformance and/or replacement and default (whether or not such actions are carried out by a third party), being limited to an agreed sum.

Comment

Under this principle, the Contractors maximum cumulative liability (excluding the indemnity regime which generally takes precedence) as a result of participating in any project, would be easily quantified and therefore managed. The agreed sum should be a FAIR allocation of risk based on the Contractors risk and reward scheme under the Contract.

8 Minimum Insurance Requirements

If the Company procures an All Risk Policy to cover risks during the performance of a Project, the Contractor should receive full details of policy terms, conditions, limits and exclusions and should be advised of any alterations in the terms of the policy. A summary of the policy terms should be provided to the Contractor during bid stage. The parties should understand whether:

1 All Risk Policy is primary to the Contractor Groups insurance. 2 The Contractor Group including its sub-contractors of any tier and/or suppliers of any tier is a co-

assured party.

3 The period of the policy includes the warranty period and the discovery period is not less than the warranty period.

4 Insurers waive rights of subrogation against the Contractor Group including its sub-contractors of any tier and/or suppliers of any tier.

5 All risks of physical loss or damage are covered including buy back of defective part Clause. 6 There is coverage in respect of defective design, workmanship and materials, temporary works and

faulty welds.

7 There is coverage in respect of standby/forwarding charges and cancellation costs arising from an insured occurrence extendable to all assureds.

8 The basis of recovery for offshore work is on Contract day rates. 9 The maximum deductible is limited to a reasonable amount. 10 All Project materials and equipment are included as covered including any Project transits, shipments,

transport and/or towage.

11 Wreck and debris removal is covered up to an adequate agreed limit. 12 General third party liability is included and should cover, without limitation, the following:

i) claims in respect of consequential losses; ii) claims in respect of seepage and pollution; iii) loss or destruction or damage to any property; iv) liability in respect of claims for bodily injury; v) maximum deductible limited to a reasonable amount; and vi) deletion of watercraft and marine coverage exclusion.


Comment

To support a FAIR allocation of risk the Company is usually best placed to procure such a Policy. The Parties should be entitled to rely on Project Specific Insurance for the indemnity provisions provided by the Company. Also, the Contractor Group should receive details of such cover at the outset to ensure clarity of risk allocation and avoid duplication of insurance, gaps and unnecessary claims dispute.

In the absence of the Company providing an All Risks Policy, the Company will be exposed, as the Contractor may look to the Company to bear the costs of such uninsured perils.

9 Force Majeure and Suspension

In the event that the Contractor is prevented from performing the Work due to Force Majeure or Suspension (excluding the Contractors default) by the Company, then the Contractors rights to remove any vessel from site once a maximum period agreed in the Contract has been exceeded should be defined.

Proper notice and terms for the demobilisation should be set out in the Contract. Terms for re-mobilisation could be agreed but will probably be subject to completion of the Contractors other commitments.

Should the Contractor not demobilise, or until demobilisation, the rates, for example stand-by rates could be paid for the Force Majeure duration exceeding maximum period, and all costs relating from any Suspension.

Comment

A Force Majeure event includes all circumstances beyond the reasonable control of a Party.

In addition, should the continuous period of Force Majeure or Suspension for the Companys convenience last beyond a number of days to be agreed, either Party could be entitled to cancel the Contract pursuant to the rules applicable to cancellation by the Company for convenience in order to achieve a FAIR allocation of risk.

10 Delay

The Contractors liability for delay could be limited to liquidated damages subject to an agreed cap, and could be the Companys sole financial remedy under both the Contract and at law.

Comment

In order to ensure a FAIR and realistic allocation of risk it is reasonable for both Parties to pre-agree a remedy in the form of level of damages at the outset of the Contract before any dispute arises. This principle also has the benefit of setting out clear and distinct liability applicable in specific circumstances.

11 Variation Orders

Consideration should be given to whether the Contractors obligations to perform the Company instructed Variation Orders should be subject to the Contractors other existing commitments and a mutually agreed adjustment to price and schedule where appropriate.

In the event the Companys instruction to the Contractor to perform additional work results in a change to the risk profile of the workplace, the Company should be obliged to either make an adjustment to the Contract price or indemnify the Contractor Group for the additional risk identified.

Comment

Prior to the Contractor being obliged to proceed with any additional work during the life of the Project, the circumstances at the time of the request ought to be considered - in relation not only to other contractual commitments but also to additional risks which the Contractor may be exposed to through, for example, the existence of other third party infrastructure present at any possible new location. It is unFAIR to assume that these additional risks can be appreciated and/or accounted for at the outset and therefore any variation rates agreed at the outset of the Contract may not be sufficient to cover these additional risks.


12 Free Access to Worksite

The Contractor should have free and unencumbered access to the Work Site. A variation should be considered in the event of delay or additional costs incurred as a result of restricted access to the Work Site by the Company or any party (other than a member of the Contractor Group), including intervention by an Action Group, whether or not such intervention is defined as Force Majeure.

Comment

It is generally FAIR that the Company is to carry the risk of the Contractor having access to and being able to perform work at Work Sites which are not the Contractors onshore facility. Such risks could include any permit or licences required for the Contractor to perform the Work.

13 Intellectual Property Rights

Intellectual Property Rights (IP) generally vest with the party who developed those IP. In the event that IP is developed during the Project, ownership could remain with the Contractor and the Company could be granted a royalty-free, non transferable right to use the IP for the purpose of the Project in question.

Comment

The Contractors IP is its net worth and is in continuous development and fundamental to its future existence. It is FAIR that such IP is protected both during and after the performance of the Project.

14 Termination by Company for Convenience

Should the Company terminate the whole or part of the Work for its convenience then the Contractor should be entitled to payment for all Work performed, materials (including cancellation costs relating thereto) and all vessel and equipment costs, plus a termination fee to be agreed on a case by case basis as set out in the Contract.

Comment

It is recognised that during the course of large scale projects, circumstances change which may result in the Company wishing to terminate either a part or the whole of the Works originally contracted to the Contractor. However, it must also be recognised that at an early stage, the Contractor must plan the use of his resources and equipment and schedule these to particular projects. This will then prevent the Contractor from bidding for other work utilising those resources and equipment. If the Company then decides to terminate the whole or part of the Work for its convenience, subject to the Contractor mitigating any loss as a result of such termination by finding alternative work for those resources and equipment, it is FAIR and reasonable that the Contractor should receive appropriate recompense which should recognise the Contractors initial commitment to the Company.

15 Companys Obligation to Pay Contractor

Payment by the Company to the Contractor should be a material term of the Contract. If the Company fails to pay the Contractor in accordance with the Contract, and providing the Contractor is not in material breach of the Contract, the Contractor should have the right to suspend the Work. In the event of non-payment continuing, the Contractor could terminate the Contract. Such suspension or termination could be treated as at the Companys convenience and the Contractor should be compensated accordingly.

Comment

The Companys obligation to pay the Contractor could be time critical. It is FAIR that payment should result in at least a neutral, if not positive, cash flow for the Contractor. In the event the Company does not meet the Contractors test of sufficient credit worthiness, the Contractor could consider seeking additional security.


Appendix 1

IMCA Competition Law Compliance Guidelines Introduction

These guidelines are compiled for members in accordance with the Associations constitution. They will be circulated to all members. Policy

The Association, its regional sections and all committees will comply with all applicable competition law (competition, antitrust and similar laws) including those of the United States of America, the European Union, the United Kingdom and other countries in which the Association is active.

All meetings will start with this as agenda item 1. General

1. The Constitution and section objectives are written to comply with competition law. 2. Membership is open to all companies active in the offshore, marine or underwater engineering

industries. Any action in rejecting a membership application or current member is reviewed for compliance with competition law.

3. The Association has a formal document retention and disposal policy. 4. The Association has a formal complaints procedure Rules for Meetings

Members should comply with the following guidelines when meeting:

1. Agendas of all meetings should be reviewed for compliance with competition law. 2. Items not on the agenda will not be allowed if they raise issues which violate competition law. 3. All participants have the right to question any topic or discussion that might violate competition law.

Any participant has the right to state their objection and leave a meeting if they feel that any topic or discussion violates competition law.

4. Minutes of all meetings should be accurate and should not be doctored or incomplete. 5. Minutes of all meetings should be reviewed for compliance with competition law. Minutes should also

include statements to show compliance with competition law. 6. All meetings should be scheduled and no unscheduled, informal, ad-hoc or side sessions should be held. The following guidelines should be adhered to by all members during any meetings:

1. Do not discuss current or future prices. 2. Do not discuss what is a fair profit level. 3. Do not discuss an increase or decrease in price. 4. Do not discuss standardising or stabilising prices. 5. Do not discuss pricing procedures. 6. Do not discuss cash discounts. 7. Do not discuss credit terms. 8. Do not discuss controlling sales. 9. Do not discuss allocating markets. 10. Do not complain to a competitor that its prices constitute unfair trade practices. 11. Do not discuss refusing to deal with a company because of its pricing or distribution policies. 12. Do not attend unscheduled, informal, ad-hoc or side sessions. Conclusion

Trade associations can be targets for government agencies patrolling and enforcing compliance with competition law. By conducting its business openly and avoiding even the appearance that it is engaging in activity that might seem to have an effect on prices or competition, the Association and members can protect themselves from charges of violations of competition law.

Introduction1 Company Group and Contractor Group Property and Personnel2 Project Works (including both Company- and Contractor-Supplied Items)3 Pollution4 Third Parties5 Consequential Losses6 Warranty Obligations 7 Limitation of Liabilities8 Minimum Insurance Requirements9 Force Majeure and Suspension 10 Delay11 Variation Orders12 Free Access to Worksite 13 Intellectual Property Rights14 Termination by Company for Convenience15 Companys Obligation to Pay ContractorIMCA Competition Law Compliance Guidelines

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IMCA ContractingPrinciples