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07 September 2015
Two versions of NTK 15 Mod
No standardisation of commercial terms
Increased risk exposure for contractor's deliveries
Notification deadlines by calendar days
Contractor's duty to act on company's "instructions"
Alternative dispute resolution mechanism
Expected revisions of NTK 07 and NF 07
Norwegian Total Contract 2015 Modification ('NTK 15 Mod') is a standard contract for EPC(I) offshore modification projects on the Norwegian continental shelf. In an EPC(I) contract for modification of a platform, the contractor performs engineering, procurement, construction and possibly installation of work.
NTK 15 Mod is a part of a standardisation process initiated by the government with the aim of facilitating cost-efficient contracting on the Norwegian continental shelf. The new standard contract for offshore modification works was negotiated between Norsk Olje og Gass (NOROG) on behalf of the oil companies and Norsk Industri on behalf of the Norwegian contractor industry. The negotiations were initiated in 2012 and concluded at the end of June 2015.
NTK 15 Mod is based on previous Norwegian Total Contract 2007 Modification ('NTK 07 Mod'), which was concluded between Norsk Hydro ASA and Statoil ASA on the one side and Norsk Industri on the other. The previous NTK 07 Mod for offshore modification projects was negotiated in parallel with Norwegian Total Contract 2007 – a standard EPC(I) contract for new constructions and modification projects which include a substantial part of a new construction ('NTK 07') – and Norwegian Fabrication Contract 2007, a standard contract for fabrication assignments ('NF 07'). These have been developed since the mid-1980s between the same parties.
Like the previous standard, there are two versions of NTK 15 Mod to cater for two different implementation strategies for work performed offshore. Work offshore may be performed either under the contractor's management or under the company's management. In the former model, delivery is made by delivery of the contract object as a whole; in the latter, deliveries are made separately for module(s), prefabricated items and offshore permanent works.(1) The two versions address different solutions for delivery and the contractor's guarantee period.(2)
While NTK 15 Mod may not appear a very extensive revision of NTK 07 Mod, it does introduce some fundamental changes.
As stated in the protocol to NTK 07 Mod, Statoil was legally committed to utilise NTK 07 Mod for modification projects on the Norwegian continental shelf.(3) NTK 15 Mod was negotiated and concluded between NOROG and Norsk Industri and recommended for use by these two trade organisations. Statoil – by far the major operator on the Norwegian continental shelf – has consequently been released from the legal commitment to use NTK Mod 15. Although it is expected that Statoil will continue to use NTK 15 Mod for its intended use, changes and modifications to the new standard contract may now be introduced on a case-by-case basis, without any need for a formal procedure as previously set forth in the protocol to NTK 07 Mod.
In the negotiations on NTK 15 Mod, NOROG and Norsk Industri agreed not to standardise commercial terms. Precisely what constitutes 'commercial terms' is a subject of discussion and NTK 15 Mod shows elements of compromise in this respect. However, the decision not to standardise commercial terms represents the most significant change from NTK 07 Mod. As a consequence, two of the provisions in the protocol to NTK 07 Mod have been removed:
The decision not to standardise commercial terms is reflected in several articles. The provisions on payment and target price and fixed price have been deleted and are expected to be negotiated on a project-by-project basis.(4) Further, the articles that previously determined the level of liquidated damages and limitation of liability no longer stipulate the level of liability; this is also expected to be negotiated and concluded on a project-by-project basis.(5) On the other hand, the fee for the company's cancellation of 4% of the contract price or 6% of the relevant part of the contract price remains unchanged.(6) This is an example of a compromise and an exception to the principle of no standardisation of commercial terms.
The extent to which commercial terms should be standardised has been the subject of heated debate in the industry and has a historical background. During the 1990s numerous projects resulted in substantial overruns on costs and losses for contractors. Following the renegotiation of Norwegian Fabrication Contract 1992 – Version 3, significant measures were taken and new provisions included in the Norwegian Total Contract 2000. The principles of neutral cash flow and contribution to the contractor's liquidity were introduced. The protocol to the contract imposed extensive restrictions on the parties' ability to agree on a target price or lump sum for projects with a low confidence level, with detailed attachments to the protocol regulating the conditions for possible conversion to target price or lump sum, respectively, down to the various disciplines. The contractor's maximum limit of liability was also adjusted to a reasonable level considering the contract value. With NTK 15 Mod, these measures have now been essentially reversed.
Like the Norwegian oil and gas industry in general, the market conditions for offshore modifications on the Norwegian continental shelf are developing. Statoil is still by far the major operator for such contracts; however, new operators are entering the market, which may have different approaches and requirements in connection with future offshore modification projects from those of Statoil or the established major international operators. On the contractor side, in recent decades the players have become more robust, both financially and in terms of their competence and experience. However, the modification market is still dominated by Norwegian-based contractors. The decision not to standardise commercial terms is intended to facilitate greater flexibility and competition.
Experience based on similar offshore modification contracts reveals that operators have already introduced expectations relating to target price and lump-sum price elements in the compensation for complex modification projects, even with significant uncertainties in the confidence level; while contractors have demonstrated their willingness to accommodate accordingly. In this respect, the revised NTK 15 Mod is another step in this direction.
Whether this is a reasonable development is a complex issue. The general experience in the industry is that success is often connected with a solid confidence level for all essential elements of a project at the time of contract award. Moreover, a low confidence level at the time of contract award will likely increase the risk of unforeseen developments in the project's execution. For contractors, a solid understanding of the scope of work and the ability to price this accordingly based on previous experience and methods are critical.
Today's market conditions may tempt operators to put increased risk on contractors on a more immature basis than would normally be expected; while contractors may be tempted or forced to undertake such increased risk as a consequence. This could increase the risk of unsuccessful project execution for operators and increase the risk of losses on the contractors' side. All parties involved in modification projects should carefully consider any possible approach in this direction.
In any event, the decision not to standardise commercial terms paves the way for more extensive negotiations for each individual project.
Changes have been made to the provision on subcontractors,(7) giving contractors full responsibility for the quality and progress of the work of subcontractors. Provisions that previously released contractors from certain types of risk in relation to subcontractors' performance have been deleted.(8) These deleted provisions have frequently represented a contractual basis for differences and disputes during the project phase. The oil companies will benefit from and welcome these revisions. For contractors, this increased liability for subcontractors' performance highlights the importance of proactive and thorough follow-up of the work of subcontractors – which was presumably also the primary driver behind these changes for the oil companies.
NTK 15 Mod introduces new deadlines for certain notifications in the contract. The requirement to notify "without undue delay" has generally been replaced by a deadline of "within 21 Days".(9) This change is intended to provide greater clarity and prevent late incoming notifications, such as variation order requests, which are frequently considered a problem during the project execution. On the other hand, the company must still notify the contractor of any defect "without undue delay" after it discovers or ought to have discovered the defect.(10)
Both the industry and the Norwegian courts are familiar with the relative term 'without undue delay'. Nonetheless, these changes may well result in greater predictability and efficiency during the project execution, as hoped. However, the determination of when the 21-day time limit commences according to the contract may still cause uncertainty and possible differences in opinion.
In respect of the company's right to vary the work, it has been clarified that the contractor's duty to implement this shall also apply upon receipt of an "instruction", and not only upon receipt of a formal variation order.(11) This is a practical and welcome clarification. The company is often reluctant, cautious and sometimes inefficient in issuing a variation order, while at the same time proactively monitoring and following up on the progress of the project and issuing instructions as and when required. The contractor must study and consider such instructions carefully and determine whether it believes that variations to work are included in the instructions; consequently, the instructions are often not implemented as quickly as required. NTK 15 Mod has clarified that the contractor must implement an instruction without undue delay. On the other hand, the company may now in principle consider the instructions sent to the contractor just as carefully as when issuing a variation order.
The contractor's duty to act on the company's instructions must be read in conjunction with a newly introduced 'deemed disputed variation order' provision, on the company's missing or late response to the contractor's variation order request. This provision states that if the company has not issued a variation order or a disputed variation order within 21 days of receipt of a variation order request, a disputed variation order shall be deemed to have been issued. This provision is intended to prevent the company from slowing down the treatment of a variation order request and is a welcome change to the standard contract.
The provision on the prevention of disputes and the arbiter has been replaced by the introduction of Project Integrated Mediation (PRIME).(12) PRIME shall consist of up to three members appointed by the parties, who – in consultation with the parties – shall determine a suitable work methodology with the aim of establishing a forum for finding amicable solutions. PRIME is similar to a provision in the standard contract for onshore EPC contracts.(13) It will be interesting to see whether PRIME will prove more successful as an alternative and preventive dispute resolution mechanism than the arbiter, which has rarely been used.
NOROG and Norsk Industri will continue with the revision of other standard contracts, in particular NTK 07 and NF 07. It remains to be seen whether these revisions will reflect the changes made to NTK 15 Mod. The extensive experience of the Norwegian industry and courts with these contracts on the Norwegian continental shelf could suggest that a corresponding update would be preferable. On the other hand, the contractor market within the scope of NTK 07 and NF 07 has become increasingly internationalised – a trend which may well result in different revisions to these standard contracts.
In any event, it is expected that the new standard contracts will again be based on the main principle of no standardisation of commercial terms. This implies that the current contract article in NTK 07 on target price and lump sum(14) and the extensive regulations in the protocol in this regard will most likely be deleted.
For further information on this topic please contact Gunnar Espeland or Preben Willoch at Advokatfirmaet Simonsen Vogt Wiig by telephone (+47 21 95 55 00) or email (firstname.lastname@example.org or email@example.com). The Advokatfirmaet Simonsen Vogt Wiig website can be accessed at www.svw.no.
(1) The differences are reflected in Articles 1.9, 1.17, 1.18, 10.4, 23.2 and 29.1.
(2) See Articles 19 and 23.
(3) In both the 1987 and 1992 versions of the fabrication contracts, Statoil and Hydro expressed their intention to use the standard contract. Later, in the 2005 version of NTK Mod, the protocol stated the legal commitment to use the contract.
(4) Article 21 is now marked as "Not Used".
(5) Articles 3.5, 24.2, 24.3, 29.2 and 32.2.
(6) Article 17.3.
(7) Article 8.
(8) NTK 07 Mod Art 8.2 second paragraph, (a) and (c), third paragraph and fifth paragraph are deleted.
(9) Articles 3.3, 5.1, 8.3, 8.4, 16.1, 16.2, 18.3, 27.2 and 28.3.
(10) Article 25.1.
(11) Article 15.1.
(12) Article 37.
(13) See "NS 8407 – General conditions of contract for design and builds contracts" Article 50.2.
(14) NTK 07 Article 21.
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