The Battle of Negligence-Based Risk Versus User-Based Risk

Interview by Helen Winsor, Oil & Gas IQ

Stacey Earley, Director of Marketing Contracts and Services at Transocean, joins Oil and Gas IQ to discuss Advanced Contract Risk Management and to give an update on business and

developments at Transocean.

Oil & Gas IQ: Now first of all Stacey, can you please give us a bit about your background within the Oil & Gas industry, for instance, how long you’ve been an expert on areas surrounding contract risk management, etc?

S Earley: Certainly. I’m a drilling engineer by background, petroleum engineer, an MBA by education. I have 30 years experience in upstream oil and gas. In my career I moved from offshore drilling operations to finance and strategic planning to drilling services contracting where I’ve specialised for the past 16 years. My experience in both field operations and corporate business have been important factors in my ability to develop optimal contract risk management profiles for my company. It’s been a very interesting career.

Oil & Gas IQ: Sure sounds like it. Now, at the conference itself you’ll be examining Negligence-Based Risk and comparing it with User-Based Risk, which WC are a key issue within the industry. Stacey, what are the fundamental differences between the two approaches and how do these affect a contract manager’s perception when entering negotiations in your view?

S Earley: This is a topic that I do spend a lot of time on inside my company too in terms of education and training. And Negligence-Based Risk focuses on what you manage whereas User-Based, which I think most people know, is knock for knock. User-Based Risk focuses on what you bring to the job. The parties to a contract may prefer to allocate risk on the latter basis for some categories of risk because the exposure is definable and usually measurable upfront. It has the potential to lower the overall cost of risk management since a party will have a better ability to define how claims or loss will be addressed and by whom. So, there is less contingency needed for the unknown with a knock for knock or User-Based Risk strategy. But I think the critical point is in either case to know your business well in order to be able to define your risk and exposures well. Any contract manager entering into negotiations has to be more than a contract specialist and more than a negotiation specialist or legal specialist. It helps to be a business specialist too.

Oil & Gas IQ: Absolutely. Now, Stacey one of the topics which is of particular focus right now is the issue of boilerplate clauses of course. In the competitive international market that oil and gas companies work in, what are the relative merits and weaknesses of boilerplate clauses, and how much can they impact on the way in which organisations approach their new ventures, Stacey?

S Earley: Well, there’s merit to using boilerplate clauses which I look at it standard clauses are used regardless of the type of job. But there are practical limits and some of those limits are used across service types, use of goods contract clauses in a services contract, use of precedent clauses or contracts in a new jurisdiction or job type without consideration of the unique requirements of that jurisdiction or job. And use when governing law changes, for instance, in the first type, for instance, construction contracts are often used as a template for upstream drilling and production services contracts. But Severage and Builders Writ does not always truck well to Well Fight Services Contracts. Likewise extensive use of clauses dealing

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with warranty of Blidge does not apply very well to a day work services contract where the work is accepted as complete each day, at the end of each day.

Also regarding governing law, I’ve seen commercial managers suggest that a contract written under English governing law, for instance, would those boilerplates be switched to US law with no changes to the underlying language. And I think that’s really open to pitfalls. It leaves you wide open to changes in risk coverage. They clearly are not considered including, for instance, changes in interpretation of gross negligence coverage. And the last idea, practical approach to development of templates, with adequate relevance to job type groupings and changes in jurisdiction has considerable merit to improving the efficiency and effectiveness of standard contract templates. And I’ll talk a little bit more about this at the conference. It’s really a proactive approach to dealing with service types, goods versus services, jurisdiction and governing law requirements that you can address in advance.

Oil & Gas IQ: Sure, it’s a really interesting area Stacey and we certainly look forward to hearing more about it at the conference. Now, following on from the issue of boilerplate clauses, another issue that experts are really looking to focus on right now within the industry is the battle of forms. So, from your perspective, is this an inevitable process that all contract negotiations go through, or are there ways in which you can avoid this battle and avoid some of the risks associated with this phase?

S Earley: That’s a good question. I think the battle of the forms can be reduced to B Stocks through good development or good document management and effective global communications. Multinational companies risk development of multiple agreements covering the same work, when they do not have a globally accessible central contracts database to retrieve documents by customer, by vendor, by country of operations or legal entity. If you don’t have that you’re leaving yourself wide open to duplication. Development and counter site master service agreements or purchase agreements and diligent use of orders referring to those agreements will go a long way towards minimising problems with battle of the forms.

And I think that’s what most people are thinking now when they’re looking at battle of the forms, what I was thinking was maybe a little variant on that, which is multiple contract templates. And I talked a little bit about this at a previous IQPC Advanced Contract Risk Management Conference. You can reduce the impact of battle of the forms by consolidating forms as much as possible and leaving job type or jurisdiction variants to exhibits. And when you do this it really wins itself well to organisations where the experience level of their contract professionals varies lightly, or where the company is small and can’t really support a fulltime contracts team. So, battle of the forms probably has a lot of different parts to it and there is a lot that you can do to help minimise the negative impacts.

Oil & Gas IQ: Yes, a great overview there Stacey and some great tips as well. Now, finally Transocean has been kind enough to participate in IQPCs Contract Risk Management Conferences for a good number of years now of course, on both a personal and business level, what is it that the conference provides that helps the development of contract risk knowledge within the industry?

S Earley: Several things that I really appreciate about the IQPCs sponsored conference; Advanced Contract Risk Management seminars have struck a good balance between the interest of commercial managers and legal practitioners. I’ve been to other conferences before where they seem to be skewed all one way or another and IQPC has done a good job at developing topics of interest to both groups. They provide value for the participants in immediate levels of expertise who are looking to advance their knowledge in the field of contract risk management. As well as for those with advanced knowledge in their fields who are looking to share best practices. And I also have to say that I’ve appreciated the quality of speaker and the breadth of backgrounds that they come from so that they really do bring some interesting and helpful perspectives on the topics that they cover. So, it’s been a really good experience for us at Transocean to participate in these conferences and I personally enjoy it as well.

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The Advanced Contract Risk Management for Oil and Gas Conference will take place from May 24th-25th 2011 at the Hyatt Regency Downtown Houston, Texas. For further information about this event please visit www.contractriskmanagement.us, email enquire@iqpc.co.uk or call +001 646 378 6026.

IQPCPlease note that we do all we can to ensure accuracy within the translation to word of audio interviews but that errors may still understandably occur in some cases. If you believe that a serious inaccuracy has been made within the text, please contact +44 (0) 207 368 9425 or email helen.winsor@iqpc.co.uk.

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