Petrobras Model Contract versus Norwegian Standard Contracts – a legal comparison of liability regimes

In Norway and Brazil, both of which have significant stakes in the global oil and gas market, the use of standard contracts is a common practice. Both Norway and Brazil use standard contracts as the foundation of their oil and gas industry operations, but their approaches differ significantly. In Norway, several oil companies act as operators. They have their own standard contracts, but they are to a large extent based on principles found in the standard contracts for offshore construction, NF2015 and NTK2015 (the “Norwegian Contracts”). These contracts serve as templates that are adaptable through negotiations to suit project-specific needs. In Brazil on the other hand, the state-owned company Petrobras has established itself as the main operator within offshore projects. The Petrobras Model Contract is therefore the main standard contract used in offshore projects in Brazil and is generally attached to the tender protocols. In contrast to the Norwegian approach, the contractual terms of the Petrobras Contract are non-negotiable (except for the commercial terms). 

In this comparative analysis, we will explore the key aspects of the Norwegian and Petrobras contracts in terms of potential liability and risk exposure, including caps, carve-outs, exceptions, and their implications.

Liability for delay

In terms of liability for non-performance, the Contractor’s liability for delays in the Norwegian Contracts is based on a pre-defined liquidated damages regime limited to an agreed percentage and maximum amount, where the Company may terminate the contract if the maximum amounts are reached. This differs from the liability regime in the Petrobras Model Contract, which is based on a system of contractual penalties subject to a cap (typically 10% of the contract value).

Liability for defects ­rectification

Under both the Norwegian and Petrobras contracts, the Contractor is obliged to rectify any defects at its own costs and risk. Under the Norwegian Contracts, the Contractor is liable for any costs directly related to the defect, with exception of offshore costs such as, amongst others, dismantling of objects other than the Contract Object, board and lodging and heavy lift operations. However, the Petrobras Model Contract subjects Contractor breaches to additional penalty mechanisms. The Contract establishes a “compensatory penalty-regime” alongside separate indemnification obligations, both subject to caps. 

Where a single event triggers both delay and compensatory penalties, delay fines are deducted from the compensatory penalties. Additionally, if a contractual breach causes actual damages exceeding the compensatory penalty amount, separate indemnification obligations apply. Liability exposure is thus broader under the Petrobras Model Contract compared to the Norwegian Contracts. 

Knock-for-knock liability regime

In the realm of offshore agreements, limitation of liability plays a pivotal role in defining the risk allocation between parties. Historically, the Brazilian civil liability system was fault-based. The previous Petrobras Model Contracts reflected that and differed substantially from the international offshore contract standards with “knock-for-knock” system of risk allocation. Limitation of liability under Brazilian law was not clearly established until the Economic Freedom Law was passed in 2019, admitting risk allocation in business contracts, except for cases of wilful misconduct. Petrobras then published new model contracts adopting a risk allocation based on the standard knock-for-knock principle. 

In terms of liability for personnel and property, both Contracts are based on the knock-for-knock principle, under which both parties assume liability for any loss or damage to their own property and the property of their respective groups. However, in the Norwegian Contracts the Contractor is liable for damage to any Company Provided Items under Contractor Group’s safekeeping and control. This differs from the Petrobras Contract, where neither party has any liability for the other party’s assets under its custody, operation, use or control. The Petrobras contract has, on the other hand, extended liability for damage to well, reservoir, use of radioactive material and blow-out events, whereas the Norwegian Contracts have no similar exceptions. 

Indirect and consequential losses

Another relevant difference lies in the provision regarding liability for indirect and consequential losses. In the Norwegian Contracts, the parties are responsible for their own indirect losses, and shall indemnify the other party’s respective group from their own and their respective groups’ indirect losses. This applies regardless of any fault by either party or any members of the respective groups, and covers any loss of profits, loss of production and loss due to pollution. In contrast, the Petrobras Model Contracts limit indemnification to direct damages only. Indirect and consequential losses are excluded from the liability allocation, in line with Brazilian law. Although loss of profit is considered as direct damages under Brazilian law, indemnification for loss of profit is expressly excluded under the allocation clause. 

Pollution liability

With regards to pollution from underground of oil or other substances, the Norwegian Petroleum Act has mandatory rules regarding pollution from projects within the Norwegian continental shelf. The general and main rule is that pollution liability is directed to the operator with right to recourse against the subcontractor limited to situations where the subcontractor or anyone in its services has acted with gross negligence or wilful misconduct.  

In Brazil environmental liability is joint and several, and claims by third parties may be raised against any party involved in the projects regardless of who actually caused the pollution. Pollution from the well, blow-outs, etc are therefore Petrobras’ sole responsibility. The Petrobras Model Contract establishes Contractor’s obligation to indemnify Petrobras for pollution from its units/installations, including damages to third parties (uncapped). 

Liability cap

The Contractor’s liability is under both contracts subject to a general cap. Although liability under the Petrobras Contracts is typically capped at 10% of the total contract price, it contains several carve-outs and exclusions for inter alia violation of IP rights, breach of confidentiality and breach of data privacy obligations. The Norwegian Contracts on the other hand operate with a total cap structure equal to a pre-defined percentage of the contract price with no exceptions and carve-outs. Hence, liability under the Petrobras Model Contract may be significantly higher for certain breaches of contract compared to the Norwegian Contracts. 

Despite both the Norwegian and Brazilian standard contracts having detailed allocations of liability and risk exposure, it is decisive to point out that under both regimes any limitation of liability may be set aside in the event of gross negligence by the responsible party’s senior personnel, or in the event of wilful misconduct. One important aspect is that under Petrobras Model Contract, the carve-out from the cap requires dolus eventualis by Senior Management (under Brazilian law, this concept is comparable to gross negligence) or dolus (comparable to wilful misconduct) of any person in the group of the party demanding indemnification.

Concluding remarks

As this short comparison shows, the Petrobras Model Contracts have evolved closer towards the international standards. There are nevertheless important differences which may be decisive to the parties liability assumed in projects governed by the Petrobras Model Contract compared to the Norwegian Contracts. However, these contracts are now to a larger degree than previously comparable, and it is therefore easier for foreign companies seeking to do business in Brazil to correctly assess and price the contractual risks and exposure involved in these projects. 

Co-writer: Daniela Ribeiro Davila, Vieira Rezende, Brazil