NTK MOD 2015 – what is new and will it be used?

After three years of negotiations, the Norwegian Oil and Gas Association and the Federation of Norwegian Industries have agreed on a new revision to the Norwegian Total Contract for modification work. A primary objective has been to produce a standard which will be used more widely by the industry.

After more than 25 years of Norwegian standard ­contracts for the offshore industry, history shows that there has not been much willingness to accept standard contracts, and it remains to be seen whether the latest changes will represent a breakthrough and change in attitude towards real standardisation.

A prerequisite to achieving the intended result of standardisation is that the contracts are used by all oil companies operating on the Norwegian Continental Shelf. The previous version of this contract was negotiated only with Statoil on the customer side, and the hope is that with the Norwegian Oil and Gas Association at the table this time, an organization which encompasses most of the players on the Norwegian continental shelf, the standard will be used more widely. However, while the previous revision included an obligation to use the standard within its scope, the parties were this time not able to agree on more than a recommendation to use it. The common approach of the oil majors has been to use their worldwide approved standards as the basis for their contracting philosophy in Norway. It will be interesting to see whether the existence of a mere recommendation to use will lead to a change in their practice. It is more likely that NTK MOD 2015 will be embraced by the smaller players who do not have existing in-house approved standards.

It appears that as a necessary concession to increase the number of operators using the agreement, most of the changes when compared with the former revision have been in favour of the oil companies. For example there is less standardization of commercial terms, more objective preclusive deadlines for variations as well as deletion of project maturity requirements for setting a firm contract price.

Perhaps not a very controversial, but nonetheless an important change from the 07 version, is the replacement of relative deadlines phrased as “without undue delay” with objective ones for the presentation of requests for variations within 21 days. This will put an end to discussions about whether a Variation Order Request has been presented in a timely manner and will in that respect provide both parties with predictability. While such ­objective deadlines represent a potential risk for the contractors it can be mitigated through proper and effective project management and will lead to fewer disputes during project execution.

A more controversial change involves moving several ­previously standardized terms to the negotiating table. These include the level of liquidated damages payable for delay as well as the level of various caps on the Contractor’s liability for breach of contract. In particular it should be noted that the cap on Contractor’s guarantee liability is removed altogether ­leaving any such liability to be limited only under the global liability cap. Clear caps on liability have previously been the same in all Norwegian offshore standard contracts and have thus represented a market standard for the contractor’s maximum liability. Especially in a depressed market, the invitation and opportunity to negotiate individual contractual caps will undoubtedly benefit the oil companies. However, the previously fixed percentage caps have been kept in brackets as examples which may at least assist contractors in achieving similar levels.

It is also worth noting a significant change in allocation of risk in relation to sub supplies ordered from subcontractors on the basis of Company’s frame agreements which the Contractor is obliged to use. In this revision the risk of such subcontractors’ insolvency and in the delay to the delivery of and/or defects in the sub supplies has been shifted from Company to Contractor. It is quite difficult to understand the rationale behind this change given that the commercial and legal terms of the frame agreements have been negotiated by the Company and the subcontractor in question has been selected by the Company.

The previous version contained a pricing mechanism ­specifying that a target or fixed price for the work could only be set when the project had reached a sufficient maturity. This provision was meant to protect Contractors from assuming the budget risk in an early phase of the project, or when a FEED study (Front End Engineering Design) had not been separately performed, but was difficult to implement in practice and often misunderstood. The deletion of this provision may force ­contractors to compete on fixed or target prices at an early stage of a project without sufficient information to evaluate potential risks. The effects of this change will to some extent depend on market conditions as Contractors in a depressed market may be more willing to take on a risk it cannot properly price. The risks involved with committing to a fixed price on scarce engineering should in any event not be underestimated.

The final major change is the removal of the provision ­requiring an arbiter to be appointed upon execution of the ­contract. In its place the new version includes a conflict ­screening mechanism called Project Integrated Mediation which has received positive feedback after its implementation in the Norwegian standard contract for onshore construction (NS 8407). The core principle is that the parties do not appoint an arbiter at the outset but may agree to jointly appoint a committee to assist in solving disputes as they arise. This ­committee shall not solve disputes with binding effect, but facilitate amicable solutions between the parties.

In parallel with the revision of NTK MOD, the Norwegian Total Contract and the Norwegian Fabrication Contract have also been under revision. It is expected that these contracts will be presented in a new version before the New Year. As all these standards have an identical set up and to a large extent identical clauses, we expect the revisions in these to be consistent with the changes in NTK MOD.

Standardisation is a much needed step in order to reduce costs and time used by Contractors on tenders. If the new standards turn out to be more widely used by operators, this marks an important step towards more predictability and lower administration costs and will allow Contractors to compete on product and price against known risks instead of through an appetite to assume risk.