The battle of negligence-based risk

Helen Winsor: Hello and welcome to this Oil and Gas IQ. I’m your host today, Helen Winsor, and I’m going to be speaking with Stacey Earley, Director of Marketing Contracts and Services at Transocean. Stacey, welcome to the show.

Stacey Earley: Nice to be with you.

Helen Winsor: Now, first of all Stacey, can you please give us a bit about your background within the oil and gas industry.

Stacey Earley: Certainly, I’m a drilling engineer by background, petroleum engineer and MBA by education. I had 30 years experience in upstream oil and gas. In my career I move from offshore drilling operations to finance and strategic planning to drilling services contracting where I’ve specialized for the past 16 years.

My experience in both field operations and corporate business I think have been factors in my ability to develop optimal contract risk management profiles from my company. It’s still a very interesting career.

Helen Winsor: You’ve been examining negligence-based risk and comparing it with user-based risk which is obviously a key issue within the industry. What are some of the fundamental differences between the two approaches and how does this affect the contract manager’s perception when entering negotiations?

Stacey Earley: This is a topic that I do spend a lot of time on inside my company in terms of education and training. Negligence-based risk focuses on what you manage whereas user-based-risk focuses on what you bring to the job. The parties to the contract may prefer to allocate risk on a 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 the party will have a better ability to define how claims or loss will be addressed and by whom. So, there’s less contingency needed for the unknown with a user-based risk strategy.

I think the critical point is, in either case, to know your business well in order to be able to define your risk and exposure as well. Any contract manager entering in a negotiation 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.

Helen Winsor: Absolutely! Now, Stacey one of the topics that you have particular focus right now is the issue of boiler plate clauses of course. In the concept of international market that oil and gas companies’ working, what are the relative merits and weaknesses of boiler plate clauses and how much can they impact in the way organizations approach their new ventures?

Stacey Earley: Well, there is merit to using boiler plate clauses which I look at standard clauses used regardless of the type of job. But there are practical limits. And some of those limits are used across service types, use of good contract clauses in a services contract, use of precedent clauses or contracts in a new jurisdiction or job type without consideration of unique requirements of that jurisdiction or job and used when governing law changes.

For instance, in the first type, construction contracts are often used as a template for upstream drilling and production services contracts. That coverage and builders’ risk does not always apply well to well site services contracts. Likewise, extensive use of clauses dealing with warranty of goods 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 laws, I’ve seen commercial managers suggest that a contract written under English governing law, for instance, with those boiler plates can be switched to US law with no changes to the underlying language. I think that’s really open to pitfalls; leaves you wide open to changes and risk coverage they have clearly not considered including for instance changes in interpretation of gross negligence coverage.

And kind of a last idea, a practical approach to the development of templates with adequate relevance to job type groupings and changes in jurisdiction has considerable merit in improving the efficiency and affectivity of standard contract templates. 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.

Helen Winsor: Following on from some of the issues of boiler plate clauses, another issue is "the battle of forms". From your perspective, is it an inevitable process that all contact negotiations go through or are there other ways in which you can avoid this battle and avoid some of the risks associated with this phase?

Stacey Earley: Well, that’s a good question. I think the battle of the forms can be reduced through 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 contract database to retrieve documents like customers, by vendor, by country of operations or legal entity, then you are leaving yourself wide open to duplication.

Development of countersign master service agreements or purchase agreements and diligent use of orders referring to those agreements will go a long way towards minimizing problems with the battle of forms. And I think that’s what most people are thinking of when they’re looking at battle of forms.

I was thinking of maybe a little variant on that which is multiple contracts. You can reduce the impact of the battle of the forms by consolidating forms as much as possible and leaving job type or jurisdiction variance to exhibit. And when you do this, it really wins itself well to organizations where the experience level of their contract professionals varies widely. Or where the company is small and can’t really support a full-time contracts team.

So, battle of the forms probably has a lot of different parts to it and there’s a lot that you can do to help minimize the negative impacts.

Helen Winsor: Well, thank you very much, Stacey, for your time today and we look forward to hearing more from you.

Stacey Earley: It’s my pleasure and thank you for talking with me today Helen.

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