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Offshore Floating Production

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CHAPTER 13

Dispute resolution

 Stuart Beadnall and Mary Dodwell

A Introduction

13.1 The performance of an FPSO charter is bound to give rise to many circumstances in which the Company and the FP Contractor may disagree. The FPSO must be procured, installed and operated to precise standards in conditions that may be untested and uncertain. Remuneration may be dependent on achieving exacting targets, and circumstances may change from the date the charter was agreed and the date of performance. That is, of course, the whole reason for this book. However, the parties to an FPSO charter cannot afford the time and energy that may be needed for each potential dispute to be resolved entirely to both parties’ satisfaction – the priority is to continue with production. This requires a collaborative relationship. We consider in the relational nature of an FPSO charter. Therefore, although disagreements cannot be avoided, both parties have a common interest in avoiding disputes, and, where disputes arise, resolving those as quickly and efficiently as possible. That said, when significant problems do arise, the consequences may be so great that formal legal proceedings cannot be avoided. The purpose of this chapter is to set out the nature of the variety of dispute resolution procedures available to the parties to an FPSO charter in order that they may consider which is most suitable for any disputes that may arise.

B Dispute resolution procedures

(i) Expert determination

13.2 There are two roles of an ‘expert’ in English legal proceedings. The first is that of an independent witness of opinion in formal legal claims.1 The second role is that of a ‘valuer’, i.e. an independent person appointed to make a determination which is final

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and binding between the parties to the contract. The role of valuer is most obvious if there is a dispute on the remuneration to be paid for the services provided. In an FPSO charter this may be described as a ‘quantum dispute’. Such a dispute arose in the recent case of Altera Voyageur Production Limited v Premier Oil E&P UK Limited 2 In coming to its decision in that case, the High Court had to take account of oilfield practice relating to availability and production and consider what the parties intended in relation to hire adjustment. It may be thought that a dispute on that level of detail, requiring an understanding of FPSO practice, may have been more cheaply and swiftly resolved by being referred to a valuation expert. 13.3 Determination of a dispute of this nature could be achieved by reference to an independent person, appointed jointly by the parties to perform this role. This may be pursuant to a specific term of the FPSO charter, providing an expert determination procedure, or by an ad hoc dispute resolution agreement entered into once the dispute has arisen. The main characteristics of an expert determination are that the parties will agree on the expert to be appointed and the information that should be provided to that expert for a decision to be made, and that they will be bound by the expert’s decision. Thus, the procedure operates as a form of contractual commitment. The expert’s determination does not have itself any legal authority, but neither party may subsequently dispute its contractual effect. 13.4 An equivalent role may be exercised by a technical expert, who may be asked to resolve a dispute concerning compliance of the FPSO with the required specification. This would be suitable where there is a difference of opinion concerning what the specification requires. Such an expert would obviously need a detailed understanding of the technical nature of the FPSO operations. 13.5 If the parties cannot agree the person to be appointed with the relevant experience and independence for the role, the charter may provide that either party may apply to a recognised industry body to appoint an expert on their behalf, for example the Royal Institute of Chartered Surveyors for a valuation dispute or the Royal Institute of Naval Architects in the case of a technical dispute. The charters sometime provide that either party may also apply for a decision of the appointed classification society. However, it should be noted that, although as a matter of course the classification society will give a decision on compliance with its own rules, the classification society may be less willing to be drawn into a dispute on technical issues where interpretation of the contract specification may be required. 13.6 The benefits of expert determination are not just the swift and economical resolution of a dispute, but this also provides the facility for disputes to be resolved ‘back-to-back’ as between obligations under the FPSO charter and major subcontracts. For example, the construction contractor may complain that there has been a change to rely upon information3 which entitles it to additional cost and schedule extension under the EPIC subcontract. The FP Contractor may wish to dispute that, but also preserve its rights to obtain an equivalent increase and extension under the FPSO charter terms.

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Given the commercial pressure that the FP Contractor will face to ensure that the FPSO is delivered on time under the FPSO charter terms, there may be considerable benefit for the FP Contractor to obtain a swift resolution on whether the EPCI subcontractor’s claim is valid. That said, given the likelihood there are a number of similar issues in play at that time, and the FP Contractor’s focus on delivering the FPSO into the charter as quickly and efficiently as possible, there may be some hesitancy about any form of dispute resolution procedure distracting from that purpose. Further, for the expert determination to mitigate entirely the FP Contractor’s exposure standing in the middle between the EPCI subcontract and FPSO charter obligations, it would be necessary for all three parties, the EPCI subcontractor, the FP Contractor and the Company to agree the same expert determination process. 13.7 Also, although the appointed expert may have the necessary quantum or technical experience to make a suitable determination, the underlying dispute may concern interpretation of the contract terms. One party may wish to insist on a strict interpretation of the agreed contract wording, which is a legal process. The purpose of appointing the expert is not for a determination based on what is fair and reasonable (although ideally it may be hoped that is what the contract terms require) but a determination of precisely what has been agreed, regardless of whether it is advantageous to one party or the other. By way of illustration, although the determination by the English court of the remuneration provisions in the Voyageur Spirit charter required an understanding of oil production targets, the court’s decision turned ultimately on English law rules of contract interpretation.4 The court’s task there was to apply the detailed hire adjustment provisions set out in the charter to determine what precisely the parties had agreed. For this reason, although expert determination may perform a useful role, parties often – either for practical or legal reasons – prefer to follow other dispute resolution procedures.

(ii) Adjudication

13.8 Under the English Housing Grants, Construction and Regeneration Act 1996,5 the parties to a construction contract are required to refer a dispute to resolution by an adjudicator; a right to adjudication that the parties cannot contract out of. Each party will be required to provide its submissions and evidence according to an expedited timetable set by the adjudicator,6 who will make a decision based on the contract terms and their own experience of similar disputes. The process has similarities to the expert determination procedure referred to earlier, but is more intense, requiring more engagement of each party in persuading the adjudicator of its case, and, crucially, the adjudicator’s determination is final and binding only insofar as either party does not challenge that determination either in arbitration, if that is what the contract provides, or before the courts. Thus, it is an interim, albeit enforceable, determination, designed primarily to allow a contractor to overcome quickly objections to its claims for payment and schedule extension, but it may not be a final determination. The expectation is that, in most cases, if the Company,

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or the employer, is unsuccessful, it would only refer the dispute to arbitration or court proceedings if the adjudicator has made an obvious or serious mistake. Given the nature of the dispute and often the subjective nature of the determination, the adjudicator’s decision is often in practice final. 13.9 The parties may agree to submit to a form of adjudication in the EPIC contract or the FPSO charter. It may be thought that this will facilitate the FP Contractor’s ability to obtain payment and schedule extensions more quickly than other dispute resolution procedures, whilst allowing more engagement by each party in the resolution of the dispute than is available in an expert determination process. However, it is rarely used in FPSO contracts. The reason for this may include the perception that it falls between the two stools of an informal and consensual dispute resolution process and the more rigorous formal procedures. The reason for explaining adjudication here is to highlight the difference between adjudication and arbitration. It is sometimes thought that arbitration follows a similar path to adjudication, albeit the arbitration tribunal’s decision is final, subject only to rights of appeal. Whilst that is true, it may be expected that an adjudicator may give their determination based on what they consider to be fair and reasonable. If one party disagrees, it has the option of referring the dispute to arbitration or court. In contrast, under the English arbitration procedures, the tribunal is required to apply the law, and to give due weight to the relevant evidence, in a similar fashion to a decision of the court.

(iii) Mediation

13.10 This is an important and often undervalued form of dispute resolution. It may be used for resolution of disputes under relational contracts where the parties may place a higher priority on resolving their dispute quickly and with certainty rather than to allow it to damage their ongoing relationship and absorb energy and expense.7 The parties agree to appoint a nominated person as mediator. This is not a form of expert determination, as the mediator is not required to make a decision on the competing arguments. For the same reason, this is not a form of adjudication. The role of the mediator is nothing more than to find ways to encourage and entice the parties to find common ground and negotiate a settlement. In other words, it is a structured and disciplined form of senior management negotiation (see later in this chapter). 13.11 Mediation is not a forum for each party to argue the strengths of its case and the weakness of the other’s. It is a method of fathoming the importance and value to each party of a settlement and arriving at a position where the terms are acceptable to both. Each party is required to set aside time and to attend the mediation with a delegate from senior management with full authority to settle the dispute there and then. It works, provided both parties have reached the stage of the resolution of their dispute when settlement is a greater priority than continuing to a formal legal hearing. It may be engaged at any time during a legal process, whether before formal proceedings are commenced, after the parties have exchanged their submissions and evidence, or shortly

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before a final hearing.8 Quite often, judging the most suitable time for the mediation to occur is the secret of a successful outcome.

(iv) Tiered, or ‘escalation’ resolution options

13.12 It is common in FPSO contracts for the parties to agree that if a dispute arises, it must first be referred to each party’s senior management for negotiations before any formal legal process is commenced. For example, the terms may provide that any dispute shall be referred to the parties’ managing directors, “who shall discuss the matter in dispute in good faith and make all reasonable efforts to reach an agreement”. 13.13 It is more common for there to be a tiered, or ‘escalation’ process of informal resolution steps, starting with discussions between the parties’ contractual representatives. If they fail to reach agreement, the matters are referred on to party nominated persons and, in the event of failure to agree at that stage, a final step is to take the matter for resolution to senior executives. There may even be an additional step requiring the parties to engage in a mediation procedure; all are stages to be completed before proceeding to formal legal proceedings. 13.14 If one party is in a hurry to enforce its remedies, or at least to show the other party that it is serious in its intent, a tiered structure may be problematic. The negotiation process may require the parties to arrange meetings at a time convenient to both, or provide a lengthy period of time before it may be presumed that the negotiations have failed. In some cases, whilst the negotiations are continuing, the legal process is suspended. The question arises whether the party in a hurry may ignore the contract negotiation procedures and proceed straight to enforce its legal remedies. 13.15 The answer depends on whether the negotiation procedures are written as a condition precedent of either party’s right to invoke the legal process. If they are, English law will enforce this intention, and prevent commencement of a legal process until the requirements of the negotiation procedure have been met.9 13.16 In contrast, if the requirement for negotiation is drafted more widely, or is vaguely worded and lacking in detail, this may be interpreted as an agreement to agree or an agreement to negotiate, which under English law is unenforceable.10 In such case, the party wishing to commence legal proceedings may do so, without following the negotiation procedure. 13.17 It will be a question of construction whether compliance with any particular mechanism constitutes a condition precedent preventing the initiation of legal proceedings until that condition has been satisfied, or whether provisions are insufficiently clear and certain by reference to objective criteria to be enforceable. In order to avoid disputes concerning the parties’ intentions as to how they are even to approach the resolution of an underlying claim and whether the terms are contractually binding, careful drafting of the tiered dispute resolution clause is advised. Factors to consider include:
  • •

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    In relation to any internal negotiation process, consider to whom the dispute should be referred. Ideally those with knowledge and familiarity of or responsibility for the services, with sufficient authority to take decisions;
  • • A clear procedure, with a timetable should be set. The procedure should not be left open nor the transition between stages subject to further agreement. Avoid open ended provisions with no time limits. Confirmation of a dispute should be by written notice, following which, a provision that states for example, “the dispute shall initially be referred to the Company Representative and the Contractor Representative who shall discuss the matter in dispute and make all reasonable efforts to reach an agreement” needs to include a time limit on those discussions, such as “if no agreement is reached under Clause [X] above within [X] days of the service of the notice referred to in Clause [X], the dispute shall be referred to [the persons next up the chain]”. This should focus minds and prevent one party from deliberately dragging its heels;
  • • If an escalation clause is to include referring disputes to mediation, state the administrative processes – for example, by reference to a particular mediation body (such as the CEDR (the Centre for Effective Dispute Resolution) Model Mediation Procedure);
  • • Should the process apply to all disputes, or should there be any carve-outs for e.g. disputes relating to specific technical issues, or payment or performance differences?
  • • To reduce arguments as to whether the tiered procedure is a condition precedent to arbitration or litigation, express it as so.

(v) Contractual negotiations: ‘without prejudice’ communications

13.18 When the contractual negotiation procedure is followed, confusion often arises concerning use of the English law expression ‘without prejudice’. Without prejudice discussions and commercial negotiations are not synonymous. Further, without prejudice correspondence may take two forms. The first is where an offer of settlement is made or commented on. In order for the parties to be able to make commercial settlement proposals without the risk of their offers being used as evidence subsequently in formal legal proceedings, they are entitled to claim ‘privilege’ over such offers, i.e. the right to prevent these being used as evidence. Written or oral ‘without prejudice’ statements made in a genuine attempt to resolve a dispute will generally stop statements that may be adverse to the maker’s interest from being referred to in subsequent legal proceedings.11 To make it clear that privilege is being claimed, it is common for these offers to be described as being made without prejudice. This is good practice, although not strictly necessary. The second reason for describing correspondence as being made without prejudice is where one party relies on contrasting arguments in the alternative. As mentioned in concerning claims from a construction subcontractor which the FP Contractor wishes to pass on to the Company, the FP Contractor may wish to adopt a ‘back-to-back’ legal position.12 Thus, in correspondence, the FP Contractor may say to the EPCI subcontrac-

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tor that it will pass on the claims for additional costs and schedule extension without prejudice to the FP Contractor’s rights in formal legal proceedings to argue the claims are invalid. Thus, it is a form of non-waiver of rights.

(vi) Arbitration

13.19 Arbitration is a contractual procedure. It occurs when the parties have agreed in their contract to submit their disputes to arbitration, or, once the dispute has arisen, to refer the particular dispute to an arbitration tribunal.13 Under English law, such arbitration would be in accordance with the Arbitration Act 1996. No other formal procedure or institutional body of rules is required. 13.20 Nonetheless, in offshore oil and gas contracts, the parties tend to prefer to nominate an institutional body to govern their disputes, even if pursuant to the English Arbitration Act. Common choices are the International Chamber of Commerce (the ICC), the London Court of International Arbitration (the LCIA) and, to a lesser extent, the London Maritime Arbitrators Association (the LMAA). Each of the arbitral bodies has their own set of rules. The major institutional rules have many similar features; for example, as to expedited procedures, emergency arbitrator appointments, rules on consolidation of separate claims and, most recently, for virtual proceedings. There are, however, important differences in how these institutions function, their expense, bureaucracy, flexibility and general suitability for the type of disputes that may arise in an FPSO charter dispute. These need to be considered carefully before a choice is made.14 13.21 Institutional rules set out provisions for commencing arbitration proceedings, the appointment of the arbitrators and establishing the tribunal and the procedures to be followed, leading up to the publication of the final award. In the following sections (1) to (4), there are some particular features which may be considered in making a choice of institution. The authors focus on what may be described as ‘global’ institutions, namely the ICC and LCIA, adding references to the LMAA whose procedures may be less familiar to parties to offshore oil and gas contracts.15 The following assumes that the chosen ‘seat’ of the arbitration (i.e. the place where the arbitration will take place) is London, in which case the procedural aspects will be governed by English law (subject to any other choice in the parties’ arbitration agreement). Note that the seat need not correspond with the law chosen to govern the main contract; for example, the parties may choose a London seat, even if the governing law of the main agreement is French.

(1)

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Ease of commencement of proceedings

13.22 Arbitrations under both the ICC and LCIA are started by a request sent to the appropriate officer of the institution. This requires comprehensive details of the parties, their legal advisers, a copy of the document evidencing the parties’ submission to the jurisdiction of the institution, a brief summary or description of the nature and circumstances of the dispute, the estimated value of the claim, proposals regarding the number of and proposed choice of arbitrator(s) and payment of a filing/registration fee.16 Both the LCIA and the ICC then have separate provisions for the appointment of the arbitrator(s); absent agreement between the parties, there is a general presumption for the appointment of a sole arbitrator unless the ICC/LCIA decides that a tribunal of three is more appropriate. In contrast, an LMAA arbitration is simply commenced when one party appoints its arbitrator and gives the other party written notice of that appointment. The appointment fee is fixed by the LMAA.17 The LMAA Terms contemplate the appointment of a three-person tribunal. However, the parties are free to agree to the appointment of a sole arbitrator. 13.23 Notwithstanding the slower procedure of the tribunal by the ICC and LCIA, both have provisions allowing an application for the appointment of an ‘emergency arbitrator’ in suitable cases.

(2) Fees

13.24 The administrative assistance and back-up provided by the ICC and LCIA come at a cost. The fees of the ICC, and the costs of the arbitrators, are calculated by reference to the value of the claim, with both being adjusted to take account of the case’s complexity. This may be seen as a disadvantage for high value, yet simple, disputes. The LCIA calculates its fees (and those of the arbitrators) on an hourly basis. Arbitrators appointed for arbitrations under the LMAA terms charge on an hourly basis. Advance payment for costs is required by the ICC and invariably directed by the LCIA, and by the LMAA in respect of booking fees for hearings.

(3) Procedure

13.25 Once appointed, and subject to the specific rules set out in the relevant terms, a tribunal under the auspices of the ICC, LCIA or LMAA has discretion as to how to conduct proceedings.18 For a typical arbitration, this will include service of written ‘submissions’ setting out the parties’ respective claims and defences, procedural steps regarding disclosure of documents, the exchange of witness statements and expert evidence and the setting of timetables through to the hearing itself. All three bodies now expressly recognise that a hearing (including any interim hearing) may take place in person, remotely or by a combination of the two. 13.26 The ICC Rules provide specifically for Terms of Reference to be drawn up by the tribunal after its appointment. This sets out the parties’ respective claims and issues to be arbitrated and the procedure to be followed; no new claims may be admitted without

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the tribunal’s approval.19 Although there may be an advantage to itemising the arbitration’s scope in this way, it may also cause what may be seen as unnecessary delay (and cost). 13.27 What if one of the parties believes it has a claim that can be dealt with quickly and simply, without the need for evidence or extensive disclosure? Perhaps for payment of an undisputed sum, or a question of pure legal interpretation? Or could the arbitration be on documents alone, without a hearing? Or with a short oral hearing only? 13.28 The ICC Rules provide automatically for an expedited procedure in relation to claims not exceeding US$3 million (although the parties may opt out of this). The procedure is simplified, with no Terms of Reference, a case management conference within 15 days after the date on which the file was transmitted to the arbitral tribunal when the number, length and scope of written submissions and written witness evidence may be limited. The arbitral tribunal may also decide on documents only and the final award is rendered within six months from the case management conference. The LCIA has no equivalent provisions, although the tribunal retains an express power to make procedural orders with a view to expedition, 13.29 The parties may agree to a documents-only determination. The LMAA encourages documents-only arbitrations; if the parties cannot agree, the tribunal will decide on the appropriateness of having a hearing, taking into account the nature of the dispute.20 An ICC tribunal is given the express power to decide a case solely on the documents (unless a party requests a hearing); the LCIA may itself decide on a hearing at any stage, unless parties agree to a documents-only arbitration. With co-operation, the parties may facilitate quick disposal of claims. Unfortunately, this is not often the case. 13.30 Finally, both the ICC and LCIA rules and guidance include express provision for summary dismissal of claims or defences that are ‘manifestly’ without merit. Under the LMAA there is no specific provision; nor does the Arbitration Act 1996 include any express power to dismiss a claim or defence summarily or early.

(4) Appeals

13.31 Under English law the decision, or ‘award’ of a tribunal is, like a judgment of the court, legally binding on the parties, subject only to challenge under narrow statutory rights; namely if
  • 1. The award is made by a tribunal lacking substantive jurisdiction;21
  • 2. There has been a “serious irregularity” affecting the tribunal, the proceedings or the award, which has caused, or will cause “substantial injustice” to the party appealing;22
  • 3.

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    The award contains a mistake of law (i.e. a question of English law)23 – a ‘s.69’ appeal.24
13.32 Parties may ‘contract out’ of, or exclude, the right to appeal on a point of law (but not appeals on the first two grounds; earlier), for example by providing in the contract wording that “the award of the Tribunal shall be final, conclusive and binding upon the parties hereto and any right of appeal is hereby expressly excluded”. Both the LCIA Rules and the ICC Rules expressly exclude appeals. Article 26.9 of the LCIA Rules states that the parties “irrevocably waive their right to any form of appeal, review or recourse to any state court … insofar as such waiver may be validly made”.25 The LMAA Rules do not so provide.

(vii) Litigation – English court proceedings

13.33 Most of the contracts dealt with in this book require disputes to be submitted to arbitration, as opposed to court proceedings. However, it is not unusual for underlying documents, such as parent company guarantees or performance bonds, to provide that the court has jurisdiction. For example, the dispute in the case of Kellogg Brown & Root Inc v Concordia Maritime AG and others 26 arose under a guarantee claim. 13.34 The English High Court has a specialist division called the Business and Property Courts, an umbrella term for civil claims including the Commercial Court27 and the Technology & Construction (TCC) Court, offering the “best court-based dispute resolution service in the world, served by top-class, independent specialist judiciary”.28 Disputes under an FPSO charter that are not destined for arbitration would likely find themselves being dealt with in the Commercial Court or the TCC. 13.35 The Commercial Court deals with complex disputes “arising out of trade and commerce”, including carriage of goods by sea, banking and financial services, commodities, ship construction and “the exploitation of oil and gas reserves or other natural resources”.29 13.36 The TCC is a specialist court dealing with technology and construction disputes, and other disputes involving technically complex issues, such as those by and against engineers, architects and surveyors and also contractual disputes involving oil and gas installations, onshore and offshore, and ship building. It also adjudicates claims to enforce

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or challenge adjudicators’ decisions arising out of the Housing Grants, Construction and Regeneration Act 1996.30 13.37 Often there may be a difference of opinion between the parties as to which is the more appropriate for FPSO charter related claims – the Commercial Court or the TCC The Kellogg Brown case could have been heard in either, but ultimately the Commercial Court was selected – the claim being brought under a financial instrument and the underlying facts involving FPSOs and maritime concepts made it suited to that division. 13.38 Finally, as the authors pointed out in ,31 there are relatively few reported cases on contracts involving FPSO operations. The main reason for this is likely to be that related disputes are aired in the confidential confines of an arbitration hearing, as opposed to the open and public court forum. It is only if they are appealed from arbitration to the High Court that they will then come to our attention. Given that such appeals will only be on a point of law (or where there is some kind of “serious irregularity” in the arbitration proceedings),32 most are determined on the facts particular to the dispute in question and for that reason, the parties’ differences stay out of the public arena. We hope that the guidance in this book is of use in early anticipation of ‘things that could go wrong’ and drafting robust contracts aimed at avoiding future disputes, or at least assisting with a sensible assessment of the strengths and weaknesses of a party’s position without the need for lengthy (and costly) legal proceedings.

1 An independent expert witness provides an arbitral tribunal or court with specialist evidence. They will have professional or technical knowledge, expertise and experience. Their role is to assist the judge or arbitrators to understand matters outside the experience of the court or tribunal, by giving their opinion on the relevant issues in dispute. They owe their duties to the court/tribunal, not to the party appointing them. In English court proceedings they are often referred to as “Part 35” witnesses, after the relevant section of the Civil Procedure Rules, which govern English court procedure. The responsibilities of an expert witness were considered in some detail in the case of National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer) , [1993] FSR 563. For an explanation of an expert witness’ duty in relation to a case on delay and disruption, see S Beadnall and S Moore Offshore Construction: Law and Practice (2nd edn, Informa Law from Routledge, 2021), Chapter 8, Section B.

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