Offshore Floating Production

Edited by Stuart Beadnall; Simon Moore; Max Lemanski

Document

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CHAPTER 5 The charter period

Stuart Beadnall

A Delivery

(i) The concept of delivery

5.1 The point at which the vessel is delivered into a conventional time charter is a pivotal event. The charterer retains the right of cancellation until delivery has occurred. A mobilisation fee may be payable, but daily payments of hire do not commence until delivery. Following delivery, the charterer is obliged to continue paying hire for each day, on a take or pay basis, unless it may rely upon a specific exception in the charter payment terms. The charterer loses the right to terminate after delivery for reasons which, prior to delivery, may have allowed termination. 5.2 The same concept is fundamental to the performance of an FPSO charter. The charter period does not commence, and day rates are not payable, until delivery, or the equivalent of delivery, has occurred, and rights of termination will vary according to whether the charter period has yet commenced. Notwithstanding, there is a tendency in FPSO charters to avoid using the expression ‘delivery’ to describe this pivotal event. It may be more usual to describe the process of formal acceptance and the commencement of the charter period, or commencement of day rates. It is nevertheless equally clear that this critical point is not reached until the FP Contractor has satisfied all the conditions that precede it. The reason for avoiding use of the expression ‘delivery’ may appear to be symptomatic of a general aversion in offshore oil and gas contracts to use of conventional maritime expressions. However, the true fault lies in maritime contracts themselves, as the expression ‘delivery’ is inapposite even in conventional time charters. Under English law, delivery is the voluntary transfer of possession.1 Although a vessel is described in a time charter as being ‘delivered’ when certain conditions are met, no transfer of possession occurs. The ship owner retains the possession of its vessel, continues to employ the master and crew, and following delivery into the charter provides a service in accordance with instructions given by the charterer. In the same way, under a typical FPSO time charter, which may be labelled an FPSO operating agreement or something similar, the FP Contractor remains in possession of the FPSO throughout the charter period and, using its master or Offshore Installation Manager and its crew, will provide a service in accordance with the Company’s instructions. 5.3

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Ironically, where the FPSO time charter is split into a lease of the facility and a separate services contract for the operation and maintenance during the charter period, delivery is the correct expression to describe the commencement of the lease. That document may be described as a bareboat charter i.e. it is only the vessel that is being provided, and not the services of master and crew. Therefore, with a bareboat charter, there is a transfer of possession from owner to charterer. In practice, where there is a delivery into an FPSO lease or bareboat charter, it is not apparent that a transfer of possession has occurred, as the FP Contractor may be required to provide operation and maintenance (or O&M) services under a separate agreement throughout the charter period. Thus, the FP Contractor’s personnel will be responsible for installing and achieving acceptance of the FPSO prior to delivery, and the FP Contractor’s personnel will be responsible thereafter for operation and maintenance. Understandably, which hat the FP Contractor’s personnel may be wearing at each stage may not be obvious.2 5.4 There will of course be no concept of delivery in an O&M services contract, even though the obligation to provide such services does not ordinarily commence until delivery has occurred under the lease. Thus, confusion may arise if the parties agree provisional acceptance, or a period of interim production pending acceptance. In such event, it may appear that the FP Contractor is providing production services under the O&M agreement, but in reality, the continued production is being provided under the lease obligations relating to performance testing prior to acceptance.

(ii) Acceptance

5.5 Once performance tests have been successfully completed, the Company may be required to issue an acceptance certificate. This will specify the time and date of acceptance, which will also usually be the time of commencement of the charter period. It may be the case that although performance tests have been successfully completed, or sufficiently successful for the Company to accept that full production should commence, there are nevertheless further rectification or remedial works to be performed. The acceptance certificate may specify the outstanding works, with perhaps a time period for the work to be carried out. A key point to observe here is whether the performance of the outstanding work within the agreed timetable is a condition of the Company’s acceptance, the consequence being that, if the FP Contractor fails to complete the work within the agreed timetable, the Company retains the right of termination. 5.6 The correct answer does not necessarily follow from use of the expression ‘provisional acceptance’, which carries the implication that the acceptance is conditional upon the work being performed. This expression is borrowed from EPCI contracts, whereby the provisional acceptance is the point of delivery, being the threshold of a contractor’s obligations passing from completion of the work in accordance with the specifications, to rectification of defects post-delivery in accordance with the contractual warranty terms. In EPCI contracts it is usual for the end of the defects correction period to be described as ‘final acceptance’. However, it is clear in those contracts that delivery (in the sense

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of transfer of possession) has occurred on provisional acceptance. Thus, if the same expression is used concerning delivery into an FPSO charter, it would be necessary for the acceptance certificate to make clear whether the conditions for acceptance in accordance with the FPSO charter terms have then been met, regardless of the certificate being described as provisional, or whether the certificate is truly provisional, and merely the method by which the parties identify the work that must be performed before acceptance occurs (even though production has already commenced). 5.7 The legal status of an acceptance certificate may be the subject of dispute. It is a contractual document in the sense it is issued pursuant to the contract terms, and the parties have agreed its purpose – for example, authorising a milestone payment or acknowledging the commencement of the charter period. However, depending on the contract wording, not all certificates are contractual documents in the sense of creating a contractual obligation, as distinct from being a statement of fact made by the representative of one party on which the other party relies. Thus, if the representative makes a mistake, for example, certifying the completion of work which is in fact incomplete, can the party on whose behalf the certificate has been issued subsequently retract it? 5.8 This point was considered in a dispute determined by the English court concerning work carried out on an FPSO by a subcontractor relating to the design, procurement and construction of the topsides process facilities on the vessel. In Aker Oil & Gas Technology UK Plc v Sovereign Corporate Ltd,3 the Contractor’s representative issued a certificate of completion of the subcontractor’s work prematurely, allowing the subcontractor to claim an early completion bonus. The Contractor disputed the subcontractor’s right to the bonus on the grounds that the work was not in fact completed early and it retracted the certificate. The subcontractor pursued its claim for the bonus on the grounds that the Contractor was not entitled to retract the certificate, and once issued, the contractual effect was the early completion bonus. The court found that, in the circumstances of this dispute, the Contractor was ‘estopped’4 from retracting the certificate. In other words, it would have been inequitable, or unreasonable, in those circumstances for the Contractor to be allowed to withdraw a notice on which the subcontractor was entitled to rely. In other circumstances, however, the outcome may have been different; for example, if the certificate was issued and then immediately retracted once a mistake had been noticed. In other words, the certificate does not have a final and binding contractual effect unless the contract stipulates that is so.

(iii) Sailaway

5.9 In conventional maritime projects, for example, where a new LNG liquefaction plant requires dedicated LNG carriers, it may be expected that delivery and acceptance into the charter will take place at the same time as delivery and acceptance under the construction contract. Under a traditional LNG charter, the charterer is expected to attend gas trials and sea trials and to decide whether the vessel is acceptable in accordance with the charter terms before the ship owner is required to make the same decision under the shipbuilding contract terms. Thus, the ship owner avoids the risk of being obliged to take

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delivery under the shipbuilding contract without the charterer being obliged to take delivery under the LNG charter. Sadly for the FP Contractor, it is rarely in this protected position. If the construction work is performed by way of conversion of an existing vessel, it is usual for the conversion contractor’s obligations to end on sailaway from the shipyard, save only for the usual warranty obligations. There may be some ‘carry over’ work to be performed following sailaway, but if that work is not performed, or material defects not corrected, before the cancellation date under the FPSO charter, the FP Contractor may be left with a vessel that has been converted for the purposes of a particular field, but with no charter to perform. 5.10 If the FP Contractor procures a newbuild vessel, the construction contractor may be persuaded to accept installation and commissioning responsibility at the FPSO field, under EPCI or EPCIC terms.5 However, although contracts of this nature defer the delivery point under the construction contract until the point of, or close to the point of, acceptance under the charter, the Company charterer will not be contractually bound under the charter at sailaway. Even if the Company as charterer attends pre-sailaway tests and trials, and accepts the results, such acceptance does not have a contractually binding effect on the charterer under the FPSO charter terms. The reason is that the FP Contractor remains obliged to deliver the vessel onsite, and to perform acceptance tests and meet the requirements of the local shelf state inspector prior to the Company being contractually bound to the charter.6

(iv) Transportation

5.11 Under the FPSO charter, the responsibility to transport the vessel to the field following sailaway rests usually on the FP Contractor. It is normal for the FP Contractor to be obliged to ensure the vessel arrives at the FPSO site by an agreed deadline. As a consequence, it is not unusual for sailaway to occur notwithstanding that significant punch items7 are still to be corrected, with these items being rectified during the approach voyage or at the location. 5.12 If the construction work is being performed by way of conversion or modification to an existing vessel, it is likely the construction contractor’s responsibility (subject to rectification of defects) will cease on sailaway, and accordingly the transportation to site is performed by the FP Contractor, or by its transportation subcontractor. If the work is performed under an EPCI contract, the construction contractor may be responsible for arranging transportation to site, using its transportation subcontractor, or it may agree with the FP Contractor that the FP Contractor will take responsibility for the transportation, as a form of owner-supplied services under the EPCI contract. The point to note here is that although the transportation may in such case be performed by the FP Contractor

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under the EPCI terms, the risk in the FPSO may remain with the construction contractor until delivery at site.8 5.13 Transportation of the FPSO to site may be under the vessel’s own propulsion, by conventional towage (wet tow) or by carriage on a specialist semi-submersible transportation vessel (dry tow). If transportation vessels are used, it is of course important for these to be scheduled to arrive at the place of sailaway to coincide with the FPSO being ready.9 5.14 If transportation to site is performed by a specialist subcontractor engaged by the EPCI contractor, it may be expected that the EPCI contractor should be responsible for delayed performance, just as it would if the delay occurred during construction works; but, given that the transportation is outside the core experience of the construction contractor, and transportation by sea is inherently prone to delay and other risks, the EPCI contractor may seek to exclude or limit its liability for the default of the transportation subcontractor. However, it is unlikely the FP Contractor would be able to exclude or limit its liability to the Company under the FPSO charter for similar risks and delays. Default of the transportation subcontractor, whether engaged by the EPCI contractor or by the FP Contractor itself, would be deemed to be a default under the FPSO charter. Given the importance of transportation of the FPSO to site, and subsequent installation at the field, it is common for the FP Contractor to enter into joint venture or consortium arrangements with the transportation and the installation contractor(s), in order that some of the inherent risks in these operations may be shared.

(v) Arrival at site

5.15 It is usual for the FP Contractor to be required to give notice of arrival at the FPSO site by a specified date. This date may be postponed if circumstances justify it under the terms of the FPSO charter. Otherwise, failure to arrive by the deadline may incur substantial liquidated damages for each day of delay. The period during which liquidated damages may accrue may be capped, in return for which the Company would require a right of cancellation of the vessel fails to arrive by the end of the relevant period. On arrival, the FPSO is required to be ready for hook up to the subsea risers, in order to receive hydrocarbons. In readiness for the arrival of the FPSO, the Company is required to bring the field into a live condition ready for flow of hydrocarbons to the vessel. If the FPSO is ready onsite, but hydrocarbons are not yet available, the FP Contractor would insist that any accrual of liquidated damages for delay should at that point cease. However, the FP Contractor would not be entitled to any remuneration thereafter, until commencement of the charter period, unless such right to remuneration is specifically included in the charter terms. This may be by an agreed rate for standby, payable in any event. However, as the Company would ordinarily not wish to commit to making any payment to the FP Contractor until the FPSO successfully passes performance tests, the Company may require the compensation for standby time occurring before start-up of

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operations to be payable only retrospectively, once the charter period begins. Thus, if, for whatever reason, the FPSO is not accepted into the charter, the FP Contractor is not compensated for standby time it has incurred. 5.16 It should be noted that in addition to the FP Contractor’s liability to pay liquidated damages for delay to arrival at site, the FP Contractor may also be liable to pay liquidated damages for delay in commencement of acceptance tests.10 The risk of double jeopardy here for the FP Contractor would be if the arrival date and acceptance date are specified in the calendar, the FPSO suffers major delays, perhaps during the construction works, and the FPSO arrives even later than the date by which the charter requires performance tests to have been commenced. In such event, would the FP Contractor be liable to pay liquidated damages twice over until the vessel’s actual arrival, or until the maximum period of liquidated damages for late arrival has been reached? If so, would the double payment of liquidated damages fall foul of English law rules on non-enforcement of liquidated damages deemed to be a penalty? 5.17 Dealing with the penalty question first, the mere fact that liquidated damages may be used to deter a breach of the contract, rather than compensate the innocent party, does not of itself mean that the penalty is unenforceable.11 5.18 Notwithstanding, it would be clearly unsatisfactory if the FP Contractor were to face double liquidated damages for, in effect, the same lateness. The charter may perhaps provide that in such event only one amount of liquidated damages is payable. Alternatively, and more satisfactory from a practical viewpoint, it may provide that the date for commencement of acceptance tests should be a fixed period after the date of actual arrival. Thus, if the vessel is late arriving, the date for commencement of acceptance tests, which attracts accrual of liquidated damages, may be correspondingly postponed. 5.19 It may be the case that although the FPSO may arrive late at site, the Company has been delayed also in preparing the field ready for the production of hydrocarbons. In such event, is the FP Contractor entitled to avoid its liability for payment of late arrival liquidated damages on the grounds that, although there has been delay in its performance, this has had no effect on the overall performance of the intended commencement of production, as the Company itself was not ready? In other words, why should the FP Contractor pay liquidated damages as compensation to the Company when the fact is that the Company has suffered no loss? 5.20 Under English law, liquidated damages are payable in accordance with the contract terms regardless of proof of loss and there is no question here of the delay being concurrent, as clearly the FP Contractor’s delay occurred before any cause of delay for which the Company is responsible.12 5.21 The more difficult question that often arises when the vessel is late in arriving at the FPSO location is whether the Company may recover its actual loss caused by delay, in addition to the accrual of liquidated damages. The general position is that the Company is limited to recovery of liquidated damages for all the consequences of the event for which liquidated damages accrue; in this case, the late arrival at site. However, the Company may allege that its losses arose not from the late arrival, as such, but in its expectations

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of arrival, and the significant costs incurred in making the site ready. For example, the FP Contractor may have given notice that the vessel would arrive by an expected time, but due to difficulties encountered at the construction site, sailaway was delayed substantially beyond the anticipated date. The Company may have incurred significant expense in bringing the reservoir into a live condition and in hiring the marine spread ready for the installation operations. Under English law, if there is a specific obligation falling on the FP Contractor to give timely and adequate notices of arrival, and if the FP Contractor is in breach of that obligation, in theory the Company may be entitled to recover its loss caused by that breach.13 Questions may arise as to whether the breach caused the actual loss, but in theory such loss is recoverable. Arguments sometimes are made that such loss falls within the definition of ‘consequential loss’ and therefore are excluded by the charter terms. Whether that is correct will of course depend on the definition of consequential loss in the particular charter but as a general proposition under English law, the cost of making a marine spread available for offshore operations is treated as a direct consequence of the breach.14 5.22 There is still the separate question of whether the description in the FPSO charter of the type of loss covered by the FP Contractor’s obligation to pay liquidated damages is wide enough to encompass the consequences of inadequate ETA15 notices – ideally, from an FP Contractor’s viewpoint, it should be drafted in this way. The burden of making the FPSO available onsite on time and the risk of accruing liquidated damages for any default which may be caused by its subcontractors is heavy enough, without an exposure to unliquidated damages due to the same causes of lateness.

(vi) Commencement of acceptance tests

5.23 As mentioned in section (v), the FP Contractor will be required to commence acceptance testing by an agreed deadline, which may be specified in the calendar, or as a fixed period after the date of FPSO arrival at site. If the FP Contractor fails to start such testing, liquidated damages will accrue. Again, as with liquidated damages for late arrival at site, there will be a maximum period of imposition, in return for the Company being entitled to terminate the charter if the FPSO is not ready by that date. 5.24 The most likely reason the FP Contractor is unable to commence acceptance tests by the agreed deadline is the failure to complete outstanding work, which may have been carried over from the construction contract, and the need to comply with the requirements of the local shelf state inspector. In the scenario mentioned in paragraph 5.19, it may be the case that completion of work is so delayed that the FPSO is not ready to receive hydrocarbons by the date acceptance testing should have been commenced. The

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FP Contractor would be bound to accept its liability to pay liquidated damages for late arrival up to the cap even though during that period the Company had not completed its work in making the field ready for hydrocarbon flow. The FP Contractor may also be at risk of paying liquidated damages for late completion of acceptance testing if the period for start-up following arrival at site has by then expired. However, it should be noted that if the period for start-up has expired, and the Company has still not finished its preparations for start-up, the delay to commencement of acceptance testing is no longer solely a contractor-caused delay. There would in such circumstances be what is described under English law as ‘concurrent delay’.16

B Acceptance testing

(i) Acceptance test procedures

5.25 The purpose of acceptance tests under a typical FPSO charter is to verify not just that the FPSO is ready to commence operations but that all the requirements of the functional specification have been achieved. These requirements are described in , Part (v), Section H. In essence, these provide a checklist, each box of which must be ticked in order for the FPSO to be deemed acceptable for commencement of the charter. It is not usually acceptable within the charter terms for acceptance to occur if the list has been substantially complied with or if the list has been achieved in all material aspects: the requirement is that all the tests must first be successfully passed. Thus, if there are ten tests to be performed, and only nine are successful, the Company can refuse to provide the acceptance certificate. The schedule for completion of testing may be extended for weeks or perhaps months whilst efforts are made to complete successfully the outstanding tests. During this time, substantial production may occur; even offloading of cargo. However, unless the charter specifies that in such circumstances some form of acceptance should occur, or the FP Contractor should be compensated for the value of services provided during this period, no remuneration is payable. Note that under the time charter or bareboat charter terms, the charter period will not have commenced, and therefore there is no payment of day rates, even though production has commenced. The Company may be willing to compensate the O&M contractor for the services it provides during this period. However, strictly speaking it would not be obliged to do so, as the O&M services would usually begin only once acceptance has occurred. 5.26 If the FP Contractor considers there are aspects of the functional specification which, although important, need not be fully tested prior to completion of acceptance testing, this should be clearly specified in the charter as an obligation to be performed after acceptance. For example, there may be gas injection equipment which is required for the later stages of production, but is not essential to be fully functioning prior to acceptance. Parties may consider whether offloading tests should be included as part of acceptance. It is important to note here also that the threshold of tests that must be performed before acceptance, and the level of performance to be achieved, should be

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consistent both in the charter itself and the technical documents that may be appended to it. Whereas it may be thought that the technical specifications more clearly reflect the intention of the parties concerning acceptance procedures, it is often the case that the terms of the charter itself take priority, even if negotiated by those (lawyers) who may not have an adequate understanding of technical details. 5.27 In addition to performance tests to demonstrate achievement of each of the functional requirements, the FP Contractor may be obliged also to demonstrate the full functioning of the FPSO processing capability over a specified period. Often, continuous production of 72 hours is required before acceptance. Again, substantial compliance with this requirement, falling short of full compliance, would be insufficient. If the FP Contractor achieves, say, 60 hours of continuous production before tripping occurs or some rectification work is required, following which production recommences within a short period, the requirement for an uninterrupted period of production has been missed. The Company would be entitled to reject the FPSO, and, ultimately, if the test is not successfully passed, terminate. With this in mind, it is obviously important from a practical viewpoint for the specifications to make clear what precisely constitutes 72 hours uninterrupted production for that particular FPSO. This may be particularly significant for an FLNG charter, where there may be two, or possibly three, streams of production. 5.28 The good news for the FP Contractor is that once each of the boxes in the list of technical requirements has been ticked and the continuous running test successfully performed, the Company is usually required under the charter terms to confirm acceptance. An exception to this may occur if, in addition to successful completion of performance tests, the FP Contractor is required to rectify all material defects prior to acceptance. It may be thought that if the tests have been successfully passed, outstanding defects would not be material to the question of whether the FPSO is fit for commencement of full operations. Charters sometimes seek to differentiate between Category A defects and Category B defects, the former being those which justify the Company not confirming its acceptance. That said, if all the acceptance tests have been successfully passed, the basis on which any defect may be categorised as Category A may perhaps be questioned. 5.29 If the charter specifies precisely the type of defects which may be Category A, the risk for the FP Contractor is that, even though all the performance tests and the running tests have been satisfied, the Company would nevertheless retain the right to terminate the charter until the Category A defects have been rectified. If Category A defects exist even once performance tests have been passed, the likelihood is that the reason for the defect is some miscalculation in the design which would require an upgrade or modification, which, if capable of being done quickly, would already have been achieved. 5.30 The second qualification to the Company’s obligation to confirm acceptance once the performance tests have been achieved may be an additional contract requirement that the FP Contractor should demonstrate that the FPSO is capable of continuous production at the FPSO site for the life of the field. This is often described as a contractor’s warranty that the FPSO is fit for the particular purpose for which it was intended, i.e. continuous production from the specified reservoirs in the metocean conditions, taking account of the characteristics of the available hydrocarbons. Under English law, there is a risk that such overarching fitness for purpose obligations may be implied into the FP

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Contractor’s ‘turnkey’ obligations, if those obligations are broadly drafted.17 However, if it is clear from the charter terms that the FP Contractor’s obligations prior to acceptance are specifically the achievement of successful performance tests as may be listed, plus additional acceptance tests, it would be difficult for the Company to imply a greater burden on the FP Contractor in relation to the performance of the FPSO than set out in such detailed requirements. The FP Contractor would nevertheless be wary of including any warranty obligations or promises as to the expected performance of the FPSO which could be interpreted as placing on it a greater burden than achieving the functional requirements set out in the contract specifications.

(ii) Provisional acceptance/interim production

5.31 We mentioned earlier that acceptance may be described as being provisional, which leaves open the question of whether the Company retains the right to terminate the charter if outstanding works are not completed within a specified period. It may also be described as being conditional on the successful completion of specific tests or rectification of Category A defects. 5.32 The FP Contractor, who at this time may have received no remuneration for the work performed in preparing the vessel for production from the field, will want the charter period to commence as soon as possible, in order that the payment of day rates may commence. Therefore, the FP Contractor may continue with its testing, making adjustments and modifications in the hope of achieving the required level of performance. During this time, production continues. The question that often arises is whether, given that during the continued attempts to pass performance tests, the FP Contractor is producing oil or gas for the benefit of the Company, may the FP Contractor receive at least some remuneration for the benefit provided? This is sometimes described under English law as the right to be paid according to the value received, or quantum meruit.18 The difficulty with this argument, if used for underperformance failing to achieve acceptance, is that remuneration by way of quantum meruit applies only where the contract does not provide a payment mechanism relating to the circumstances covered. Under a typical FPSO charter, the circumstances are covered; it would provide that the FP Contractor is not entitled to payment until acceptance is achieved. Where there is a separate O&M agreement, with its own remuneration provisions, the FP Contractor may alternatively argue that it is nevertheless entitled to remuneration for providing a service under that agreement, even though no right to payment has accrued under the charter. However, as mentioned in paragraph 5.25, although the Company may be willing voluntarily to pay for the services of the O&M contractor during this testing period, it is not contractually obliged to do so, as the payment regime under the O&M contract will usually commence only once the charter period commences, following acceptance. 5.33 Another aspect of the same conundrum is that the FP Contractor is not obliged to continue production prior to acceptance; it does so in the hope of passing the acceptance tests, but may, if it prefers, shut down production while it endeavours to resolve

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the difficulties. The FP Contractor in such circumstances may run the risk of accruing liquidated damages for delay but may consider this to be the most practical solution to its difficulties, and only recommence production once it is confident the solution has been found. If the FP Contractor takes this approach, the Company may prefer to agree a provisional acceptance, in order that production continues whilst the FP Contractor makes the modifications and adjustments necessary to achieve the required level of production or other functional targets. Payment would be made for services provided under the O&M agreement, or under the provisions of the time charter concerning remuneration for production, but as the charter period would not have commenced, the FP Contractor during this period is not paid for the use of its capital asset. It may also be the case that the length of the charter period may be calculated as running from the date that acceptance should have occurred, not when it actually happens, and accordingly the total period for the FP Contractor to recover its capital expenditure will be reduced. This may be an acceptable price to pay for a short period, but the requirement to continue full production whilst modifying the production facilities may lengthen the period before full functioning is achieved. During this period an FP Contractor has no legal mechanism to oblige the Company to bring the interim production period to an end and accept the vessel. There may be a risk the interim period continues indefinitely, during which time the Company retains the right to terminate the charter for the FP Contractor’s failure to achieve the conditions for acceptance.

(iii) Reservoir characteristics

5.34 When the conditions for acceptance have not been met, the FP Contractor will inevitably question whether the reason is due to the characteristics of the hydrocarbons being extracted, or the performance of the reservoir and related structures. If gas is being processed, its composition may include a greater proportion of condensate than anticipated. It may be said the oil is too waxy, or gassy, or wet, or otherwise fails to achieve the specification in the basis of design. The Company’s position may be that the hydrocarbons are within acceptable parameters, but in any event any deviation is not the cause, or not the only cause, of the FP Contractor’s underperformance. The parties may agree that the quality of hydrocarbons and the reason for underperformance may be referred for determination by technical analysts – although it may be a considerable time before they are able to achieve reliable results, and even then, it may not be easy to determine whether out-of-specification hydrocarbons is the reason for the underperformance. Thus, the dispute may be unresolved for a significant time, during which there may be a period of interim production, as referred to earlier, or a period of shutdown, with the Company threatening to exercise its rights of termination. The particular difficulty faced by the FP Contractor in these circumstances is that even if it is able to establish that the hydrocarbons are outside the specification, the fact remains that the conditions of acceptance have not been met. The charter may provide that the FP Contractor is entitled to a variation order for the consequences of the out-of-specification hydrocarbons, but the burden would rest on the FP Contractor to demonstrate what that variation should be. The FP Contractor may face the further difficulty that although the specification has been provided for in the basis of design, it does not necessarily follow that the Company has warranted the hydrocarbon characteristics.

C

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The charter period

5.35 The agreed charter period dictates the minimum time during which the Company charterer is obliged to continue paying hire or day rate. Consistent with the concept of take or pay, the Company is obliged to continue paying the day rate throughout the charter period even if, for whatever reason, it may no longer have need for the vessel being chartered. The most obvious reason would be the reservoir has been depleted more quickly than expected, or is found to be uneconomic to produce. With this possibility in mind, the Company may wish to commit only to an initial charter period, which is likely to be less than the full period for which the FPSO is needed, with a view to extending that period, if necessary, in due course. Extending the charter period is covered in more detail in concerning payment of day rate. 5.36 If the Company wishes to cease operations before the initial period has expired, or before the end of any agreed extension period, the FP Contractor would be entitled to refuse. The question then arises whether the FP Contractor would be entitled to keep the FPSO on station and claim day rate for the unexpired period of the charter, even though no contractual performance is required. In legal terms, even though the Company’s wish to terminate the charter period may be a repudiatory breach, the question is whether the FP Contractor is obliged to accept that breach and bring the contract to an end and claim its loss, or may it affirm the contract, and insist it continues until the charter period expires. The answer is found in equivalent maritime law concerning bareboat chartering of a vessel.19 5.37 If an FP Contractor accepts the Company’s repudiation of an FPSO charter, its loss would comprise the unpaid profit on day rate for the unexpired period, including the opportunity to receive payment of bonuses, for a period which may be many years. However, the FP Contractor would have a duty to mitigate its loss, taking into account the possibility of redeploying the FPSO before the date when the original charter period would have expired. This would lead to a complicated and often speculative calculation concerning the prospects for redeployment. To avoid such complications and protracted disputes, the charter will often grant to the Company a right of termination without cause, or ‘for convenience’, in return for payment of an agreed termination fee. The fee to be paid would vary according to when the termination occurs and would also require a degree of speculation. 5.38 If the FP Contractor successfully negotiates into the contract terms a generous fee that the Company is obliged to pay on termination for convenience, it would be unsurprising if the Company wishing to terminate before the expiry of the charter period would first consider whether it has alternative remedies. For example, the contract would usually allow the Company to terminate in the event of FP Contractor’s material breach or continuing underperformance.20 It may be thought that unless the FP Contractor is clearly

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in default, the Company may be reluctant to avail itself of its termination remedies, for fear of itself being in repudiatory breach for wrongful termination.21 If that were to be the legal outcome, the FP Contractor would claim its actual loss, but would have some difficulty in explaining why its recoverable loss should be greater than the termination fee that would have been payable if the Company had simply chosen to terminate for convenience.

D Redelivery

5.39 In the same way as the act of delivery usually represents commencement of a charter period for a conventional vessel, the act of redelivery usually represents the end of that period. Thus, the obligation to pay hire or day rate commences on delivery and continues until redelivery. There may be no actual redelivery, in the sense of transfer of possession from the Company to the FP Contractor, under a typical time charter, as the vessel at all times remains in the possession of the FP Contractor. The parties are free to agree what event marks the exact moment of redelivery, which is usually when the vessel reaches an agreed location or range. 5.40 If the charter is in the form of a lease, or bareboat charter, there may be a true redelivery in the sense of possession being handed back to the FP Contractor, but even here, conditions may be attached to the point where the FP Contractor is obliged to accept redelivery, for example following any repair work to enable the vessel to be redelivered in like good order and condition as when first delivered. 5.41 These same principles apply to the end of a charter period for an FPSO, but the conditions attached to redelivery may be more extensive; for example, expiry of a notice period and payment of the day rate until the Company has finally shut in production and has removed the cargo from the FPSO. 5.42 It is important to note that although redelivery may signify the cessation of the Company’s obligation to pay day rate, it does not signify the end of the FP Contractor’s contractual obligations. In particular, the FP Contractor may be required to remove the FPSO and all its ancillary equipment from the location, at all times in compliance with the safety and environmental regulations. The Company may require the FPSO and crew to remain onsite for some considerable time after cessation of production to allow the FPSO facilities to play their part in the preparation of the subsea wells, flowlines and risers for abandonment (removal).22 5.43 It is usual for performance of these post-redelivery obligations to be remunerated by way of a demobilisation fee, payable once all requirements of removal of the FPSO have been satisfied. This fee is normally a lump sum to cover whatever costs the FP Contractor may incur. 5.44 The relationship between redelivery and termination under a typical FPSO charter is often not set out with clarity, the assumption being that redelivery occurs on termination. However, as explained earlier, the requirements for redelivery may not have been achieved at the date of termination, and the FP Contractor’s obligations do not end on

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redelivery. Sometimes, the concept of a complete termination is introduced i.e. the point at which all the obligations flowing from the act of termination have been discharged. In some ways, this is the reversal of the procedure leading to the commencement of the charter period. Whatever expression is used, the priority is to ensure that the practical and commercial consequences of termination should be clearly addressed.

1 Sale of Goods Act 1979, s. 61 (i).

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