New standard contracts for the Norwegian Shelf - NTK 15 MOD

Several years of work have resulted in new standard contracts for modification work on the Norwegian Continental Shelf. This note sets out a brief overview of the most interesting changes.

1. Cost-efficient project completion and resources management

Building and modification work on installations on the Norwegian continental shelf has traditionally been based on standard contracts such as the Norwegian Fabrication Contract (NF 07[1]), the Norwegian Total Contract (NTK 07) and the Norwegian Total Contract Modification (NTK 07 MOD). After several years' work, the operator interests (represented by The Norwegian Oil and Gas Association) and the contractor interests (represented by The Federation of Norwegian Industries) have agreed on a new standard contract for modification work (NTK 15 MOD) and this was published 6 June this year. It is anticipated that this will be followed by new versions of NF 07 and NTK 07.

An important element of the negotiations has been to ensure that the model contracts achieve broad acceptance in the industry and a clearly stated goal has been to contribute to better, quicker and more reasonable contractual solutions for work on the Norwegian Continental Shelf.

NTK 15 MOD has been issued in two versions, one of which is appropriate for contracts for separate delivery of modules, pre-fabricated material and offshore permanent works and the other which is suitable for single delivery of the entire contract object.

The changes and the rules are mainly the same in both versions, and below is a brief overview of the most interesting changes.

[1] Norwegian acronyms are retained.

2. No standard solution to commercial terms

Many commercial terms (such as the level of liquidated damages, limitations of liability and agreement on target price) are removed from the standard document and assumed to be resolved through negotiations (see, for example, changes to Articles 3.5, 21, 24.2, 24.3, 25.4, 29.2, 30.2 and 32.2).

The cancellation fee set out in Article 17.3 is, however, maintained, so that the 4% of the total contract price or 6% of the unpaid part of the contract price will still apply as compensation to the supplier if the company elects to cancel during the project.

Moving the commercial terms from the model form to the negotiation table is a natural consequence of NTK 15 MOD being concluded at a time of considerable market volatility for both the operators and the contractors. The effect is that it will be more difficult to identify what is accepted market terms so that the negotiations will be increasingly be affected by a dominant position. This will usually be to the advantage of the operators, and put increased pressure on the contractors.

3. Stricter and more predictable deadlines

Another key theme is the shift from relative deadlines ("without undue delay") to absolute deadlines (21 calendar days) for giving notices under the Contract. This change is implemented throughout the entire contract (primarily Articles 3.3, 5.1, 8.3, 8.4, 16.1, 16.2, 18.3, 27.2 and 28.3).

This change has not been reflected in the time limit for bring claims, where the reference to "without undue delay" is retained (see, for example, Article 25.1). This could reflect that the need for predictability in terms of parties' positions, quick exchange of alerts and other notices, is critical primarily during the project phase and less so after delivery.

Our experience is that parties using the standard contracts have previously preferred to quantify the "without undue delay" requirement by reference to a specific number of days so that the use of absolute deadlines is already normal practice, and it is therefore not surprising that this has also been introduced to the standard documents.

From an operational point of view, it is natural to assume that the shift to absolute deadlines will give more predictable and efficient project management. However, a typical, and potentially unfortunate effect, is that both parties will send more notifications and send them earlier than they normally would to avoid the risk of failing to comply with the deadlines. This could, at worst, contribute to undermining the notification systems and damage project cooperation.

Although the motive of shifting from relative to absolute deadlines is probably to achieve certainty, this does not necessarily mean that disputes will be avoided in the future. For example, instead of disagreeing on the meaning of "undue delay", another typical effect could be that the parties will disagree on when deadlines start to run.

4. Increased efficiency improvement of the change system

A frequent scenario is that the Company gives an instruction and the Contractor interprets it as a Variation Order. Provided that the instruction is in writing, the Contractor must issue a Variation Order Request and await completion until the Company either withdraws the instruction or responds with a Variation Order or a Disputed Variation Order.

Article 15.1 requires the Contractor to act on the Company's instructions (which in Norwegian is referred to as "hoppeplikt", literally a duty to jump) without waiting for the Company's response to the Variation Order. This means that a Contractor may be performing work that the Company did not order which may lead to disagreement as to who bears the risk of such a misunderstanding. This does not necessarily have a defined solution in the variation order system but efficient progression appears to have been prioritised over more controlled variation order handling. It is probably that the Company will benefit from this approach.

When the Contractor has issued a Variation Order Request, the Company must respond with a Variation Order, a Disputed Variation Order or respond otherwise as it sees fit. In our experience, the Company sometimes fails to comply with its obligation to respond to the Variation Order Request within the applicable deadline.

Article 16.2 requires that the Variation Order Request is deemed to have been responded to with a Disputed Variation Order if the Company does not respond within the new deadline of 21 calendar days. This is a correct and important step in the direction of a more efficient variation scheme, which protects the Contractor and contributes to balance the duty to maintain progress before the Company responds.