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Press article: Repairs – contractual issues from a P&I cover perspective

17 July 2014

James Bean, Offshore Syndicate Director, drafted the following article which appeared in Ship and Offshore Repair Journal in July

From scheduled or emergency repairs lasting days or weeks, through to major overhauls and conversion works lasting several months, it’s recommended when negotiating repair contracts that the shipyard contact its insurer to ensure any liabilities assumed fall within scope of cover. Notwithstanding the great values that are normally at stake, too little attention is often paid to repair contract wordings before they are signed with expensive consequences.

The Standard Club has been providing protection and indemnity (P&I) cover for offshore operators’ third party liabilities since oil exploration started in the North Sea. Liabilities include personal injury to crew and others on board, for oil pollution, for wreck removal of the unit and liabilities arising out of collision with other ships and damage to third party property.

The main providers of P&I cover are the 13 P&I clubs comprising the International Group (IG), of which the Standard Club is a member. Each P&I club can provide members high limits of cover, currently approximately US$7.9bn, achieved by a claims sharing mechanism whereby all clubs mutually reinsure one another in excess of US$9m in agreed proportions.

IG clubs share, or pool, claims amongst themselves. Therefore it’s important they all provide similar cover. Normal poolable P&I cover responds to operators’ legal liabilities –i.e.liabilities – imposed upon them by law. This includes liabilities incurred by a member in tort, in law or statute, or most commonly in the offshore industry, under contract.

Annually the Standard Club reviews contracts for its members and has considerable expertise in offshore contracting, including the repair and conversion of offshore units. The purpose of contract review is to proactively advise members on the effect of contractual arrangements they’re negotiating regarding normal poolable cover and draw attention to any extra extensions to cover the contract may require, thus providing assurance in terms of the members’ insurance position before any potential liabilities arise.

Ideally, contracts should be fair and balanced, clearly and comprehensively drafted, and reflect a realistic assumption of risk and reward. Neither party should be exposed to disproportionate levels of commercial risk or potential liability. Unfortunately, not all contracts are well drafted.

To benefit from poolable P&I cover, where an operator contracts with suppliers for services, goods or facilities in respect of their insured unit, such as a repair contract, they are obliged to exercise best endeavours to ensure that they do not assume responsibility for something they would not otherwise be liable for at law or which they would otherwise be entitled to exclude or limit liability. Alternatively, P&I clubs will approve knock-forknock contracts for poolable cover, provided they are balanced and do not expose the operator to wider liabilities than those imposed on their contractual partner, and that they have not waived their right to limit liability under applicable law.

The best endeavours requirement acknowledges that operators’ bargaining position, particularly where repairs to units are urgent/ unplanned, might be weak making the negotiation of fair and balanced contractual terms difficult or impossible. What constitutes best endeavours depends on the facts of each case but as a minimum must involve some proactive engagement on behalf of the operator to negotiate more favourable terms.

It is not just the P&I provider who should be consulted. H&M policies generally state that the insured must not agree to any contract term that might jeopardise the insurer’s right to recover sums from third parties that are paid to the insured. Therefore, particularly onerous terms in repair contracts may prejudice an operator’s cover.

The liabilities under the BIMCO REPAIRCON are intended to be clear and balanced. With the exception of liquidated damages for delay, the REPAIRCON excludes consequential losses. Liability for death or personal injury is essentially on knock-forknock terms with each party accepting responsibility and liability for death or personal injury to their own personnel. The provision also requires each party to indemnify the other party against the consequences of claims for death or personal injury pursued by personnel or dependents against the party that is not responsible for them. For the purposes of insurability, the liability of both parties is contractually limited. Contractual limits of liability, however, do not affect the right of either party to limit their liability statutorily.

Contracting on the REPAIRCON can be challenging as many ship repairers have their own contractual terms, which vary significantly. However, time spent reviewing and considering the terms of a repair contract is a small investment that can reward dividends. Knowledge of contract terms also results in better understanding of the repair process, and thus better control.