Lower oil price could lead to ME contract challenges: DLA Piper

The sharp fall in oil prices could lead to attempts to renegotiate prices and other terms in contracts, international law firm DLA Piper says in a report about the implications for people doing business in the Middle East & North Africa published today.

“Such discussions often lead to disputes between counterparties, which often require urgent remedy given the financial constraints on the industry at these times,” the report says.

DLA Piper says issues are likely to include:

  • the commercial viability of certain contracts become compromised, compelling parties to resort to any means available to them to minimise their losses and exposure under such arrangements
  • the means available are limited, but include triggering of pricing or hardship clauses, wholesale re-negotiation based on commercial pressure, allegations of breach and even termination. Many of these arguments trigger counter-arguments from the other contracting party
  • major players are likely to scale back, or suspend, projects, leading to decreased headcount requirements and decreased opportunity for third party contractors
  • the industry as a whole is likely to undergo some changes by way of restructuring, insolvency, distressed sales and resulting changes in the labour markets and intellectual property structures.

“Most O&G service contracts contain provisions allowing for early termination or termination for convenience for the employer/customer,” the report says. “Some of these terminations will be contested by contractors as ineffective.”

Disputes over contested termination tend to be more problematic in the region and claims for wrongful termination tend to lead to claims for loss of profits.

“While contractors will aim to challenge any “ineffective” terminations and claim losses of profits, it is often the case that such claims are met with claims of set-off for inadequate performance and similar issues – meaning that contractors may face a long fight before they see any money,” the report says. “Even where early termination provisions provide that a contractor will be reimbursed for work completed up to the date of termination (which is common), there may be disputes over how much is owing and whether (for example) the counterparty is entitled to claim liquidated damages for delay. Such complications are common in the region, and become more frequent when times are hard.

The report advises companies to be sensitive to the handling of job cuts. Distressed mergers and acquisitions, restructuring and asset sales become more common.

For more, see www.meed.com.