News / 17.01.2017

New standard contract for procurement to the Norwegian Continental Shelf – Norwegian Conditions for Purchase 2016

Author(s) Christopher L. Sveen

The Federation of Norwegian Industries has during 2016 continued the standardisation of contracts for the offshore industry and has compiled and negotiated what is called the Norwegian Purchase Conditions 2016 (NIB16) with NF15 as the starting point.

Having been central to the development of the new standard contracts, first as negotiation lead for the contractors in the NTK and NF negotiation and last as an moderator, mediator and co-drafter in the NIB16 development, partner Christopher L. Sveen will in this article present the new standard.

During 2015 The Federation of Norwegian Industries (Norsk Industri) and The Norwegian Oil and Gas Association (Norsk Olje og Gass) finalised and issued revisions and new versions of the NTK/NF standards covering contracts for new-builds, modifications and fabrication of major deliveries to petroleum installations on the Norwegian continental shelf (NCS).

The new purchase conditions are primarily intended for contracts between suppliers and sub-suppliers, as part of either framework agreements or as part of project specific contracts where the main contract between the supplier and the oil company or another ultimate buyer is on NTK or NF terms.

However, with NIB16 in place the industry has availability to a template for also turning NTK and NF around if the main contractor will subcontract modules on EPC terms or have parts of its scope fabricated by others.

NIB16 is established and negotiated among all contractors and suppliers involved in The Federation of Norwegian Industries´ Legal Forum, including Kværner, Aker Solutions, Wood Group, IKM, FMC, Reinertsen, WorleyParsons, Beerenberg, EMAS Chiyoda Subsea, Siemens, GE, ABB and Nexans. These represent a good balance between EPC/main-contractors and equipment suppliers/sub-contractors being central in the Norwegian offshore industry.

Purpose and expectations

Standardisation of terms and conditions are important contributions to streamlining and savings in the oil and gas industry on the NCS. Use and implementation of standardised purchase conditions formed on the back of the NF and NTK contracts will contribute to the learning and recognition of the NF/NTK main principles throughout the industry’s supply chain, and thereby to achieving transparent and predictable risk distribution. This should in turn result in cost efficient transactions, more correct pricing, more efficient and better controlled project execution and finally less disputes during and following the project execution.

It will take time to get the entire industry to implement the use of the new standard contracts, but several of the major operators at the NCS have already started, including Statoil. The operators have expressed that they expect “to see the savings” for them to use the standard contracts, and that they recognise that the savings first will become visible when the standardised principles are applied throughout the value chain. By introduction of NIB16 the operators are controlling this potential; the implementation of NIB16 is depending on the operators using NTK15 or NF15 in their contracting with main contractors and NIB16 in their framework agreements with suppliers that they intend that the main contractors will be required to purchase under in accordance with NTK15/NF15.

Structure

NIB16 is developed as a downscaled NF15. The structure from NF15, including the appendices, is kept, and, as with NF15, standardised appendices have not been developed. Even though it could have been desirable with further simplifications, compared to the NF15 terms and conditions, especially for procurement of equipment with short lead time or low risk, the standardisation and efficiency effects of maintaining the NIB16 terms and conditions as equal as possible to the main terms of NTK and NF outweighed this desire for simplification.

The NF15 terms are hence mainly adjusted for:

  • establishing a balanced risk distribution between the main contractor and the supplier, where risk and liability is placed where it can be controlled and mitigated and hence is cheapest and most preventive;
  • establishing a knock-for-knock, indemnity and insurance regime that is consistent and without “holes”;
  • enabling the main contractor to meet its obligations and maintain its rights under NTK15 or NF15, including;
    • a) Contractor´s obligation to implement instructions and Variation Orders;
    • b) Company´s right to require delivery of the uncompleted work upon delays;
    • c) Company´s right to audit Contractor and his sub-contractors;
    • d) Contractor´s various obligations to notify Company of certain events within certain time-limits;
    • e) Company´s warranty rights;
    • f) Contractor´s CSR and compliance obligations; and
    • g) Contractor´s various obligations to document his performance and entitlements.

NIB16 is developed as a generic document that is flexible wherever NF15 and NTK15 are flexible, and where all variables agreed in the main contract with the operator must be specified and catered for in the specific purchase order or other separate document. Elements that must be clearly defined and addressed in each purchase order are specifically identified.

The Federation of Norwegian Industries has, in the introduction to the conditions, included a list of elements that need to be defined in the specific purchase order, and has in addition attached a model document for how these elements can be addressed in the purchase order or other separate document.

In the introduction it is in addition made a particular note to the user reminding of the fact that;

“NIB16 provides for recourse to the Norwegian court system in the event of disputes, while NF and the NTK contracts provide for ad hoc arbitration. For some contracts it may be appropriate to consider a back-to-back dispute resolution mechanism throughout the contract chain. In this case amendments will need to be made to Arts. 15.2, 20.5 and 38.2 of NIB16.”

Details on the adjustments made in NF15 to create NIB16

NIB16 has NF15 as a starting point, but is adjusted as follows:

1) Amended terms and definitions

  • The term ”Drawing Revision” is removed and Art. 14, 15 and 16 are adjusted as required;
  • ”Acceptance Certificate” (being issued following the expiry of the guarantee period) is not a requirement;
  • To ensure that the indemnities also apply in relation to the Client, “Buyer Group” includes the Client;
  • The term “Main Contract” is introduced and a separate agreement document called “The Purchase Order” is presumed entered into.

2) The structuring of the appendices is equal to the NTK structure, and ”Sellers’ Specification” is hence introduced (Appendix I and Art. 7) to facilitate for many procurement-packages being EPC deliverables based on Sellers’ specification

3) Some details of little material relevance are deleted to simplify the administration of the contract

  • Relevant to NF15 Art. 3.2, Art. 3.4 last paragraph, Art. 4.3 last paragraph, Art. 8.6, Art. 12.3, Art. 16.1 last paragraph, Art. 19.3 last paragraph, Art. 20.6 last paragraph, Art. 21.2 last paragraph and Art. 22.3

4) Adjustments in the change order chapter:

  • A separate obligation for Seller to notify Buyer in advance if he intends to request compensation for preparing estimates required by Buyer and not resulting in a Variation Order (Art. 12.2 last paragraph) is introduced;
  • The 21-days time-limits to present requests and notifications are reduced to 14 days to give Buyer time to notify the Client within the 21-days requirement in NTK and NF;
  • 13.2 regarding pricing of variations is materially simplified and basically refers only to the rates and prices included in Appendix B;
  • Dispute resolution by arbitration is substituted with ordinary court proceedings. Oslo City court shall have jurisdiction, unless otherwise specified in the Purchase Order;
  • The time-limit for initiating court proceedings regarding disputes concerning the consequences of Variation Orders is reduced from 6 to 4 months and applies to both cost and schedule effects (Art. 15.2);
  • There is no default DVO being issued if the Buyer fails to respond to the Sellers’ VOR (Art. 16.2);
  • There is no expert-mechanism (Art. 16.3 and Art. 16.4), and the time-limit for initiating court proceedings regarding DVOs is reduced from 8 to 6 months (Art 16.5/New Art. 16.3).

5) Adjustments in the provisions concerning cancellation, delivery, payment, securities, etc.:

  • The cancellation charge in Art. 17.3 is simplified and reduced from 6% to 4% of the value of the work being cancelled and not otherwise being paid for;
  • The provisions regarding compensation during suspension are intended simplified without changing the subject (Art. 18.2);
  • 19.1 and 19.2 are adjusted to facilitate for the parties agreeing on particular terms of delivery in the Purchase Order. It is specified that the use of INCOTERMS shall have no effect on the contract provisions regarding liabilities and insurances in Art. 29 through Art. 31;
  • To facilitate for alignment with what may be agreed in the Main Contract regarding invoicing and payment, invoicing and payment terms are not specified and shall be agreed in Appendix B;
  • The time-limit for initiating court proceedings regarding the final account is reduced to either 4 months after the receipt of Buyers’ response to Sellers’ proposal for final account, or if Seller fails to present its proposal, 6 months after Buyer issued the Completion Certificate. Alternative Dispute Resolution is no longer an option or requirement in Art. 20.5;
  • The period for Buyer to request audits on Seller is made flexible against the Main Contract (Art. 20.6);
  • The value of a potential Bank Guarantee shall be specified in the Purchase Order (Art. 21.1);
  • To cater for supplies from other jurisdictions than Norway, Seller has a general obligation to implement all measures required to ensure Buyers’ title and rights of secured creditors (Art. 22.1);
  • Sellers’ entitlement to be compensated for suspension of work caused by Force Majeure is limited to Force Majeure events for which Buyer is also qualified for being compensated for under the Main Contract.

6) Adjustments in the liability provisions:

  • To be aligned with the Main Contract the Guarantee Period shall be specified in the Purchase Order. If the parties fail to do so, the Guarantee Period will expire at the same date as the guarantee period under the Main Contract (Art. 23.2);
  • Values in square parenthesis and corresponding footnotes included in NF15 are omitted and left for being specified in the Purchase Order;
  • Sellers’ liability for defects includes Buyers’ potential liability for dismantling and reinstallation costs under the Main Contract (Art. 25.3 a) and 25.4 a));
  • Seller may become liable for Buyers’ potential losses or expenses under the Main Contract or other project agreements caused by delays resulting from defects in Sellers’ Deliverables or the remedy of such. This liability is separately limited to a percentage of the Contract Price, and potentially a maximum amount, similar to the liability he carries in relation to his own delays pursuant to Art. 24.2 (Art. 25.3);
  • Art. 29.1 concerning damage to other parts of the Deliverables than the Contract Object (typically design documents and files) is made equal to the corresponding provision in NTK15.

7) Adjustments to other provisions:

  • The requirement for insurances that Buyer shall procure and maintain in accordance with Art. 31.1 may be deviated from in the Purchase Order. The insurances may be procured and maintained by either the Buyer or the Client;
  • Both the Buyer and the Client have rights to use information and inventions in accordance with Article 33.2;
  • Buyer has an unconditional right to assign his rights and obligations under the Contract to the Client (Art. 35.1);
  • NF15 Art. 37, concerning PRIME, and Art. 20.5, concerning alternative dispute resolution to solve disputes regarding the final account, are omitted.

With Christopher’s insight into the motives for – and understanding of – the new standard contracts, we have the very best basis for advising the industry on matters related to contracting and project execution on the Norwegian Continental Shelf and to be a proactive contributor to the development of the industry and their practices. This builds on Haavind´s long tradition of contributing to the standardisation of industry terms and conditions.

By signing Christopher L. Sveen and Bård Sandstad as new partners, and by the return of Kristine Hyldmo from Kvaerner, Haavind strengthens its already strong team – read more about our new members to the oil and offshore team.

The standard contract is published at Norsk Industri, access here to view.

Read our news story on the contracts NTK MOD, NTK and NF.