Offsetting risk in Middle East oil and gas disputes

Disputes can derail even the most well-planned oil and gas projects. Projects in the Middle East often carry specific risks stemming from the particular procurement models in use and the way in which typical contracts – which tend to be bespoke and diverge from the standard FIDIC standard form – pass significant risk onto the supply chain.

As the sector continues to weather successive global supply chain shocks, tariffs and other unforeseen events, structuring contracts with these considerations in mind has become increasingly important for the successful execution of oil and gas projects.

The most common causes of disputes range from delays and defects to payment issues and contract ambiguities. Contractors will often charge an additional premium – known as ‘risk loading’ – on an engineering, procurement and construction (EPC) contract. This will be priced into the lump sum price to offer them some protection. However, when a problem arises, in the absence of collaborative standards, appendices or conflict avoidance clauses, such contracts can quickly become dispute magnets.

Civil code considerations

Where contracts are governed by Middle Eastern civil codes, civil code doctrines can be a helpful tool for parties to resolve a dispute. At times civil code provisions can override contract terms agreed upon, even if the drafting is clear. Care must be taken to understand the impact of concepts such as good faith and other principles that affect liability, such as pre-agreed damages.

Good faith applies to the performance of obligations. Once signed, both sides must cooperate on change requests and avoid obstruction. However, limitation of liability cannot exclude deceit or gross mistake. Subcontractor rights, including direct claims in some codes, can rewire cashflow late in the project.

Local laws in the Middle East recognise force majeure, but when it comes to an undefined force majeure clause – where the contract does not cite any examples of what exactly constitutes a force majeure event – outcomes can vary. The relevant civil code may be relied on to find a solution.

An exemption clause can exclude or limit liability, usually in a claim for damages, except for fraud. Other clauses may be included to allow the parties to extinguish obligations under specific circumstances.  

Design and delay risks

The requirement to achieve oil or gas production to meet agreed sale and purchase agreements (SPAs) means that contractors are under pressure to meet contractually binding deadlines. However, the likelihood of delay is high and the limited commercial headroom for programme slippage can escalate friction.

There are many factors that can delay an oil and gas project. Scope churn, where the requirements change during the project’s life cycle; regulatory shifts; weather conditions; and labour and material shortages are some of the most common reasons for project delays in the region. Should things go wrong, legal counsel can advise on entitlement where significant unexpected costs are incurred as a result of delays and disruption caused by circumstances out of their control.

Preferential engineering

A common issue that EPC contractors face during the design development phase is owners requesting changes to designs which are arguably 'fit for purpose' and satisfy performance and specification requirements. Such requests are often referred to as 'preferential engineering' – where the owner uses the contractor's design phase as an opportunity to consider alternatives and improvements under the guise of ‘design development’.

Scope creep, whereby a project goes beyond its original agreed time, cost and resources, requires careful management and puts teams delivering oil and gas assets under significant pressure to track changes of this nature and comply with contractual notification requirements. Often contractors’ claims fail when design changes and their impact are not documented sufficiently.

Decennial liability

The UAE Civil Code grants joint designer or contractor liability for 10 years for serious defects concerning stability or collapse. The designer’s liability applies more widely if they have a supervisory role in the project.

In Qatar, similar decennial liability requirements apply. Attempts to limit this liability or exclude it altogether are void.

As decennial liability sits outside the negotiated liability cap, businesses must plan for it in their contract management and may consider taking out insurance to provide an element of cost protection.

Supply chain risks and realities

Geopolitical shocks such as inter-state conflicts, the Red Sea shipping crises, tariff changes and sanctions exposure all create supply chain risks that have the potential to severely disrupt and even derail projects.

These often unforeseen events can cause insurance and freight premiums to surge, impose airspace and travel constraints and create complications for package interface management, often at short notice. All of these can cause projects to exceed their expected time scale and budget.

It is common for contractors to sub-contract third parties for particularly complex oil and gas projects which require specific expertise and capabilities. Although the main contractor usually remains liable for the completion and quality of the subcontracted works, subcontracting arrangements can leave parties more exposed to price spikes and can create ‘pay-when-paid’ tensions and pass-through claims.

However, it is possible for the main contractor to limit the effect of such conditional clauses by ensuring that any contractual agreement entered into with the subcontractor provides the contractor with a certain degree of protection from such payment claims.

Mitigating and offsetting risks

There are other mitigation measures that stakeholders involved in these projects can implement both from the outset, and throughout the project cycle, to minimise the types of risks outlined above.

During the tender and drafting stages, external counsel that are well versed in the relevant local civil code will be critical to ensuring that contract drafting is compliant with local laws and for example extension of time (EOT) grounds, including specifics on time and cost assumptions, are laid out in detail.

Specific provisions to mitigate risk should be incorporated into the contract, including ‘step in’ rights and specifying force majeure scenarios that typically occur in the region.

High-risk clauses should be discussed between at the point of handover from tender to execution teams, to ensure proper awareness of these liabilities and obligations.

It is also necessary to assign teams to scrutinise comments on design drawings, identifying immediately when an instruction amounts to a contractual change.  Flagging preferential engineering early will be critical, as well as embedding a comment protocol in contracts and recording when designs are ‘fit for purpose’.

It will also be prudent to identify and outline any contractor design obligations and employer requirements to avoid ambiguities or misinterpretation that could give rise to conflict.

Programme visibility is vital between the main contractor and any subcontractors, as is a disciplined approach to record-keeping, including naming conventions, folder hierarchy and drafting robust progress reports.

Documents should always be accessible and consistent. Ideally, teams should look to design a process for change tracking with named owners and regular progress reporting, and ensure records are clean. Should a formal dispute resolution scenario become unavoidable, this will help them stand up in a court or tribunal.