Key provisions in a service contract - Lex Energy

1. Key provisions in a service contract Contracts are often unnecessarily voluminous documents making them turgid and confusing. At Lex- Energy though we want to simplify things so for this short series I will be cutting straight to the key areas which deserve an investment of your time to enhance your understanding and risk management. After all, you don’t want to jeopardise the viability of your business on a contract which doesn’t go to plan. Services contract serves several important purposes. Key areas to be discussed are: (i) warranty; (ii) contractual limit of liability for default; (iii) liability and indemnity provisions; (iv) intellectual property protection (if you own or create such); (v) dispute resolution and governing law; and (vi) payment terms and security of payment. I will touch on (i) and (ii) here, and the others in following blogs: Warranty The warranty clause sets out: the standard your work shall be performed to; specifications to be met in respect of goods or equipment being supplied; and warranty period e.g. typically 1 or 2 years after completion. Contracts, however, often "go to town" in this clause which inadvertently increases your risk e.g. (i) incorporation of subjective language such as "all acts shall apply to the highest standards", and (ii) including all implied warranties, possibly extending the warranty period. Failure to meet your warranty obligations will constitute a breach of contract, possibly to prevent the breach in order to give your client the right of termination or to bring in another contractor (ie your competitor). Your breech may result in the cost of the customer getting back to you without any financial limit provided they have sought mitigation. Accordingly, you want to consider the next area below in terms of this risk. Contractual Limit of Liability for Default (“Cap”) A cap provides financial security to the contractor if it is in default which includes a warranty breach or failure to comply with other material conditions in the contract. This is usually an area under contract

2. that will not be insured therefore has significance. The cap should be enforceable in all situations (including the negligence of you or your subcontractors), but perhaps excluding your willful misconduct. Without the cap you will be liable for the direct loss of all your customers as a result of your default. If your customer is an operator or a major services company, then given the nature of their operations and the type of equipment and facilities involved, their direct losses can be considerable. Such losses can be so great that they can sink your business. Despite the oil and gas industry customers understanding and accepting the concept of CAP, many of them do not offer voluntarily. So do not hesitate to ask for the cap. It also shows your ability to manage risk effectively. Lex Energy is renounced legal consultancy in UK with complete knowledge of all sectors and phases of the energy industry. For more details visit http://www.lex-energy.co.uk