1/3LY Oil & Gas Disputes: Recent Cases On The Interpretation Of Contracts

In terms of disputes, the conclusions of the recent survey of the oil & gas industry carried out by Clyde & Co are entirely consistent with our own experiences in the sector, throughout the Clyde & Co offices globally. As a result of acute financial pressures caused by the sustained low oil price, disputes in the oil & gas industry are on the rise.

This represents a considerable change in attitude for an industry which, historically, has been relatively reluctant to trigger contractual dispute resolution provisions, due to the close, inter-connecting relationships which exist, often globally, throughout the supply chain.

The main pressure points for disputes include attempted renegotiation of contracts, early termination of contracts, and non-payment. When times were good, many companies may have written off unpaid invoices or sought a commercial compromise, but in today's climate a harder edged, more bullish approach is increasingly prevalent. Many of the disputes are resolved by either mediation or by negotiation, often with the close involvement of the senior management of the respective companies in dispute. Such top level intervention can be highly effective in reaching a pragmatic compromise which avoids the need to engage in costly and time consuming legal proceedings.

Contractual interpretation

For those cases which cannot be resolved amicably, the contractual dispute resolution process, which will stipulate either arbitration or litigation, can in some cases be the only way to reach a conclusion. This, in turn, brings the precise wording of contracts, and how such terminology will be interpreted by the courts/tribunals, under the microscope. From the litigation following the Piper Alpha disaster in 1988, which finally concluded in the House of Lords in 2002, through to the more recent Macondo litigation in Louisiana, there have been many examples of how the courts interpret oil & gas contracts, and in particular, any exclusions in the contracts. What is crystal clear from the decisions is that clear, unambiguous and express wording must be used when drafting exclusion clauses. For example, where parties wish to agree that indemnities shall apply irrespective of negligence, then the language of the clause must specifically address negligence.

Recent Supreme Court cases

Different approaches to interpretation

One of the most controversial debates in the English courts is the tension between the strict "literal" approach to contractual...