FEED Contracts - Food for Thought

1. Introduction

• FEED contracts for Front End Engineering and Design services are entered in the early stages of FPSO projects to perform engineering studies, to demonstrate concept suitability, to identify early-stage technical requirements and/or to generally advance the project deliverables for a full FPSO contract award.

• This article looks at some of the key issues that FPSO contractors should consider in a FEED contract negotiation.

2. Service obligations

• FPSO contractors will be expected to perform the FEED services with reasonable skill, care, and diligence and to ensure that the FEED deliverables are accurate, complete and on time.

• FPSO contractors should, however, keep in mind some important qualifications to their service  obligations.

  • Rely Upon Data. The FPSO contractor should be allowed to rely on the accuracy and completeness of any client furnished data, which is not independently verifiable beyond reasonable desk checks (e.g.  metocean, soil, bathymetry, geotechnical, environmental and well fluid data etc.).

  • Re-Performance as Remedy. The remedy for deficiencies in FEED services should correspond to the nature of the service itself (typically engineering and desk-based work). If the services are faulty, the remedy should be limited to re-performance of those services (e.g. re-performance engineering) without extending to any physical defect rectification (e.g., repair or replacement of any procured equipment).

  • Sole Remedy. Because FEED services will likely fall within sales of goods legislation, e.g., the UK Supply of Goods and Services Act 1982 (which imposes wide statutory make good obligations for six (6) or more years),  the FPSO contractor will want to specify a reasonable maximum warranty period for re-performing any faulty services (e.g. 12 months from the date of completion) and to limit the client’s remedies to those rectification remedies  (e.g. re-performance) specified in the agreement, excluding any implied or statutory remedial obligations or other conditions, warranties, obligations, representations, or liabilities whether arising by law, contract, tort (including negligence) or otherwise.

3. Intellectual Property (IP) Rights

• FPSO clients may seek to acquire the FPSO contractor’s IP rights related to the FEED.  FPSO contractors should be wary of any ‘technology transfer traps” and should watch for any wording that would vest their or their subcontractors’ IP rights in the client.

• The preservation of core IP rights is essential for a sustainable business model.  Any underlying IP in engineering deliverables etc., especially pre-existing IP, should remain with the FPSO contractor (and its subcontractors). The FPSO client should only be licensed to use the deliverables for the purposes contemplated by the FEED contract.

• A ‘permitted purpose’ provision should be considered to expressly set out the permitted uses of the FEED.  The FPSO contractor will want to specify that the FEED deliverables (and underlying IP) may only be used in the next stage, to build or supply an FPSO, if the FPSO contractor been engaged as the FPSO provider.  Clarifying the authorised use of the FEED deliverables will not only assist the FPSO contractor in preserving its IP rights but it will safeguard against any unintended operational risk exposure. An FPSO contractor, which has performed FEED work, but which has not been awarded the contact to supply/operate the FPSO, should not have any design-related liability for pollution or other ‘big ticket’ risks that may arise from the use and operation of the completed FPSO.

4. Other issues

• Considering the modest commercial upside of FEED work (compared to full scope FPSO work), the inclusion of consequential loss* and overall limitation of liability provisions are critical to ensure a safe risk and reward balance, in which the FPSO contractor does not assume disproportionate liabilities.

• Consequential loss and overall limitation clauses require careful drafting to be enforceable and should, amongst other drafting considerations, always contain ‘regardless of fault’ wording that the exclusion or limitation applies irrespective of the negligence, breach of duty (statutory or otherwise), breach of contract, breach of warranty, or strict liability of the person to be indemnified.

 *For more on consequential loss, please see my post: https://www.jayprintzlaw.com/blog/consequential-loss-its-not-what-you-think

 The foregoing provides only an overview for discussion and thought and does not constitute legal advice. Readers are cautioned not to make any decisions based on this post alone. Specific legal advice should always be obtained.