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Operators are increasingly revisiting long standing contracts with the supply chain, to identify instances where financial provisions in the arrangement designed to save them money have not been properly enforced in the past. 

During better times, it appears these rebates and arrangements were sometimes ignored by the operators and contractors alike.

They were either overlooked and simply forgotten about as strong market performance and a high oil price kept the industry buoyant and less attention paid to contract management or because in practice the operators and contractors had in fact decided to move away from the contract and work to a different arrangement.

Instances where benefits due through a previous contract haven’t been passed on are being used by operators as leverage in current negotiations with contractors.

The type of financial provisions involved include rebates in favour of the operator typically based on volumes of activity – if the contractor invoices more than a certain amount over a certain period of time, then the operator is entitled to a reduced invoice.

Other provisions include tax indemnities where, for example, the contractor is required to pick up certain tax liabilities relating to the work.

We have, in recent months, become aware of several instances of operators spending more time going back over the old contractual arrangements with supply chain partners and identifying failures to implement financial arrangements properly, in some cases over a significant period of time.

Although this has led to the prospect of fairly significant claims for payment of arrears under the contract, these situations have not, to our knowledge, typically resulted in supply chain firms being required to make payments to operators.

Instead, those have become an important factor in the ongoing tightening of margins for the supply chain.

In these cases, the value of rebates and other financial provisions in the contract has been thrown into the mix in the negotiation of renewals of contracts – and taken into account in setting the rates/charges levied by contractors for future work.

Neil Forbes, Partner and Ross Gardner, Partner

Chambers UK 2106

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