Saipem has signed a 12-year long-term framework agreement (LTA) with Saudi Aramco and includes engineering and ground-based construction activities. The agreement includes efficiency activities for existing facilities and is part of Saudi Aramco`s broader long-term plan to upgrade its facilities in the country`s eastern province. All this seems very neat and simple. In practice, however, things can quickly become much more complex. A recent case in the English courts provides a recent example of how the use of onshore/offshore contracts can yield unexpected results if they are not carefully developed and managed (Petroleum Company of Trinidad and Tobago Limited v Samsung Engineering Trinidad Co. Limited  EWHC 3055 (TCC)). Summary: Imagine that you are involved in the development of a large facility for renewable energy. During negotiations, the parties agree to use a shared onshore/offshore contract structure for the project (an onshore/offshore contract). The overall use of this structure is expected to reduce tax pressure, saving money for both parties. On paper, it sounds good – but how does it work, and what are the risks? Instead of preparing a single contract covering the entire scope of the contractor, an “offshore” contract and an “onshore” contract are prepared. Although they have different construction obligations, the two contracts are closely reflected, with parallel provisions for liquidated damages, dispute settlement, etc. These two contracts are then bound by a coordination agreement signed by the employer, the land contractor, the offshore contractor and, in certain circumstances, the contractor`s parent company as guarantor. This agreement provides that the two contracts are jointly managed and operated as if they were one, and they can also offer a wraparound guarantee in favour of the employer.
Despite the allocation, the contracts must cooperate smoothly, with all the contractor`s work under either contract. The onshore element consists of parts of the scope that must be carried out in the field or in the country where the project is located, i.e. construction work, testing and commissioning, as well as part of the acquisition. The onshore element is usually carried out by a wholly owned subsidiary of the contractor, which is attached to the project`s competence, or, in some jurisdictions, by a joint venture with a local construction company (the land contractor). In our experience, one of the most important documents (and often receives the least attention) is the coordination agreement. These can be as short as a few pages, even for very complex and high-quality projects, although more detailed agreements are common.