Commercial Risk Management Case Study

Risk can defined as “the effect of uncertainty on objectives”. Every time an organisation enters into a contract it is inevitably facing commercial risks. Commercial risk management is the identification and assessment and minimising of uncertainty to control the impact of negative events to assure, as far as possible, that uncertainty does not affect the business objectives. Commercial risk can be managed in many ways including the establishment of policies & procedure, management of change, peer review, planning, insurance and the contractual transfer of risk. Contractual transfer of risk is using the contract to move risk, which otherwise would be one’s own to others, usually the other parties to the contract. Who should carry what risks

This is a ‘liability’. The liability is, and this is a critical point, unlimited. It is whatever amount of money is necessary to right the wrong. It is not limited because the contract was of a small value. It is not limited because of the relative size of the company. It is, simply, unlimited. Examples of a liability, in the international offshore oil and gas industry that could render small to medium size company insolvent are the liability for the remedial work associated with a pollution event or the liability for the replacement of an oil & gas platform should they cause an explosion which results in a fire that destroys the platform. These are not imaginary events. The Occidental Petroleum (Caledoina) Limited Piper Alpha incident in the North Sea in 1988, PTTEP Australasia’s Montara incident in the Timor Sea off Australia’s North West Shelf in 2009 and BP’s Macondo incident in the Gulf of Mexico in 2010 serve as salient reminders of the liability national oil companies, international oil companies and contractors face every

The legal liability framework of the contract acts as a safety net, should something go badly wrong. Instead of one party agreeing to do something under the contract and excluding or limiting their liability should things go wrong, it may be more appropriate to draft the contract in such a way as the respective party never agreed to do that thing in the first place. This can be addressed in the scope of work and pricing sections. This is not the terrain of the lawyer nor is it the contract manager’s terrain. This is the terrain of the General Management team. The majority of a contract is written in simple English and can be read and understood by anyone who has a reasonable amount of experience in the relevant business. Most of the contract refers to what the contractor has to do (the scope of work) and what the client has to pay (the price or remuneration section). There is, hopefully, a third part of the contract which addresses the legal liability (the safety net). Finally, a contract may contain other provisions relating to HSEQ and other administrative requirements. Consequently, the majority of a contract (the scope of work, the price and the administrative section) can be reviewed, by an operationally competent person. One could concluded from this that the most successful approach to contracting is to draft the contract in such a way as to be clear in terms of what has to be done and then do