Forecast: Lawsuits Over Rig Cancellations Will Grow

In a reflection of the state of the offshore drilling market, consultancy and expert witness firm CAM OilServ Advisors announced Wednesday that it its creating a new branch specializing in offshore rig construction contract cancellations.

Cary A. Moomjian, Jr., the firm's president, has long experience with disputes over rig construction contracts, and his expertise may be in high demand as oil prices plummet: he says that over 25 offshore rig shipyard contracts have recently been delayed or terminated.

Consultants McKinsey & Co. noted as early as July of last year that delays and cancellations were growing, especially at Chinese yards, which had often provided easier contractual terms at signing in a bid for market share.

“Offshore drillers are in a survival mode and are unable to secure drilling contracts for many of the rigs they ordered,” Moomjian said, adding that “many drilling contractors have entered into agreements with shipyards to extend rig delivery for several months or years. Now, some drillers are declaring shipyards in breach of contract” in an attempt to escape the cost of taking delivery.

Given the circumstances of each case, cancellations may or may not be justified under each construction contract, and disputes over the myriad specific details in each could take a long time. CAM gave a list of potential sticking points, “including permitted delay terms . . . change orders, new regulatory requirements, builder and owner obligations, and compliance with specifications.” Plus, Moomjian says, offshore drilling rigs are highly complex and are usually accepted at delivery with a list of deficiencies to be fixed later – a potential boon for rig buyers looking to find a violation of terms. 

The complexity of the contracts and the growing number of cancellations means a growing field of litigation, one that CAM's new division seeks to tap. The outcome of each dispute will hinge on whether a court or arbitrator finds that the owner attempted to cancel simply to avoid the cost of taking delivery, without legal justification, or whether the shipyard was actually in breach of contract. While CAM does not represent clients as legal counsel, its expert witness services are intended to help courts to parse the contract text and physical realities of rig construction operations – and to determine whether a rig must be paid for or not.