PART V I II

ADMIRALTY LAW AND THE OFFSHORE INDUSTRY

OFFSHORE SUPPLY AND SERVICE:CHARTERING AND OPERATIONS

Discussion Leader John D. 'MurphyStewart, MacKeen II, Covert

Halifax

JOHN MURPHY: Ladies and gent Iemen, the progrmii for thismorning is "Offshore Supply and Services: Chartering andOperating." We think this Is an aspect of the offshoredevelopment which covers the broad spectrum and involves verydiverse Interests: government, large oil companies, largeinternational supply and service companies, and many smallerlocal companies.We are very fortunate to have with us today threedistlngu Ished speakers who are exper lanced in these matters.First, Mr. Ashton R. O~Dwyer, Jr. Is fran New Orleans,Louisiana, a partner in the law firm of Lemle, Kelleher,Kolmeyer L Matthews. He ls a member of the Maritime LawAssociation of the United States, and a resident member of theAssociation of Average AdJusters of the United States.Second, Mr. Barrie Harper ls a Scot, born ln Glasgow andnow a resident of Aberdeen. He holds a Master's Degree inEconomics with First Class Distinction, a Law Degree franAberdeen University, and Is a chartered accountant. Moreover,he holds a diploma in Management Studies and ls a Fellow at theInstitute of Petroleum. Barrie started his own I aw andchartered accountancy firm, and he ls now a senior partner. Heacts as a f Inancial and legal consul tant to oil companies andoil service companies; Is a Senior Lecturer in Iaw and taxationat the Business Management School in Aberdeen. Finally, he lschairman and principal shareholder of a consortium of 14 servicecompani es.Th lrd, Mr. Richard Spel lacy ls a maJor sharehol der lnCrosbi e Of f shore Serv lees, L iml ted, which Is based I n St.John' s, Newfoundland. He was born ln the U.K., immigrated toAustralia in 1945, went to sea in 1959, obtained a Master' sCertlf Icate in 1968, and by 1968 he entered the offshorebusiness. He started his own business ln London In '1976, andthen opened Crosble Offshore In St. John's ln 1979.

Ashton O' Dwyer wl I I speak f lrst.ASHTON O' DWYER: Thank you very much, John. I wish tobegin my presentation today with a disclaimer. My law f irm inNew Or leans represents the Interests of Ocean Dr I I I I ng andExp I orat 1 on Company In connection w 1 th the unf ortunatecatastrophe tnvolv lng the rig Qgfifig IIIMIgIM.. As you know, It isa very serious matter Involving multiple I ives lost. It islltigatlon presently, therefore it Is fitting for me to statethat any s imi I ar I ty between that case and anything that we

discuss today Is purely coincidental .

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I also w Jsh to dfscl a Jm anY exPertf se In Canadfabecause that ils not mY bai I Jrick and I do not hold myself outbe an expert Jn that field. out to

In order to I I lustrate a tyPical drl I ling operationGul f, I thought it woul d be helpful to enumerate forvarious service companies involved ln drl I I fng an of I rel IJn servicing the drl I I Jng rig.

The f Jrst step for o«PurPoses ls the selection ofdrll I lng site. The location, on rhfch thedrilled, Js selected by the ol I company alsoIndustry as the operating ~pany! based upon g~fef Istudies, sasetimes made years ln advance of movfnglocation, as rel I as economic and legal fact~ The oJImust consider the Price of oJ I, the pol ltlcal cl lmate incountry where one wishes to drll I, and the tax cons+��drf fling and producing in a particular locale. The oil QQ@penwil I necessarilY obtain leases granting lt the right tofor oil and gas, and lt must contract with a dr J I I fngand the other necessary service companies available to workthe feased area. The of I company must canply with focal as ref Ias national law, but in the Gul f of Itlexfco, a unique body aflaw, whJch has evolved fram the of fshore oil industry, isknown to those advlsfng the companies.

The drf I I lng company provides the equi pment, tools, endcrew necessary to dr I I I the hole at the selected site.sefectfng the drl I I ing contractor, the operatfng company eeysol felt bids for the rork to be done and select the driller onthe basis of those bJds. Since January of this year, as the rigcount in Louisiana has dropped significantly, oil companies aresaaetimes requesting bids on an entire pacikage, thus placfng theonus on the drl I ler to contract w fth the serv ice companies.Prev I ous I y, serv f ce compan I es had been h f red by the ol Icompa n I es.

Since the f irst of the year, the rig count in Loufsfana hesdropped fran 501 to 312 as of June 11, 1982. Yes, 1962 fs beingtouted as "one for the record books."

Although the hiring of the "drfl ling unit," as the offshorerlgs are more prof ftably known, fs technical ly a time charter,the vessel Is simply another piece of equfpment furnished by thedrl I I fng contractor Jn order to umpfy with the provisions ofthe contract. You w I I I not see a document ent I tl ed "t feecharter" or "charter partyr or "operatfng agreement" when yoeana I yze the ref atI onsh I p between of I company and dr I I I legcontractor. You are, however, going to see a dri I I lng contractIn the schedule attached to the drfl I fng contract, whichthe var I ous pieces of equ I pment to be supp I I ed bycontractor, you r f I I see as an Jtem of equ f pment: one dr I I Ish Ip, or one seI f-elevating jack-up unit, or one semI-submersible drll I fng barge and its equipment, crew, etc ~

There are various types of offshore drf I ling unfts in theindustry today. These fnclude drli I sh Ips, submersible bargwijack-up barges, also known as se}f-elevating drilling unf». a"dsemi-submersfbles. In the Gulf, we mostly see jack-upsy or " +

e refer to as drii I barges, the faml liar DB's that you wii I see,s the identifying characteristic before the name of the vessel.'hase are to b4 distinguished fran fixed platforms, which arepermanently attached to the sub-sol I and seabed on the shelf orelsewhere. In the States, we cal I these platforms artificial,slands, and the unilue bodY of law that was applicable to themls found in the QIi&r&002109015L2I~&IIMI~+.The artl f icial islands have been judicial ly determined to!e extensions of states adjacent to the locales, even though thesrtif tclal islands maY be outside the territorial limits of thatstate. The state's boundaries are f ictional ized and extendedfor these arti f ic I a! Is I ands I ocated on the shel f.

There are various types of jack-ups, but two that you mayba fbi l iar with are the famous Bethlehem jack-ups, which aregeneral ly rectangular and have three legs with a hei I-portmounted forward, and the triangular jack-ups. Both of them havekey way slots or notches I n the I r stern end. Over that key-way,mounted on skids, is a huge derrick that can be positioned lnalmost any direction to drl I I the hole.pack-ups suItable for the shel low waters of the Gul f ofNexico, adjacent to the Coast of Louisiana, may not be sultab! e

the deep waters of the Atlantic Ocean off the Coast of NovaScotia. I understand, however, that there ls at least one jack-up off Sable Island. A typical rig for your deep waters would

semi-submersible, one which has pontoons or columns ~hichafford flotation to the rig. While the rig Is being transportedto the drilling site, the pontoons may be mnpty and the rigfloats above the water. Although such rigs may be self-propelled, they are usually towed to the drilling site by atowing company which may be hired by either the oll company orthe drilling contractor -- there Is no hard and fast rule there.

Once the rlgs reach location, the pontoons or columns arepartially filled with water so that the rig remains partiallyafloat but not actually touching the seabed � essentially in astate of suspended animation. In order to position such a rigcorrectly, and to keep it ln position during the operation,anchor handling vessels and crews must also be hired either bythe oil company or the dril i lng contractor. After the rig hasbeen towed to the site, the pontoons are f looded and the anchorsset; the dr I I I ing company is beg innl ng to set up dr I I I ingoperations.So we have already identified several actors, the oii~pany, the drilling contractor, the tower, and the anchorhandlers. These are just a few of the actors directly involvedmobillz lng and getting an offshore drilling unit to itslocation.One issue, which has been much litigated in the courts ofEngland, and the United States is whether and under whatcircumstances a drilling rig might constitute a vessel, thus~n«rring Admiralty jurisdiction upon claims involving suchAlthough the ultimate decision as to whether astructure constitutes a vessel rests upon the facts of eachU.S. Jurisprudence Is consistent in holding drilling rigs

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capab I e of f I oatlng on water as vessels; and thus Inc{ dentsinvolving thm fa I I w i thin the jur 1 sd let i on of the Admiraltycourts.

The leadIng case ln the United States on this question IsQf~{}cy Ce Y A{}1}j.S{}D, 266 F.2d 769, out of the 5th Circuit.it was found that a jack-up rig was a specfal purpose structurewhich, nonetheless, qualified as a vessel. Consequently, aroustabout who was permanently assigned to the Jack-up as amember of the crew was a seaman under the J{}DI}~+gf., and thusentitled to maintenance and cure as well as to pecuniary damagesfor the negligence of his employer and the unseaworthlness ofthe vessel. In accord, there is another 5th Circuit casewherein the court affirmed several earl ler decisions,speclf Ically holding that a semi-submersible was a vessel forpurposes of jurisdiction under the J{}lm Qgf and the generalmaritime Iaw.

do not know whether you are familiar with the courtsystem in the United States, but most Admiralty matters areI ltlgated in the Federal Courts. Each State Is divided intoDistricts. The Federal Court ls the court of originaljurisdiction ln Admiralty matters. The Appellate Court, or theCourt of Appeals, ls classif led by Circuit number s. The 5th lsformali y compr I sed of the States of Texas, Lou 1 si ana,MIsslssl ppl, Alabama, and Florida. It has been the leader Inthe United States in Admiralty matters Involving the offshoreol I industry. It recently, however, underwent a spl It becausethe various other legal matters which it had to decl de wereconsuming so much of its docket that the Judges were overworked.It now is spl it into two Circuits, the 5th and the 11th, withTaxes and Louisiana remaIning in the 5th Circuit.

I thought that you might be interested in a few cases thatI feei are a little bizarre, but are, nonetheless, on the books.Under our system, they are precedent, at least if you areiltlgating in the particular district or circuit court tronwhich they mnerged.

A recent Texas District Court case, which is now on Appealto the 5th Circuit, ls QacgaL lI Baic{}loi}m Bf}llQQiQc5~-,514 F. Supp. 1199, decided by Judge Fisher, of the United StatesDistrict Court for the Eastern District of Texas. He held thata helicopter equipped with pontoons was a vessel with in themeaning of the J{}D{im 5gf and general maritime law, so that theservices of the pilot who was killed in a crash over water couldsue the helicopter company under the J{}1}f}a Mf and generalmaritime law.

Judge Fisher reasoned that a helicopter, which «asconstructed for the purpose of transporting men and materialsacross the navigable waters of the Gulf of Mexico, spec lf Ica I lydesigned for take-offs, landings, and movement on water, «as avessel. He further reasoned that the helicopter ccmpany engagedalmost exclusively in the business of transporting personnel toand fran offshore platforms and was therefore engaged In atraditional maritime activity � the helicopter, being thefunctional equivalent of a crew boat.

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ln accord w 1th Judge F I sher's decl sion Is another 5thCircuit case, which held that a hei icopter being used to ferrypersonnel and equipment to and f rem an offshore rig bore asignl f leant relationship to a traditional maritime activity,therefore, cl alms for damages ar ising out of a crash at seawhile the helicopter was being used to ferry supplies andpersonnel to and free drilling structures offshore fell withinthe Jurisdiction of the Admiralty.You should know that in the United States, some connectionwith "traditional maritime activity" ls necessary to theconferring of Admiralty Jurisdiction as is the necessity thatthe tort actually occur upon navigable waters. As a result, wehave a t«o-pronged prerequisite to Admiralty Jurisdiction.ln EIcecuil~II dpi ihla1lgo LJIc ~ x MhfLCify. wf~~lafIILQblg, 1973 AMC 1<1972!, for instance, claims arising out of thecrash of a cocnmerclal alri incr on Lake Erie, navigable waters,were held to fal I outside Admiralty Jurisdiction since neitherthe flight nor the crash bore a substantial relationship withtraditional maritime actlv Ity, even though occurring uponnavigable waters.1 stated thai I disagreed with the decIsions holdIng that ahelicopter with pontoons is a vessel. And, to tell a war story,which most lawyers have a tot of fun doing, particularly whenyou' ve won, I wll I tel I one.I recently successfully tried a case for a geophysicalcompany, and this was a non-Jury case decided by a FederalDistrict Judge in New Orleans. He held that a marsh buggy,which is a track amphibian that looks much like a tank and Isconstructed and designed to float on «ater and actually does so,was not a vessel. Therefore, its driver was not a seasan, eventhough the marsh buggy had the capability of navigating smalllakes, canals, and streams.That case was Pacrlfi Ic JtaaiatQ GQQQhYRlMLGQRIMII~bSRLkCa, 528 F. Supp. 227. Those are the people that go throughthe marshes and offshore with geophysical equipment, settingcharges, dynamiting, and then taking surveys.How does this relate to what you people do and what yourlaw Isf I wi I I remind you of my disclaimer, but 1 am going tocite a learned author lty on Canadian Admiralty Iaw, Mr. Wy I leSpicer, who has written In his f ine article "Sane Admiralty LawIssues ln Canadian Offshore Oil and Gas Development," which wasprinted In Llgiidlg>aCiilIII 884 ~IIC~L. Let >~ly. InFebruary of 1982. In that artlcl e, Mr. Spl cer warned hisreaders that Canadian Jur Isprudence on the subJect lsinconclusive, even though U.S. and Engi ish law appears to beconclusive. Nevertheless, In a footnote to his article, Wyl iepoints to a recent Canadian decl sion, Ih~u~ ~lJLL~G5hjgIIIIjliilgg aOII P~IIggg ~ <lalfyII unrePorted, A-638-79>,wherein the Federal Court of Appeal reviewed many decisions ofthe Canadian courts, and concluded that a barge f ltted with aheavy crane, even though not capable of self-propulsion, was aship. Mr. Splcer viewed this decision as indicative that thecourts are moving toward the conclusion that a semI-submersiblerig is indeed a ship under Canadian law.

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Why worry about al I this2 What relevance does it have tooffshore supply and service, and assigning charter partfesT Theeffects of drll ling rlgs being classified as vessels are many,at least in the United States. These reasons Include theJurisdictional question and appl lcab le law, the rmnedles wh fchare aval labl e to the parties as a result of these units beingcl assi f led as vessels, and fssues as respects I Imitations ofliabf lity.

You know that ln the United States, re have a statutecal led the Jgluf~t which permits a se«nan «nployed to sue his«nployer for d«nages In Admiralty and have his case tried beforea Jury. The word "damages" is signff leant because, unlike manyJurisdictions, a Jgffas 8& se«aeneas remedy against hfs «nployerls not I fmited to compensation benef Its according to a f fxedschedule. In fact, his recovery Is whatever the jury sees fitto gfve him based upon the evfdence that it has heard. Let metell you that scmetfmes they give him the sun, the moon, and thestars. Reasonable men scmetimes wonder how these juries reachsuch unreasonable results.

If one working aboard an offshore drllllng unit Is found tobe a JIWIaa~i se«nan, and If this Individual Is Injured due tonegligence on the pert of his employer, or the unseaworth Inessof the vessel, then he has potential, at least, for recovering avery, very high award.

U.S. Iaw Is to the effect that a determination of whetherthe various serv Ice personnel may be classified as semenfalling within the perlmeters of the JfflfaS hei and the generalmaritime law depends l urge l y upon thel r degree of attachmentwfth vessels and the particular functions wh fch they perform.lf one ls attached to a rig fn more than a transftory way, andIf his or her «np I oyment contr lbutes to the r lg ~ s mlsslon,operation, or welfare, then he or she may be subj'ect to theprotection of the Admiralty courts.

Sane of you might be Interested ln the status of theproposed «nendment to the Jgfiag ACE Invol ving foreign se«nen.This was not sanethfng that I had prepared for you today, and ithas been several months since I last looked at the proposed«nendment wh ich was then f n Nr. B I agg I ' s Carnal t teeWashington, under review. As I recal I, It wll I r«nave fran theJanoi~ci Jurisdfctlon claims by se«nen and their survivors Imthe case of death, lf the se«nen are foreign nationals, Injuredor ki I led ln foreign waters while working for foreignsubsidiaries of companies owned by a U.S. parent. I urge anyof you who have a particular Interest In the status of thislegislation to either talk to me after the presentation today orto write Wr, Blaggf In Washington.

Now let's talk about I 'Im'ftatlon for Just a minent. Is mvessel a vessel for al I purposes2 Wel I, not necessar I ty.Yesterday, I I earned that a Judge In Houston, who I s veryscholarly and who wrote a very erudite opinion, did what I wouldcal I re-Invent the wheel In holding that a semi-submersible Is mvessel for purposes of the owners Invoking the benef its of thenLjjnj.>ilQ~f&lahlljiIL ~. Had someone asked me I ast week.

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whether I thought there was any question about that, I roul dhave unhesitantly ansrered no. However, this Judge rent Into avery long discourse on why it ras. This ras Judge O' Connor ofthe United States District Court, the Southern District of Texas� a well respected Jurist.The LliliailQD ~ LJIIIll~ 5c;i ln the Unl ted Statesapplies to "every description of water craft or other artificialcontr I vance used or capabl e of be ing used as a means oftransportation on water." That is a pretty broad def inltlon.Judge O' Connor in jIIyJ5II+fi~f XIIQ~QlfllniMf SEDGQ~QQ ~ i 05QKSQC Qf iIIQ SQhll~cllllog gGRDFDQL~ -- which was the rigover the now Infamous IXTOC g1 wel I off the Coast of Mexico,rhich blew out in '1979 � decided that the semi was Indeed avessel for the purposes of the owners' invoking the provisionsof the LlmliciilQILhgg. In doing so, the Judge did not hint whatmight occur when the owners' right to I imitation is determlned-- that being reserved for another day.It might also interest you to knur that the lQ5KIIIIilQIIkLGQIIIIIMlQD Qa J.lmiiailgo Qf i.lIIIIll~ MC ~C].ilII Gliilmm.signed In London in 1976, may preclude Canadians' worrying aboutI imitation I f that particular Convention ls adopted by Canada.Again, I woul d urge you to consult a learned Canadian Jurist forhcw that might Impact your operation.I would always advise those who ara negotiating and writingcontracts to include in the contract a provision which stateswards to the effect of "it ls hereby understood and agreed thatthe right to limitation of I labi I ity shall not be affected." Ican quote one that I have used and seen in other places:

Nothing contained in this agreement shall be construedor held to deprive the owner of any right to claimlimitation of liability provided by any applicablelar, statute, or convention.

I shall nor turn to the issue of who are the variousserv ice personnel, who contracts for their services, and hor dothey get to and fran the Job sltef As a general rule, the oilcaspany contracts with al I fhe service companies except t' hemarine crew of the drilling rig and the catering crew, both ofwhich are usua I ly h I red by the drl I ling contractor. There aresane exceptions to this rule, however. Besides the towingccmpany and the anchor handler, transportation and supplyccipanles must be hired. These include helicopters, crew boats,supply vessels, and standby vessels. I even understand that youhave iceberg watch vessels here.The ol I company generally contracts r 1th those servicecaspanies engaged in the more technical or speciali2:edoperations conducted on the rigs. These include casing,cementlng, testing, logging, geologtcaI services, and personnel.At the commencement of operation, the drilling crew lsresponsible for drilling the surface holes.I thought that it m'lght be interesting for you to gothrough a little bit about a drilling operation, This task ls

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accxmpt I shed by running e str ing of dr I I I pipe, one Jointscrewed tnto the other, with a dr I I I bit attached right downInto the seabed. The hole ls then dr I I led to speclf led depth.Once the dri I t pipe ts renoved frcm the hole, the casing crewmoves ln. You have a hole ln the ground and then you time ltwith easing. This ls stml I er to dr I I I pipe, but larger lndimeter. It Is pl aced In the hole to permanently I lne thehole. Behind that, a cementing crew comes in and f I I is thespace between the hole and the casing with cement.

Itormatly, Independent contractors are employed to performboth the casing and cementlng functtons. However, the dr II lingcrew is normally avaiiabie to assist ln such operations. Oncethe casing ls cemented in place, drilling operations areresumed. However, additional casing operations may be necessaryas the drilling crew reaches greater depths. While the hole Isbeing drilled, certain testing or logging crews and equtpmmntmay be necessary to monitor the various types of formationsbeing passed through and to determine whether oil and gas e Ightbe present.

First, you may f Ind mud logging personnel. The mud loggerls to monitor down-hole operations, examine cuttings fn +hmformations made by the drill bit and determine whether of Igas ls present.

ln addition to mud logging, there mey be electrlcai loggingequipment and personnel on the rig. In electrlcai logg lngoperations, various logging tools are lowered Into the hole omstrings and tests are conducted which al low electrical loggingtechnicians to measure the properties of the formation mm thehole Is being drilled. Also present at this stage of thaoperation Is a mud engineer, or mud man, whose duty it Is toregulate the properties of the drl I I lng f iuld In the hole,mostly or usual ly an ol I base product. The properties of thesefluids may vary, depending upon the formations and the stages ofdrl I ling. It is the Job of the mud men to insure that the aidhas the necessary properties during each phase of the dr i I I lngoperation. The mud man often works pursuant to a separatecontract, with the contractor prov ldlng the drl I I lng f I ul dproducts and engineering to the ol I cempany.

lt may interest you to know that our wel I has not yetreached preduction I but imagine a hole ln the ground w 1th acavern at the bottce of the hole with oil and gas under greatpressure seeking to escape. We have dev lees on oi I we I I m,cal led bl m-out prevent«rs, high dr I I I s, and Chr I stmas Mmmmthat keep ol I and gas fran coming out of the top of the hole.

Itud ~ parti cu I art y In a workover operation, Is a I so very ~very Important. You can Imagine e tube several thousand feetlong, or deep. with pressure being exerted at the bottom of thetube or hole by el I of this mud or fluid. It Is this weightmaterial, or mud, that often keeps the ol I and gas fran Justoaatng straight through to ihe surface.

Once the hole has been drll led to Its specified dept.h andproduction Is desired, personnel are necessary to complete thmwet I ~ This Includes gravel packing and perforating into the pay

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zone, Perforating Is Just what it sounds I ike. You put acharge on the end of a tool and you explode it and It puncheslittle holes in the pipe down there in the bottom of the hole,and your production material then enters your string, Thisoperation is normally conducted by special Ists pursuant tocontracts entered with the ol I company. At this time, one wouldalso find down-hole production testing personnel present on therig whose Job it Is to measure the flow of oil and gas comingout of the well.Also available at various stages of the operation aresurveyors, weather forecasters, and dlv Ing personnel. Weatherforecasting services may be necessary to offshore rigs in areaswhere peculiar weather conditions may arise. In operations inthe Gulf of Mexico, such weather forecasting services mightmonitor atmospheric conditions and w Ind and wave actions. Uphere, it might require Iceberg watchers.Oivlng personnel may be hired to make any seabed surveys orbottan inspections, both before and after the rig moves on'I ocat I on.As you know, the Northwest Atlantic is famous for its shipwrecks. I am sure that the charts that are used by theccmpanles out here are covered w'1th the locations of known wrecksites. I am equal ly sure that there are many other sites thatere unknown.Before you move a 25 to 50 mll lion dol tar Jack-up rig onlocation, you want to make sure that you are not going to set Iton top of one of these ancient wrecks. So, you have surveyparties and divers who perform bottom inspections to make surethe area Is clean. This gives an overal I view. Let us now movebackwards and begin to speak in more detail of speclf lccontracts.Once lt has been determined what service personnel arenecessary for each phase of operations, the oi I company and/orsubcontractors must enter into separate service contracts withvarious support companies. A prel lml nary consideration lndrafting al I such contracts 1 s a determination of the lawappl i cab I e to the dr I I I ing operations In general and to anycontracts which may be entered Into. This Includes determiningwhat law Is appl I cable, be It national law, the law of aparticular country, or the Iaw of a certain state within thecountry. The terms of the contract must then be drawn so thatthey comply with applicable law.l.aws which should be analyzed ln order to determine thenecessary contractual prov Islons may include laws relating toequal mnployment opportunities, workmen's compensation benefits,Indemnity agreenents, pollution control, and limitations on thenumber of expatriate personnel and/or contractors, lf theoperations are to take place ln a foreign country.After the research has been completed on the lawsapplicable to each contract, the terms of the contract must bedrafted. Generally, each contract serves to identify theparties Involved and the service and equipment to be prov Ided byeach. It also sets forth the obligations and responslbll'ities

of the respective parties and ldentlf les the term or length ofthe contract.

The parties to the contract, we have seen, wl I I general lybe the oil company and the sub-contracting service personnel «w,ln the case of the catering or towage contracts, the dr i I lingcontractor and the serv ice personnel . The personnel ~ equi pmmntand services which are to be provided may be enmneratedcontract I tse I f, or they may be I dent I f I ed in attachments,separate agreements, or even oral agreements which mod l fy thewritten contract. The dri I I ing contract, for example, general I yprovides that a number of special ized crews wll I be furnished toman and operate the dri I ling vessels, as wel I as what equipmentthe dri I ler Is to furnish, for example, the vessel, the dr~storks, rotary tabl e, air compressors, pumps, mud tanks, cranes,drl I I col lars, drt I I pipes, blow-out preventers, etc. Al I ofthese Items are general iy specif ical ly enumerated, ' so that ifyou get to location, and you begin a drl I I ing operation andsomething Is missing, you know who is I labia.

Just to give you an example of the detail that has gon«winto prepar I ng a dr I I I ing contract, It even goes down tnscmething that I consider to be an expendab I e Iten, sl i ps.These are the things that hold the pipes up to keep lt fr«smfal I ing down into the hole as the next stand, or Joint, of pip«als being moved frcm the pipe rack or racking fingers to b«sscrewed on to the one end of the hole. The sl lps keep the lanJoint that you have screwed to the next to the last Joint frommfal I ing right down Into the bottom of the hole. That Is anexpendlble item and they are not very expensive. Yet, here 1+ls, item number 39 In this dr I I I ing contract. That's prettYspecif icl

The general obligations and responsibilities of each of th«aparties are normally laid out In a master service contract «+-agreement between the ol I ccmpany and the serv ice compani esMaster service contracts normal ly extend for a specified periodof time, June I, 1982 to June I, 1985, and are renewable at thaoption of the parties. They are usually not turnkey gyp«econtracts, terminating upon completion of 8 speci f led task. Thecontractor's ob I lgations, as opposed to the company'aobligations, are numerous and are detal led ln several provfslonawhich are common to near I y a I I master serv ice contractsFirstly, the contr actor normal ly agrees to comply with any andai I appt lcable law, and certain attachments may be made to thmmaster agreement which «ertlfy the contractor's ccmpliance wl+happlicable I egal provisions.

Secondly, the contractor normally warrants to perform thwswork in a safe, proper and workmanlike manner, and to prov Idss

F rthmater I el and equi pment of good qua I I ty f ree of d f mett e s.

ur er, each master service mntract normal I y contains r I si«allocation, indemnity, hold-harmless, or insuring clauses, wh Ich

thdetal I the obl igatfons of the contractor and/or the compan

elr underwriters, to indemnify the other for lnJury to, de>riby an

of, and/or loss of or damage to equipment.

indemnity agreements in master 'serv ice contracts havespawned a great deal of litigation In the United States, and IfI were a betting man I would bet that it Is going to provide thelawyers In the audience with a great deal of business. Syindemnity agreements, l mean those agreements by the terms ofwhich one party agrees to Indemnl fy the other even for theconsequences of that other party's own negligence.

In the United States, although tal Ismanlc words are notrequired, the intention to Indemnify one, even for theconsequences of his own negligence, must be spelled out in clearand unmistakable terms In the contract. You cannot say:«Ashton O' Dwyer agrees to hold harmless, defend and IndemnifyJohn Murphy of and fran any and all llabll Ity arising out of theagreement between the parties." You must specif Ically say:«Ashton O~Dwyer agrees to hold harmless, defend and indemnify!ohn Murphy of and fran any and all liability arisIng out of thecontract between the parties, Including I labil Ity resulting franthe sole, Joint, or concurrent negligence of the parties andincluding particularly Mr. Murphy's negligence."Although one might f lnd disagreement In some corners, theidentification of Indemnitor v. Indemnitee Is generally afunction of the market place -- supply and demand. It waswidely held a few years ago when dri!ling contractors and rigswere in great demand, that the drlliers could Impose conditionsupon otl companies which you Just would not find In today' smarket. The Gulf Region has seen certain dr Ii lers go underrecently, a phenomenon which was previously unknown.

On the other hand, there have been those who challenged fheindemnitee's position, that is, the person who is beingindemnified, depending upon whose ox ls being gored, withcharges of violation of public policy or contract of adhesion.A contract of adhesion, as we cali It in the States, is one Inwhich there Is unequal bargaining power between the partIes,such that the party wielding the most power may force the lesspowerful party to accept certain contractual provisions thatinure solely to the benefit of the other party.

In determining the validity of the release fron negligenceclauses and towage cases, the Supreme Court of the United StatesIn Qg~M ~~OII g~il~gggK~, 1955 AMC 899�955!,whl ch I w I I I discuss I ater, hei d that such clauses wouldgenerally not be enforceable because they did not encourage thenegl i gent party to pay the pr Ice of his negl lgence. They lethim of f the hook. Because the clauses were often incorporatedinto a contract of adhesion, the argument often put forth byservice companies Is that they are not In a position to bargainwith large oi I companies and must general ly accept whateverterms the oi I company proposes,Thus, most indemnity agreements ln master service contractsdo favor the ol I companies. That is a fact of I ife, ladies andgentle«en. They also require the service companies to bear therIsk of most losses regardless of fault. Whether or not youcal I it negoti ated contracting between legal persons of equalbarga tnl ng power, the resul t is that the contractors usual iy

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bear the burden of fndemnifylng the oi I companies for personalinjury, death, or loss of or physical damage to property, whfchmay occur as a result of the contractor's operations, whether ornot such damage Is occasioned by the faul t or neglect of theIndemnitee.

I do not want to create the Impression that I am paintfng apicture of an ot I company wearing a black hat. As we ai I know,they do not always wear black hats. Many of us depend upon theol I caspanles for our very I ivei ihood. Where woul d we bewithout theml ln fafrness, there are � and I wil I dfscuss thfsa bft later � other forms of indemnity.

We know, for instance, that contracts of Indemnity aIndemnitee's obligations, can be insured. If your only exposureas a result of signing a contract with an indemnity prov isfon fmft is an fncrease fn your Insurance premium, then you can usethat insurance premium for setting your rates. You always wan4to reiain competitive, but certainly It Is something that cen bepassed on to your customer, and the custcmer in many cases lsthe oil companies.

Additionally, In fairness to the oil companies, you w Ilksee a lot of risk allocation In contracts. You take care otyour people, I w III take care of my people. You take cars ofthe above hole operation; If anything happens down hole, Itmy responsibility. There are various ways to spread the risksand I did not want anyone to get the mfs-Impression that I wasputting a black hat on anyone. I was Just stating econcxeicreality.

Legislation In Texas and Louisfana forbids oil companiesengaged In offshore drilling operations fran procuring Indswsnityagreements or agreements by which one seeks to escape thaconsequences of his own fault or neglect. Is this good forlawyers or bad for lawyersf Our statute was passed only lasTyear, and we are gleefully awaiting the opportunity to test ftsconstftutionality and its various provisfons In court.

The Texas statute pertains to property damage, as we! I aspersonal Injury and death, whereas the Louisiana sWmtutmprohibits such agreements only with regard to fhe I atter

forTherefore, you can stil I agree to indemnify people In Loufsfenm

property damage, but the statute on Its face prohibits f+with respect to personal injury and death. The practical Impartof these two statutes on contractual rel atlonsh f psindemnl f ication agremnents and dr I I I ing contracts, and relatedagreements has yet to be tested, as both are relatively recent.

to date.Neither has been subJected to any real Judicial interp t tfre A C81

Both statutes are slmf lar In language and In purpose mndthey both dec I ere genera I I y that I n damn i ty agreemen~s I mdr I I I ing and service contracts, which require Indemni f ice+ fcmf or I oases attr I butab I e to th e f au I t or neg I ect of 4hm

discourindemnitee, are nul I end vofd as against publ I I I Thc po cy. eg

scourage the wrongdoer fran taking steps to al I ev fate theconsequences of his negl igence, and they are the resul t ofnegotiations between people of unequal bargaining power.

358

Both acts are very broad ln that they apply not only todr I I I lng contracts, but to any agreements which have anythingwhatever to do with operations involving the drl I I lng of sol ld,I lquld, or gaseous minerals. Both of them are similar ln thatthey exempt lndemnl ty prov Is ions concerning bodl ly ln Jury anddeath due to radloactlv lty. There is a radioactive mater lal ondrilling rlgs; It is used down ln the hole, or used in theperformance of services to control a wild well, which ls one ofthe risks of the venture.The Texas statute also exempts indemnity provisionspertaining to property damage resulting from pollution, or framreservoir or underground damage. Thus, the maJor rationalebetween two Statutes ls the same, that Is, to make void, ascontrary to publ lc pol icy, any agreement which would require oneparty to Indemnify The other for losses occasioned by the soleor concurrent negl lgence of the indemnitee. I am reporting thisto you as a fact. I am not espousing one view or the other asgood or bad.The way cases have been decided recently, unless the typesof I labl I I ty or faults are spel led out ln the contracts, thecourts are not going to enforce the harsh provisions of theindemnitee against the indemnitor. Needless to say, theLouisiana 8giJ.-J.I!IIINIQjiy 5jIIiII~ was heavily lobbied for by theservice companies, not the oil canpanies.

The reason no lobbying effort in Louisiana was put forwardby the oil companies in this session of the legislature wasbecause the oil companies were more involved ln what we cali theCWEL legislation, which was recently defeated ln 'Louisiana.This was a proposal by Governor Treen to tax the oil industry.CWEL stood for Coastal Wetlands Environmental Levy. It boileddown to a tax on mineral resources. The oil companies came outIn force and defeated the measure. Next summer the oilcompanies may marshal their forces against the Louisiana ~~-jaIINNII jiy. Sia&ifi.It may be interesting to trace the history of indemnityprovisions In a towage contract setting. A landmark decision ls

cited prev lously, wherein the Supreme Court held thatrelease and hold-harmless clauses In towage contracts, whichreleased the towing company fran liability for negligence, wereinvalid and unenforceab I e as contrary to public policy. Thecourt thus applied to towage contracts what It had announced Isthe general rule Iong recognized by the courts, I.e., thatrelease from negligence clauses were invai ld and unenforceablefor two reasons: 1! negligence must be discouraged by makingthe wrongdoer pay damages; and 2! those in need of goods andservices must not be overreached by others who have the power todrive hard bargains. Thus, the Qjg~ Rule established in towagecontracts a rule similar to the effect of the Texas andLouisiana Anti-Indemnity Statutes.The Supreme Court has been steadfast ln upholding the QjSmoRule. The Fifth Circuit has, however, held the QjzSg Ruleinvalid where the second prong of the QjmSg rationale wasabsent, I. e., where the indemnitee was not in a position to

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exert undue pressure on the lndemni tor dur I ng contractnegotlatians. If they are not of unequal bargaining power, theCourt w I I I enforce the contract. The Supreme Court, however~reversed the finding of the Fifth Circuit's rul fng as befng f>direct contradiction to its holding In Bldg.

As a result of the f frm stance taken by the Supreme Court,the fndustry has developed other means to provide for releasefran negl fgence or indemni f I cat ion of the tower in tow~contracts. The most popular method is to draft a contract whfMrequires the tower to be named as additional assured in the hul Iand P d I pal lcles issued to taw; and that the underwriters crfthe taw waive subrogation against the tug, Its owner/Ioperator. In the States, we cal I this naming and waIving Thelegal lty of such an arrangement has been upheld by the FifeC I rcu I t.

In the Gulf of Mexico, the I fabl I fty form most often seemin Insurance contracts is Form SP23 revised I/56, The buf I f~most often seen is the American institute Hui I Clauses Forfm>June 2, 1977. Additional assurances and wel vers of subrogationare added to or deleted f rem the pol lcles by endorsement. Therequirement that owners of service vessels such as tugs, supplYboats, end other encl I lary craft should be enroi led in P IL Iclubs Is pract1 ca I ly unheard of In the Gul f reg lan, although Iunderstand that lt is common in this part of the world. InP jL I club context, addi t lone I assurances and wal vers nfsubrogation are, of course, dealt with ln the appl feeble terlmmof entry or in club circulers, whfch general ly requIre mutua IIndemnf f fcatlon agreements, by which the contractor takes careof his people and the property, and the company takes care crtfts people and property.

I recently had the pleasure of winning a case ln whichrepresented e supp I y boat company. The anchor of the supp' yboat allegedly pul led up a pipel lne running between platforms f nthe Gulf. We were hired by a drillfng contractor to supplydrilling rig owned by Union Qfl Company of California and ~echarter party between the driller and my client, prov Ided thestUnion would be named and waived In the P 4 I policy on the tuQ-As soon as we were sued by the owner of the pipeline, Union, whowas also sued, called upon my client to agree to Indemnify It I naccordance with the terms of the policy in wh lch It hed beesmnamed as an additional assured. This was the P IL I polfcy amthe supply boat.

I denied that my cl fent pulled up the pfpel fne. 'keI Itfgated, and the two defendants cross-cl afmed against eac:hother. The court agreed that The pfpel lne owner did not bearhfs burden of proving that our anchor In fact damaged th tmpipe I inc. The F I f th Circuit Court of Appeals af f I rmed the0fstrlct Court opinion but remanded the case to the D fstrf~Court for a determination of whether or not, notwithstanding tfaevictory, I awed attorney fees and costs to the lawyer hfred ByUnion. That case Is under submission right now.

The position that I took Is that the P 4 I pol fey,particularly the SP23 form, insures one "as owner as the ves~I

360

naned herein." My position Is thai, first of al I, my client hadno I I abl I ity as owner of the vessel and therefore there Isnothing for which to lndemni fy Union. The claIms made by thepipeline owner against Union included fal I lng to warn the vesselowner of the presence of a submerged p I pal lne, permitting thesupply boat to anchor In plain view of the people who wereworking on the rig. Moreover, Union felled to Instal I a mooringbuoy for the supply boat at the rig location which would haveal lev lated the necessity for dropping anchor. I submit to youthat this Is a claim of I labl I ity, other than as vessel owner,and one which my cl lent has no responslbi I ity for.In the ri sk ai location scenar lo I would refer you toMichael Summersk1 I I 's book, Qjj Bigs Lou IIEIUOSIICNOgi. whichls a very learned treatise on the subject. In his book, Mr.Summerski I I notes, for example, that In the case of a blow-out,unless the terms of the contract prov lde otherwise, the riskfalls upon the oi I company because of the money Invoived. So vehave seen three ways to Indemnl fy: I ! spec I f I c indemnityagreements, 2! Insurance prov ls ions, and f lnal I y, 3!a I locat'ion of r I sk prov I slons. Those shou 1 d be consl dered bydratters and reviewers of contracts.The last problem that we will talk about Involvesinterpreting the contracts and what law we use to Interpretthos. The resolution of the indemnity question often turns notonly on the language in the contract but also on the typedcontract ln question. The applicability of one law over that ofanother. Courts have generally held, except In uniquecircumstances, that the validity of indemnity clauses inmaritime contracts is to be governed by maritime law. Undermaritime Iaw, indemnity provisions are generally upheld asvalid. If this is the case, then indemnity provisions Inmaritime contracts may be upheld notwithstanding the Texas andLouisiana Anti-Indemnity Statutes provided that ~ma was foundto be Inapplicable. The question Is, then, what constitutes amarltlme contractySeveral contracts relating to offshore drilling operationshave been found to be maritime. In IL:ISSggbij.DQQial %OK~jl!II gap ~ ~+] jf! I!L]+/I!g ~Cgn, "Mr. Char I ie," Bdril ling contract governing dril I lng operations ln the Gulf, wasfound to be a maritime contract, and thus governed by marltImelaw. A contract to furnish, man, and maintain the vessel to beused in serv Icing oil wells was similarly found to be a maritimecontract. Thus, admiralty law governs where It is In conflictwith state statutes. However, the Supreme Court has held whilemaritime Iav governed maritime insurance contracts generally,state Iaw would govern interpretation and validity of thosecontracts In the absence of any contrary Federal law. This, ofcourse, Is confusing. Those who draft contracts In the offshoreoil industry should know that parties to contract are free,within certain limits, to choose their own governing law andhave the same enforced by a court, prov Ided either the partiesor the contract has some connection with the forum state.Moreover, the application of the stipulated lav should notviolate strong policy considerations.

L lke the Federal courts, Louisiana state courts havelikewise recognized that the stipulation of applicable I~should govern the interpretation of a contract, absent strongpolicy considerations.

What other obligations should those advising servicecompanies be aware of 7 Workmen's Canpensation and Empl oyer~ sL I abl I lty Insurance prov is I ons are two ob I igatlonm.Camprehenslve general I iabi I lty Insurance provisions, includingInsurance covering contractual I I abi I ity for the obl lgatlomsassumed ln the contract, are important as we i i. Camprehensl vmautomobile I labii Ity insurance, hull and machInery Insurancm,protection and indemnity Insurance, aircraft I labil layInsurance, all must be considered. Generally, the Insuramcmrequirements are laid out In attachment to the master servicecontroct, which requires delivery of certificates. Contractorshave the obligation of acqu I ring and maintaining necessarylicensing and permits. Assignment clauses, arbitration clauses,contractor's obligation clauses must ail be consIdered. Them,it can be plainly seen that the development of any offshore of 1ol gas wel I entai ls the services of numerous ccmpanlas.

The servIce companies are general ly responsible directly tothe oi I caepanies, and are general ly responsible for seeing 4omaster serv ice contracts. The types of services which must bmprav ided, and the personnel and equipment necessary to providesuch services, depend upon the expertise of the serv fce aaepm~and the stage of the operation, In general. Although most of umwould prefer not to admit lt, although rates may be negotlabl athe terms of the master service contract which service companiesare cal led upon by ol I companies to sign are not general Iynegotiable. As the insurance manager of one of my f irwi~ mcl lents told me, "If you' ve seen one, you seen thee ai I." I hopmthat this presentation has I I lustrated some of the bas i cresponslb I I I tIes and ob I igat tons of the respective partlet.Thank you.

8ARRIE HARPER: I am going to try and tel I you sane of +heaspects to look at ln the oil related contracts, which you mightpay same attention to if you are advising cl lents. I think th~you saw fran «hat Ashton said this morning that unless you keen>what the terminology is about, you are dead. I would strangl yadvise yau to get a glossary af terms of the ol I industry if ~do not already have a copy. You have got to know what you aretalking about. To that end, get information frcm ol I campanfea'publ lclty departments and fran the oi I companies thmnsel ves.

I recciend Srl tish Petrol eum as being very hei pf ul.understand now how they are set up here, because we have IIedsame deal ing with then in St. John' s, Newfoundland.

I strongly advocate that you know the basics as, firstlyyou must be able to advise your cl ients property and you moatknow the terminology. Secondly, the ol I campany lawyers may 9m%exasperated trying to explain the terms to you and may try andtake advantage of you.

In my experience, the major ity of the ol I canpanles areconservative. Therefore, they prefer to try and use tried andtested equi pment and supp I I es rather then new ones wheresomething may go wrong. They are prepared to pay more money forscmethtng that they know is going to work wel I. Therefore, ageneral out I y lng know I edge of how the Industry works isessential If your client Is trying to pursuade oi I companies touse his product rather than the tried and tested ones.On the obverse sIde, however, oil caspanies have a pol icyof encouraging local Industry. They want to appear to befriendly ln the local area, particularly on the service side.if you can demonstrate a certain basic knowledge on the serviceside, then fran an oil company 's point of view your stock isgoing to rIse and your client's stock Is going to rise. In thenortheast of Scotland, for example, same Iaw firms have beencaspietely bypassed by the oil industry, as these firms havemade no attempt whatsoever to understand the industry. To thisend, If you do get a chance to visit oi I platforms and supportvessels, I think you should do so. I think there fs nothinglike actual ly going out there to see lt. In the North Sea, wedo not normally have breaking vessels. We have three types ofvessels. FIrstly, supply vessels. These deliver suppliesranging fran bulk quantities of food and rater for personnel' tomud and cement for drilling, which are essential to the ongoingoperations on platforms. To cope with the dally demand for abroad range of vital serv lees, offshore supply vessels commutebetween the ports and the rlgs.The main requIrement of a supply vessel ls a powerful bowor stern thrust and varIable pitched propellers which ensure ahigh degree of maneuverability when the vessel gets alongsidethe platform. Normal supply vessels are roughly up to 260 feetlong with a cargo-carrying capacity of about 1,400 tons on cleardeck areas measuring at least 135 feet by 35 feet. That isabout a carry lng capac I ty of 9,000 to 12,000 cubic f eef'.Supplies are usually in special containers, and, at the moment,we are Just using single containers. I have visions ofmultlples of six going alongside of the rlgs. They aretransferred to the Installation by the platform's crane. Someof the more versatile vessels are also equipped for towing andanchor handl Ing operations to broaden the scope of theirfunctions when ln an offshore location. Secondly, we usestandby safety vessels. These are 24 hours a day, 7 days aweek, stand-by safety vessels. They circle the explorationr lgs, the platform or groups of platforms. These special 1stvessel s prov I de emergency rescue support In the event of anevacuation of fshore, and fast recovery should a person fal Ioverboard. The vessels ln our case, that~s fras Aberdeen andI.erwick, are custan converted trailers, which were selected fortheir known abi I lty to operate even In the worst' of North Seaweather conditions. They are out there al I the time. Al I mustcarry one or more rescue craft capable of being launched inseconds. The vessel s are subJect to Department of Trade andIndustry regulations. They must be capable of accommodating on

363

a short-term basis al I personnel stationed on the pf atf~-They are also equipped to give f frst aid to rescued personnel-

Thfrdly, and caning In Just now, are spacfal fst supportvessels, mu I ti-f unct I one I serv ice vessels � MSY 's. They ce"per form a broad range of tasks, inci uding div ing supportunderwater construction and ma1ntenance, and comprehensiveenergency support fn such situations as f Ire, b Iow~temergency evacuation. Seaforth Maritime, for example, a ~pafvybased ln Aberdeen, Is having one constructed that can take »xwinged afrcraft I ike an aircraft carrier.

These are the main types of vessel s that we usescsnetfmes they are capable of us f ng remote control vehlcl eswhich operate instead of dIvers. We are now seeing m bigtoward renote controll ed veh I c I es. These are J Msttelevision cameras. You have to arrange that your pl lot onboat and the pilot f lying the RCV know what they are dofng-fact there Is a shortage of these RCV's In the world.then come free San Diego, Cal Ifornla.

To give you some sort of f fgures as to how these vessefsare used, and I' ve got clearance fran one of the umpaniessay so, In one of Shel I ~s f felds alone, we have had 50 vesselsoperating at once. We had more than 22,000 air movanents. Toplace this In context, this fs only 4,000 movmnents tees thenthe average f I lght movements ln Heathrow during one month- Nehad 2,623 people moved fn the f irst week of last month, end ee«npfoyed a fleet of 15 helicopters, 5 fixed wing aircraft and 10supply handl lng boats. The money involved In the one f lef d mtthe mcment ls at least 3.6 bi I lion pounds. That wl I I give Y++sane Idea of what you are gofng Into, ff off is discovered fnyour of fshore.

The next problem is what do you do, or how does your cl ferrtget the f Irst contract? In these c I rcumstances, I advocetecaution. I have been in situations slmi lar to your own, where elocal entrepreneur has been given a chance at his f Irst contr metwith a major of I company, and you are to advise him legal fy-your Client usual fy comes bounding Into your office, without anappointment, and says, throwing down a draft on your desk, "Ilhatdo you think of that?" Hav lng gl anced at the main cl muses,suggest that he refuse to have anything to do with the contre'ln Its present form. Two things might then happen. Ffr stwmight Iwamdfatefy lose a cl lent. And secondly, and hopeful fy'rhe might ask why. If that happens, then you have to explain ~eslgnlf fcance of certain terms and conditions.

As Ashton O' Dwyer said this morning, as a general ruile,most oil company contracts, when they are original I y drmfted,are In the oil company's benef it. I think the reason for thatIs fairly obvfousf first, the of I company pays its In-houselawyer or legal consu I tant to produce the contract, madsecondly, If a third party Is InJured or there Is an act ion fordenages, he often tries to bring in the ol I canpany es eo-defender as «el I as your cl fent, knowing that the ol I cwpmnyhas vest resources conpared wfth your cf fent.

364

You are expected, as advisors to the ci lent, to take thedraft contract, as a standard form contract, and adapt It tomeet the main needs of your client. One thing I would ask youto rmanber: it Is not the Job of the ol! ccmpany or legalconsul tant to indicate what areas you should pay particularattention to. So, be very careful when you go through a draftcontract. I am going to Indicate two areas ln particular whichcall for attention: f lrstly, off-hire clauses, and secondly,prenature ending of the charter party.Mf=bJCI |:JIIuSIIS. The off-hire c!ause Is an exception tothe charterer 's obligation to pay hire throughout the charterperiod. The charterer must shcw that the off-hire clauseapplies. There are various problens. The first one ls theclause may be triggered by events which should not be attachedto the owner' s fault. It may apply even when exclusion clausesrelieve parties of the obi Igatlons. Because lt ls triggered byevents, these need careful definition, hence you must def inewhat the events are. They may be accidents, repairs,breakdowns, col I lsions, groundings or def iclencles ln crews.The ol I companies have the right, If they do not I ike thelook of a particular worker, to Iet him off the rig, no reasonsgfven. In practice, they do not give you reasons. They Just donot like him.lf the event Is caused by a breach of the charter by thecharterers, the charterers cannot claim off-hire when theythmwselves are ln breach of contract. Secondly, the typicaloff-hire clause does not easily cope with an intermediatesituation. E lther hire is payable or lt Is not. If there was apartial breakdown or def iclency, we found it essential toprovide for a proportionate amount of hire. The amount, if needbe, can be f Ixed by arbitration.would also suggest you do not have arbitration fixed inLondon, because scmetimes It can be pretty horrendous. 1understand that other places can be worse, but the worst we havehatI has been In London.Thirdly' charterers who claim off-hire may withhold theoff-hire claim against future hire payments and thereby improveMeir cash flow. This is a constant source of aggravation.0bny oil canpanies, as you know, have a Iot of financial muscle.They can use this money. They have treasurers and treasurymanagers. They utliIze this money to the maximum, so, again,make provision for It.Fourthly, on the other hand, charterers do not always win.Just because a vessel is off-hire does not mean suspension ofthe charterer's obligations. The charterer may have to continueto pay for fuel, harbor dues and services.Fi fthly, the resumption of hire creates two probiams: a>Is the vessel ful iy eff'iclent again, and who decides that'i AndIb! what happens to the time lost' For example, lf a vessel ishired for 12 months and It Is off-hire for 3 months, does thehire end at the termination of the orig'inal 12 months or after15 monthsf The answer depends on the contract.

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Bcaau}iud Endlng&f ~ILCbIIL~~~. Premature andi nthe charter party can arise fran frustration, rightscontract or recision for material breach. r the

Firstly, frustration, or, as we cal I it, commercial dl�fo parties As a pret rmlnary point it should b noted ththe common use of the term ~~mlitt~, at least In theand I think, the rest of Europe, ls uncertain, desplt h ' ' ~been adopted frcm the Code Napoleon.

Frustration can arise frcm the acts of the partiesvery difficult in taw to say that mere delayexpense is f rustrat ion. Other frustrating events may artsresult of the fault of one of the parties. Ifhat ls the eff~of "lt on frustrations The law tn my vl~thing that ls clear is that a party cannot byproduce frustration.

In referring to ~ y. QyJIhtttJJ �8S3! 122 E R 3pLord Sterndale obsewed: "I do not think any authority hasgone so far as to decfde that ff the defendant has burned dthe music hal I himself, he would have been entitled to saysubject matter was gone and the contract was frustrated.» This~ was fol lowed in ~~ v.

Oj v ~LI942]

A.C ~ 154 H ~ L ~ !, per Viscount Simon, L.C.Self-Induced frustration fs not a bar to the enforcement Of

the contract. That was fol lowed ln ~

v- {}gttaLZCaISj.aCaJJmlimd �935! A.C. 524 P.C.!.

For this reason, we must treat with cautfon recentwhtch state that whether an employer dismisses an employee Is efactor indicating frustration of the contract of deployment, asIn ~ v. ~ PI978$ 2 Al I E.R. 413.

tn the case where the supervenfng event fs caused by theparty's negl lgence, there ara ~ Indicatifng that It Is not ebar to pleading frustration.

where there are ~ fndicatlng that negligent acts are not thedegree of fault which bars the contractor fran relying "f rustrat I on.

Viscount Stmon was concerned with a problem of a KLIEGttttmMI who lost her voice as a result of carelessly not changf»gher wet clothes after being out In the raIn. Lord Russet Ipictured her sftttng In a draft. Lord Oennlng, the met»antimryer, has taken Lord Russet I's ~~Q.gpss to mean that therels frustration of the contract. Th is Is f of I awed

L1947j Ali E.R. 940 C.A l.case, the S~nd DlvIsion decided that the

n gl lgent groundfng of a ship did not present frustration of echarter party.

The law fn frustration Is clear lf the event Is unconnectedwith the parties, such as The destruction of a vessel Il legeliy

or a strike. But how long must a strike be to frustrate acontractT Hy v1m s that a strike must result In performancepf the contract wh I ch wou I d be radl ca I ly 4 if f erent f p~intended by the parties. I strongly recommend that you Includeexpress Provision In the contract for this.

The next item I wouid like to look at Is terminationclauses In the contract. A diff Icu I ty with the concept ofmaterial breach is deciding when a breach is material. partieswithout prejudice to the'Ir rights of common Iaw mey try to easethe problem by Providing that, in the occurrence of certainevents, the contrac"ay be ter inated. An Indlr~ example lsthe provision that time is of the essence. The phrasing of such

pf ov ls I on, however, must be hand I ed w 1th cere.0ne of the standard form contracts by one of the world~s

oil companies, which probably intended to state that timeperformance by a contractor was of the essence, a provision

which In the context of the North Sea would have commercialsense, did not say that. Instead the contract merely statedthat time was of the essence. However, the contract, as common,hed a provision that Invoices were to be paid by the o' ll canpanywithin 30 days, which was a condition experience suggested wasnot always complied with. The result was a valuable weapon lnthe hands of our client, a contractor.Sophisticated termination clauses In commercial contractsmay prov'Ide for termination in two distinct cases, either afailure of performance or insolvency. A simple Instance oftermination in failure of performance is: "A company may bywritten notice to the contractor terminate the contract if thecontractor breaches any conditions of the contract." Whetherthis condition is accepted depends on the care with which thecontractor examines the contract and the bargaining parties. Tobe exact, I should say the contractor's lawyer.

Termination clauses which operate on the Insolvency of oneof the parties are not always drafted with sufficient care. Forexenpie, a clause in the contract for the supplier of deepfreeze cabinets offshore prov ided for: termination If a partyshall "become insolvent, shall go Into liquidation, whethervoluntary or compui sory, or a receiver shall be appointed of theassets of the party already a part thereof." These comments Ithink can be made in this drafting. The word insolvent lsanblguous. It could mean practical or absolute insolvency. ThePhrase "shell go Into liquidation" may not cover the situationwhere a prov lsional liquidator is appoInted, because, at thatstage, there are no winding up orders.Indeed, if one wishes to attack the drafting of suchclauses, their weakest point Is iiabie to be a failure toclearly deal w ith the appoi ntment of a provisional liquidator,what we eel I in Scotland a judicial factor. The clause doesnot make the normal exception of voluntary liquidation for thepurposes of analgamatlon or reconstruction.011 companies are very much Interested ln maximizing theircash resources. For example, in the United Kingdom we have~ecently received a major oil canpany mineral exploration grant.

367

grant simp I y means that they do not rePay the money ~ Amineral grant in the United KIngdom ls worth 35 percent

cost. You can imagine scmeone putting 10 ml I lion pouthepounds

down and recefving 3.5 mil I ion pounds back. They arewant that grant. They only get it back fn the Unfted Kfngd<~

"9 to

they happen to be a United Kingdom company.This fs sfmple to do. But, if you have made your

contract whereby there Is no question of the amafg~atireconstruction of that company, and you lose the 3,5pounds lnitiai ly, with more to ccme, then I doyou are going to be hired for very long.

One problem needs specfai mention. That ls the pro�isf �of payment of hire charges. Late payment of h fre may giveto the owner's right to withdraw fran a charter,further Problans. When is the hire due2 Theccewnence in Panama on the delivery with hfre to be payabf~London in monthly installments fran the time of delivery.at what time fn !.ondon2 Which time zone governs the Payment ofhlre2 What if payment is due on a weekend or on a hollday2

For example, the case of g~gMaygQ g Qg~gflSOLI acclacj&gcg Of~ibm j.4 Li'9273 A.C. 850 " L ~ ! ~ Whenpayment made2 If payment is by credit to a named bank, is thepayment made: a! when a charterer Instructs his bank tothe transfer; b! when a charterer's bank advfses the awnerisbank of the credft; c! when the funds reach the named bank; Dr, d! when the owner's account Is credfted.

In my vier, the answer is probably c!, that is, when thefunds reach the named bank. If lt is when the oner's accountis cred I ted, it may involve a day, or a delay for a computerprint-out. The contract should make clear what happens butoften does not.

In thfs instance, what happens if the bank's computerbreaks down2 You have to th ink of quite a multiplicity offactors.

Avoid what Is meant by material breach by hav ing expressprovisions on a breach. You should have survival clauses sothat parts of the contracts w i I I surv fve the recision for amaterial breach. Survival ciauses are appropr late, for example,for exciusfon clauses. Ashton 0'Owyer mentioned indemnitycfauses, secrecy clauses, clauses propagating Jurisdiction andarbitration clauses.

A few other points. I would say, on the indemnificationclause, that the latest one I've seen by one of the majorssimply said: "the consultant shal I indemni fy the company, ltsservants and agents, against al I claims by and I fabii ltlesthird parties." We do not have the same situation as ln Texasor Loulsfana, and therefore no lawyer worth his sait whoact lng for a serv ice company wou I d accept that. I havehowever, seen it accepted. Such c I auses shou l d excludeindemnif icatfon against reservoir damage, sub-surface damegsipollution damage, or other d~age resulting frcm sub-surf~edamage. Un!ess It says that, then your client can be placed I"a bind. If I an acting for an oil company, then norma!Iy

368

w I I I a ePt these modl f I cat lons to the general clause. I f,towever, you do not raise It, they w I I I not give lt to o jwould say do no try and Pul I fast ones on the oi I cat company

lawyer.Our alm Is to try to Produce a fair contract,the w Ishes of bo th sl des. I saw this ref I ected ltdrmsaticai iy in a co s partnership situation. Scotch Im isS t

e qu e

different fran Engl fsh law and we have a situation whereby apartnership Is a separate legal entity distinct fra the me,barsof the partnership, so they are Individual partners. So, wehave a legal persona, partnership, and we have the individualpartners. The person who was acting for the service company lnthis instance did not point this out to a lawyer frcm Houstonand, in fact, the ol I company had to pay out 4,Opp pounddamages In an out of court settlmnent.

This lawyer, however, lost his cl lent and ai I the workInvolved there, which might have been hundreds of thousands ofpounds.

RICHARD SPELLACY: In my stand, I will now try and give youset of general legal comment fran a contractor~s point of

view Once you have an of f shore rig, the serv ices that arerequired can general ly Just sp I it into two categor les: [I !transport, and �! services. We wi i I take transport f lrst. Inthis case, transport would consist of the primary route which isby sea, supply boats, etc., and the secondary route which Is byair, i.e., hei icopter and f lxed w ing aircraft. Lastly, thesupport services to these routes ashore wl I I util lzeconventional land-borne transportation, but al I these contractsare very wei I covered by standard prov lnclaI contracts and wewil I try to touch al I those.When industry Is being carried out on land, the maJority ofthe variable factors can be calculated and hence most contractswill be carried out on a turnkey basis. This has been thepractice of the oil Industry ever sInce its inception. However,once the Industry goes offshore, then the variables imposed byIncleaent weather set up problems so difficult that only Inextreme cases will an operator attempt any kind of project on aturnkey basis.Slumps In the industry where operators, desperate for work,will turn their hands to ai most any rmwedies to work their Idleequipment tend to bring out these turnkey contracts. However,ln a normal circumstance, the equipment for el I servicesoffshore tends to throw the maJorlty of onus upon the oilcompany rather than on the operator of that equipment.The second group of contractual services w III be thoseservices actually requ i red by the oil company to service thewell that they have drilled with the drilling rig. Theseservices Include such things as div Ing, drilling mud, mudengineering, cement lng, supply of cement, weil logging, welltesting, and so forth. However, these contracts will be much»re compl lcated than the contract of the transport equipment.

369

lie contract the equipment In two modes, f.e., standby andwork Jng. The equipment wl I I be out on the rig for anything

weeks or more to do a job that may take one week. Pnhg up

gets out there, you cannot a I rays get I t of f, and once yoget the men out there to service their equipment, you can~ya f ways get them of f e 1 ther. Consequent l y, they w I I I havemodes of payment � standby and worktng, the same applyfng f+.the men.

The contract wl I I also have to cover the hfrlng pfequtpment dur tng transport to and fr~ the rig and the risksfncurred by that equipment If, for example, some crane operate<drops a mt I I lon dol lar separator Into the sea. One also has tpfactor fn standby time, whl te the equipment might be at shorethe ol I company's disposal. Various insurance companies provtdfor a package I ike this.

One of the contractual d f f f I cu I t I es we often f ace IsIn addition to carrying out the normal supply of our workare asked to carry out research work for scientists. All ofcontracts have to cover any damage that might be tncurredwork of this nature.

Our standard form contracts tend to be rather abbreviatedbecause a Iot of our chartering Is done over the telex, but theyInvarfabfy make reference to far more campt Icated standard textssuch as both-to-b I arne col I fston clauses, the York-Antwerp Rules,etc.

A modern supply boat is highly soph Isticated andextranely expensive, startfng at I5 million dol lars and workingup. These craft have evolved during the past 35 years freefairly simple craft which were tn fact converted tuna craft,first used by operators working of fshore in the Gul f of Mexico.The chartering of these vessels has become very sophtstlcatedsince then, becomtng real ly complex In the early 1960's when theof I industry started to penetrate places such as the North Saa.There the operators of new generations of supply vessels wereprtmartly shipowners who were accustased to chartering a ship tnaccordance w 1th standard mar I t ime contractual practice. Thl eIed to an evolution tn the supply boat contract, fran what was efatrfy standard simple form fn the Gul f of Mexico 25 years ago,to the canptex, considered documents that al low the supply boatIndustry to charter much more expens I ve craft on the openmarket.

More Importantly, they al low supply vessels to trade wtthteany recognized maritime I Imits.

The shipowners in Europe are used to frequenting the BalttcExchange and I tvtng by the rules of the standard documentsproduced by the Bat tie International Mar 1 t lme Conference. TheBaltic Exchange ts a bui ldfng In London that acts as a placewheretn owners of cargo and shfps and brokers of cargo and shipsgather to f tx trans-shipping and cargo movements the world over.The Baltic Exchange ls very similar, In fact, to Lloyd's «London tn that there is a f toor and there are brokers andare purchasers of the servfces, but there the similarity e«s ~

370

At L loyd's there ls a wel I organized structure ofunderwr I ters, underwriters' boxes, and a broker s imp is mp y goesstraight to a box to obtain the service that he may need. TheBaltic Marl time Exchange is a more Informal gathering of peoplewho mix and discuss their needs and either f lx their shipstransport the I r cargo as their needs may be. However, thisloose gather I ng i s f a I r I y we I I governed by the Bal tl cInternational Mar I time Conf erence and its documents.majority of trading has been carried out In accordance withstandard conference documents. One that comes to mind which youwll I al I be fami1 Ear with ls Barecon A, which Is the Balticinternational Marine Conference's bareboat. When the supplyboat industry started to become more widespread, and the moresophisticated, the Baltic International Conference produced itsown charter party document known as the Bal tl c InternationalMaritime Conference SuPply Time, which is generally abbreviatedtp B IMCO SuPP I y Time. This I s the standard form.

The BIMCO Supply Time document was compl ied mainly byoperators of supPly vessels and was meant for handy referencingwhen chartering by telex or spot chartering on the internationalmarket. As there Is a trans-shipping market in var Ious ports ofthe wor I d where heavy concentrations of olE f I e I d acti v ltyoccur there i s a spot market for supp I y vessel s, a I be I t a I wayspn a ~ time ~ bas1 s. Th I s document «as composed by the Bal t I cinternational Mar It ime Conference; however, the major I ty ofInput to that document was f rem the supp I y boat operatorsthmuselves. As the document ltsel f became heavily loaded In thesupply boat operators' favor, every major oi I canpany and Itsiegal department decided that they have to have their ownstandard charter party; thus today, it is normal when deai ingwith a major oil company to accept their own standard contractswhich wil I be an adaptation by that company's maritime or tankerdepartment of either theIr own standard marine tanker contractor BINK Supply Time form.The BIMCO Charter Party Includes a face page, whichcontains the broad detal I s of the contract, I.e., port ofdelivery, redel lvery and cancel ling dates, period of hire, etc.It Is ln fact a title page. What fol lows is the guts of thecontract. It Is composed largely of what we in the businesseel I legal boi lerplate. I wi I I brief ly run through the form andscca of Its pecul larltles to highl lght the difference ln a timecharter of this nature as opposed to a time charter that astandard owner might face.In clause one we have the time period, the first normal iyoccurs In Section B where the charterers have the option toextend. In an ol i f 1 el d contract, particularly the ones thathave occurred off Canada, they have been there to support a rigdrl I I lng on a number of we I Is. Wel ls normally are not verycooperative. They sometimes run way over time as did the f irstdiscovery wel ls on Sable Island.If you are an ol I company and you have issued a standardtime contract for your equipment and al I of a sudden you f'lndthat you have your rig but your hei icopters have run out of t»e

571

and your supply vessel has run out of time and scmebodcontracted then el sewhere, you have a Prob I ia- Normal lyY as

contract wll I cover adequate extensions to al la cc pletloOn Ofthe wel I.

The next one deals with del ivery ~ Normal ly under standaftrmnP shiPP lng or ! Incr sh iPP 1ng, an owner wi I I acceptdel ivery clause such as passing Gi ibratar, dropping theoutward bo und, anything of that nature. In oi I f Ieldterminology, the vessel ls always del lvered along side at thebase port and it always is redel tvered along the side of a baseport, or at an alternate specified port.

Also, ln this clause, there appears another pecullarI+and that is a mob l I ization or demob I I ization clause �h; h

emobile, hes no need tor mobi/ization clauses foequipment fran one part of the world to the other,their job to move the sh lp. However, the oil Industryfixed position, or geographIcal ly lt is f ixed, and they havemobil lze this equipment fran one part of the world tolfe have a ship which is going on charter to a customerJohn's this summer. IIe mob i I ized that ship frcm Japan so thamobl I ization itsel f is a separate clause in the contractcover this.

Once you pass the del ivery clause, you proceed In a fairlynormal course, i.e., the emp I oyment clause, which givesmapl oyment I imits, is fairly standard. Next comes the "owner iato provide" clause. We then have clause 5, which states whetthe charterer ls to provide. In the BIKO Charter Party, lt lsa lot. To g'lve you same idea, the owner's provision covers 12I ines, whIle the charterer ' s prov I s ion, including bunkers,covers 40 I ines. Obviously, that is the state of af fairs thatowners would like and It's the state of affairs that we neverget. But lt Is a good place to start.

ln general, due to the uncertainties of the trade, thesuppiy boat operators try to place the onus for any variablesupon the oi I company. This is wel I I i lustrated when we come tothe bunkers and iube oil. We wll I run the ship fran the baseport to location and back again, but we may be occupied chasingIcebergs, we may be occupied Just stemaing up and dawn standIIviby the rig Itself. So, fuel and Iubes are scmething that we cannever calculate to any degree of certainty. This pushes rightback onto the charterer himself.

Clause 7 covers the hire and how lt wil I be paid and how Itincreases. This clause al laws for certain escalators to coverthe owner on any increase In costs of the charter party.interest lng th I ng Is that or I g i na I I y the f ormu I a thatoutl ined ln the clause wouid take cere of the actual increase Iawages plus a smal I increase ln other costs. However, withincreased sophistication of these vessel s, this particularclause, lf it ls used, beccmes grossly unfair towards the oIlcompany. For example, a 20 percent increase in wages wouldccmpr ise approximately 30 percent of our costs these days andwi I I al low us to lnf I lct a 12 percent Increase on a charter

372

htre. The actual increase In charter hires reflectsincrease In wages and shoul d be closer to 7 percent. So, we areJust de I Ighfed when somebody accepts that esca lafor cl ause.

odi f I ed fo ref I eClause 8 deals with the redel tvery of the vessel. Therevar tous opt l ons for the oi I company. Age In' fh'is

peculiarity of mobl I ization and demobl I ization artses. It is tover the times when the owner of the supp I y vessel

+yt I ized hl s equipment fo a remote area where there Is noprospecf' of cont I nu I ng consecut I ve emp I oyment beyond th I spart tcu I ar Job. I nterest I ng1 y enough, th Is Is the case af themoment In Canada, because fhe ol I f laid here ts sf I I I ln Itsearly sfages and there ls no other wel I developed market tn this

Thus, an owner mobl I Izing equtpment here has fo face theprobabl I lty that when his contract ts f tnt shed he wt I I be�nl ikeiy to obtain consecuf fve continuing employment unless ttis with the same oil company. When a supply boaT owner gets aJob in Canada, he Invar 1 ably asks for a demob l I tzaf Ion fo thenearesf oi I f tel d activity. which ln this case would be theNorth Sea.Clauses 9 to '13 are more standard bo I ter pl ete Items.Clause 14 deals with towage and anchor handling. As an addendumfo fhe contract, we normal ly specify the amount of equipment andfype of equ I pment that w I I I be carr I ed. This a I so coversfcwtng. It simply says, as I have made reference to earl ler,that the towing vessel wit I be governed by U.K. Standard TuringCond I t I ons.We manege to get our brief contracts, by making referenceto Items such as the U.K. Standard Towing Conditions, which areotherwise on four forms of close-typed foolscap pages. Here, wehave managed to dispose of them tn two I ines. In Canada,however, we have another condition that enters the I 1st at thistime, and that Is the tow ing of I cebergs. I n our charterparties, we al ways have to spec I fy that the vessel w I I I becapable of standing by and towing lcebergs away free oi I rigs.

Clauses 15 and 16 are standard bol ler plate agaIn. Clause'l7 Is salvage. This Is a clause that ls dear fo every supplyboatman's heart. Al I supply boat skippers and owners arebasically pirates at heart. This ts a clause that ls unique tothe supply boat trade. The bul I d of these ships quiteaccidental ly makes then very ef f ic tent towing and sal vagevessels. This clause must be included to al low for sal vageoperations to be carried out while this contract ts ln force.Normally, the clause that ts proposed here proposes thaT salvagewill be to the benef tt of both parties.Clause 18, however, ts there to restrict the more piraticalImpulses of both the owner and hts captain. It Is a fairlynormal guarantee fo ihe charterer that the owner or operator of

supp I y vesse I w I I I not c I aim the salvage on the oi Ipany s equipment used tn thts operation. We have had three

or four sal vage claims.Clauses 19 through 27, again, are standard marine bot lerplate cover I ng such tf ems as general average, both-to-b I arne

373

col I I sion, arbitration, etc. This, then, concludes tha BIN@!supply Time form and al lows me to camment on some pf SPecul iarities of chartering ln Canada In the 19QQts

It has become the custcm of the trade over here foroperator of the supply vessel to supply lube oils ln ret���a fixed payment for a charter. This is not s~ething~ould normai ly desire because it is not somethingcontrol. Tre consumption of lube oi is Is a direct fun~ipnthe amount of steaming hours on our main enginescontrol that. however, as al I of the people have poi�t dtoday, the ol I ccmpanles tend to have the upper hand in a Iotthese bargains, and they have forced this custom upon us be~�they really do not want to be bothered with supply paymentlube oils.

We have mentioned the towing of icebergs.fairly sImple function until one actually tries it Aft~ tito tow an iceberg with an inexperienced skipper/ even wlproper equipment, can lead to h llarlous and frustrating res�ltEvery season we have ships whose crews have never done thisbefore and we have a fresh crop of ships I imptng into porticeberg towers wrapped around their propel ters and bent bowsbecause the tool pusher gave instructions to push the iceberg.The inabi lity to carry out this function properly can lead totragedy.

Chartering ln the 19%'s holds yet another problem for theoil canpany and the owner of the supply boat al lke � the hazar<of currency. When an operator has to purchase a vessel in U.g,doilars, his own currency may be pound sterl ing and he has tooperate In Canadian dol lars. He has to incorporate hedges intothe contract to try and al low for currency f luctuations. Eachand every supply boat operator has his own version of thesehedges. I wil I not go into them because otherwise I would behere al I day trying to detail the various exchanges around.

There I s a I so a prob I em w i th customs duty. CanadianCustcms and Excise insists that if a vessel runs between tvoCanadian ports then you must pay duty on them. This is all verygood, except that you do not have to pay duty If you are aBritish flag ship. If a British f lag ship ls trying to canpetewith a German flag ship, you have an edge over the Germans.interestingly enough, If you are a Canadian f I ag ship trying toccmpete with a British flag ship, then you have no edge at al I.This seems scmewhat Inequltab I e when the government stressesCanada for the Canadians.

Lastly, the biggest pecul I arity of al i in the Canadi»charter scene is income tax. Canada has taxatlon treatiesvarious countries throughout the world and each and every one Ofthem is different. There ls not one single thing in any one ofthorn that fs the same, I f you have sh lps, as we have, undernumber of f legs, then you prob I ems have just mul tip I led.have ships under German, Be! gi an and Caned I an f I ags ~taxation compl icatlons are absol utel y horrendous and they austbe covered under your contracts. I wi I I give you an example.There Js a treaty currently In force between the U.S.A- »~

574

Canada whi ch al iows American suPP I y boats to operate herewithout pay lng tax here. The same vessel w 1 th a Bel glum f I aghas to be taxed here as wel I as in Belgium. Consequently,have «work out the tax imPI ications on that and try and get

eque y, you

your custcmer to pay for I t.You have Just heard me go through the standard BIMCO Supply

Time Charter. The t I t I e page w 1th three cl ose-typed fool ~~psize pages. It is nice and simple and you can quote parts ofover the telex. Presently 92n Canada, everybody wants their owncontract.Right now, the smal lest contract used by ma]or oilcompanies is 28 quarto Pages long with various addenda. As you

see, chartering in this country has become a verycomplicated business.

I would I Ike to move on, very briefly, to the other formspf chartering. I have already mentioned helicopter and fixed�ing aircraft. Their chartering would be very similar to thoseof supply vessels, with the exception that a hIgher base rate

be charged for the equIpment and there will be a f}ylnghour charge to allow for the use of the equipment offshore.There will usually be a certain minimum flying hour periodspecified in the contract.

I have tried to convey to you some of the ccxnplexities thatare involved ln thIs work, and I hope, to some extent, that Ihave succeeded.

D I SCUSSI ON AND QUESTIONS

GORDON BECKER: I have same questions to address to Mr.Spencer. I be I I eve you have mentioned that a typl ca Iconstruction contract for a drll ling rig often has a provisionIn lt permitting the purchaser to have an inspector on thePres I ses for the purpose of looking at, approv lng ordisapprov lng certa In aspects of construction. How does thepurchaser prevent h lmse I f f ran hav ing such a prov isl on usedagaInst him? I had in mind, fol lowing de I lvery, the purchaserasserting that some of the vendor's warranties concerning therig have been breached. Is not the vendor in good position tosay, &a I I, your Inspector approved such and such, and youcannot now turn around and c I aim that the work wasunsatisfactory or that the material was not proper material "7My next quest Ion I s th I s. You ment I oned that,Increasingly, the somewhat familiar provision that title to thevessel, as It is being constructed Is passed to the purchaser,» falling Into disfavor. This prcmpts me to esk you whether atypical construction contract for a drilling rig may have aprovision that permits the purchaser to withdraw the rig frcmthe vendor's yard, say, ln case of insolvency or bankruptcy onthe part of the vendor.«stiy, the question about f lnanclng which involves thebere boat charters as wel I as the owner of the drilling rig.

575

We assume, of course, that there wi I I be Bn assfgnme~charter hire by the owner to the lending fnstitutlonbare boat charterer wll I consent to this assignment.

at the

any danger signals for which the bare boat charterer fwatch ln this situation7 For example, would he

urer should

Insist on a prov lslon that preserves his right to set of fe w se to

any payments assigned, ewounts of money due free the owne~frow

him under the terms of the bare boat charter7

EDWARD SPENCER: Taking the f fr st question aboutinspector fn the butlderls yard. 0 as he ls more usu IIcal led, the supervisor. The supervisor under the contract Isaid to be there to supervise the construction and also jo

ract is

at the materials which are be'fng used, to see that they areto the speci f icatfons fn the bui I d 1ng contract. The prov fsfo�

are up

are usually such that if a supervisor f inds that ft Is notrov sfovs

built properly, or the materials are fncorrect, then that mattsro fng

Is raised Imwdfately with the builder, and a decision is takegas to whether the bui I der I s correct or the superv isorcorrect. I f they cannot agree, then there fs usual fyprov 1 sion whereby the cl assi f Ication society decides whorfght and who Is wrong.

Therefore, mostly anything whfch Is raised by a supervisorwi I I be corrected before the contract ls comp feted. However,think you probably have a very good point that If the supervisorhas been there and ha has al fowed saneth lng to go wrong orscmethfng to be fncorporated which he said was ai i right, thensubsequently I thfnk it is very unlikely that the purchaserwould have good cause of action against the buf lder.

GORDON BKCKER: is there anything that the purchaser can doto protect hlmsel f against this consequence7

EDWARD SPENCER: Wel I, the supervisor Is there as his agentand, therefore, he Is virtual ly bound by what hfs agent isdoing. Either he gets a good chap there to be a supervisor orelse he sacks him If he does not do what he Is told to do.

I do not think that he can have his cake and eat It.The second question was concerning a bu I I ding contract

under which parts of the rig passed to the purchaser as he pefdthe var ious Instai lments on the purchase pr I ce. There areprov islons written Into a contract such as those wh feb al larsthe purchaser to go In and use the feei l ftles of the builder tofinish the vessel or finish the rig.

That was probably fine In the days when ships were beingbuilt of wood and you need a few shipwrfghts to f inish the worksbut In the day of the modern ship, f t Is reall y qu I telmpractfcal. There Is, of course, a prov lsion such as Yousuggested, to al low the purchaser to take away his propertYthe bul I der becomes fnsol vent. The prob I em w 1 th that. <course, is that It may not be ln a state where he can take itaway, or a liquidator or a receiver may say It is his or >~company's. I think those are two of the main reasons whYtype of contract fs now falling out of favor.

576

As for the third question regarding the assicharter hire under the bare boat charter- I was talking ab,utthe financial bare boat 0 financial de ise charter ~hereexcept at the end of the lease period, virtually all pa@pentone way that is, frcm the charterer to the owner.

payments go

I cannot think of any Provision In that type of charterwhere the charterer ls going to get any money until, under theterms of the charter, the rig ls sold and the sale proceeds aredivided as they have been agreed In the contract.

GORDON BECKER: Supposing the owner did not keep up thevessel 's registry properly and the vessel became forfeited?That would be a situation where the charterer might wei I feeithat to keeP on that charter hire would be an unfair burden forhim to bear.

EDWARD SPENCER: I supPose that In that type of contractthere are only two main obligations on the owner. The f irstthat he should give to the charterer the quiet enjoymentvessel during The charter Period so long as the chartererPerforms his ob I igatlons. The other one you have high I Ightedthat the registration should be kept up. Certainly, onceunder the British Shipping Register, you do not really have to

anything else during the time that lt Is there which wouldwake It ccme of f the Reg I ster, because ai I things such askeeping It In the right cl assi f ication are the ob I igations ofthe charterer under the charter party.

I suppose that I s one of the main reasons why It could betaken of f the reg I ster, because it does not f u I f 11 I therequirenents of the Department of Transport surveyors.

I wou I d agree w 1 th you, th eor et I ca I I y, that Is onepossiblt lty, but it is very unl ikely.

GORDON BECKER: Thank you.

WYL IE SP I CER: I woul d I lke to ask Ashton O' Dwyer aquestion. I am wonder ing what the rel ationsh ip Is underAmerican law between a claim under the ~ ~ by a seaman andrights to entitle him to worker's compensationT

ASHTON O' DWYER: Wel I, If a seasan Is covered by the ~bd: he actual ly has two remedies against his maployer. One fsthe remedy of ma intenance and cure which is awarded to theseasan who was injured in the serv ice of the ship, withoutregard to fault on his employer's part, and without regard tounseaworthlness on the part of the vessel. This maintenancerestudy Is an entitlement to a daily ai lowance which is intendedto compensate the seaman for the value of the food and lodgingthat he would have received aboard the ship had he not beenInjured.

The rate of maintenance today is an issue that is beinglitigated al I over the country. Until the Iast year and a haltor two years, the rate had been fixed at $8.00 a day, through

377

custan really, and the fact that contracts with unions and hi~ners arbitrarily fixed this $8.00 rate. In todayls

an sh tp

with what things cost and what lodging costs, $8.00 is sl yunreal istic. At least, free the pi atntt ff 's perspective

Defense lawyers I tke mysei f have been able to ns ratthrough motion practice that you can, when you are feedtnlarge group of men, I lve reasanab I y wet I on $8.00

ng a

Unfortunately, none of the Judges before whcnr this has baezlitigated in He Orleans has b Ught lt This has been pre�eproventhrough the testimony of ecorxmrtsts, who have studied what f~and lodging cost when the $8.00 a day rate came Into vogzzPlaintiffs have had their economists proJect that same rx,ztforward. I bel lave the highest dai ly maintenanoe award so fearis in the neighborhoad of $20.00 a day.

Part and parcel with the maintenance raggedy Is theof cure, which ls the searran's entitlement to medical expenses

These are due without regard to fault, If he Is InJuredThe service of the ship, untl I he reaches a point of maxim~medi ca I cure. That ls, where he can no longer respondtreatment or untl I such a time as it I s determined that hisdisease in incurable. For instance, what happens to thefel law who Is suf fering fran cancer7 He was stricken In theservice of a ship. maybe he worked on a chmrr ical carrier, andhis condition is terminal.

The law says you cannot expect the shipowner to continue trrpay th'Is man until he dies.

Consequently, there Is the nonfault renedy of maintenanceand cure and there ls the fault rmsedy of damages. You do rrptof f set the ean's damages on what he received by way afmaintenance and cure.

IIYL IE SP I GER: But you can br lng an act lan separate andapart free recovery of itorker's Compensation?

ASHTOH 0'lNYER: Yes, the seaman has no ltorker'sCompensation rmrredy as such. He has the r lght to maintenanceand cure and the right to damages If hts empiayer Is at fault ifthe vessel was unseaworthy.

EDGAR GOI.D: Nr. Chairman, I would like to try and returnfor a few rrkmrents to the question of def lnttion which you havewritten eloquently about, and several of the speakers today havealready referred to.

am wondering whether this dtlmmna w ll I not eventually besolved by the CMI conventlan which ts, at present, being workedupan by II%!: the International Convention of Offshore liobIIeCraft, which was produced in draft form dur lng the RloJaneiro meeting of the CNI.

The discussion there showed that these craft are not reallyships the way we know thea. Ho more than the hei icopter Iswithin the ~ hate parmseters. It Is nat sa much tooks, b«it is also the operation. I thtnk that Is the real key. Thesecraft are not being operated es shIps.

378

The draft convention def ines these craft as: nanystructure of whatever nature not Permanently fixed Into the sea-bed which a! is capable of mov ing or being moved whl 1stfloating In or on w~ter, whether or not attached to the seabedduring operations, and b! ls used or intended for use In theexploration and exploitation, Processing, transport or storage

the mineral resources of the sea-bed or lts subsoil pranci I Iaf y act iv I tl es." It wou I d sean to me that a comp I etel y

regime for these structures, because I refuse to cai I thanships, wi I I perhaPs solve this dilemma with «hlch we have beenfaced.

WYLIE SPICER: I wonder if you have any conf Idenca that theCanadian government is likely to adopt that convention!

EggAR GOLD: Wei I, that is an interesting question, Wyl le.pniy time the Canadian position has been tested was during

the MARpoL discussions in 1973 at IMCO. There was a very strongdlscussIon between several of the Maritime countries on one side

Canada on the other si de. Canada argued that thesestructures should not be cl assi fled as ships against the verystrong oppos I t I on of some of the Mar I time co untr I es. So, I tscans that the Canadian position going back atmost a decade is

these are extra-terr itor I el craft rather than sh lps in anormal manner. With respect to the question of I imitation ofliability, as a precondition to operating ln the offshore, manyof the oil companies enter Into operating agreements w 1th thegovernment which prov Ide strict liability provisions w 1threspect to things like pollution. Whether or not thoseoperating agreements impinge on the rights of the owners oroperators of r I gs to base defenses on limitation of liability Isnot entirely clear to me.Nevertheless, there ls a very extensive regulatory regimein this country which does attempt to provIde strict liabilityprovisions In some cases, by way of statute In the North, but 'inother cases by way of operating agreements, which are requiredfar offshore operation.And, on behalf of the organizers of this particular sessionI would like to thank ail of you for coming.

379

FINAHCING OFFSHORE RIGS

Discussion Leader W.Wyile SplcerMcinnes, Cooper & Robertson

Ha I I f ax

If. WTLIE SPICER: This afternoon's session wl I I dealthe Financing of Offshore Rlgs. I would Just 1 lke to thank J<Murphy for his assistance In organiz lng this particular Paneland al so the I.SI people who have been k lnd enough to al loadmiralty lawyers to muscle In on the Law of the Sea Institute

ow us

Conference. I am sure that we have learned a lot. Pefhaps s ~a s someof the Law of the Sea peop le have I earned scmeth'Ing ab utadmi ra I ty lawyers. Unl lke th Is morning, we only havespeakers.

Mr. Spencer was educated at the Royal Naval Colleges ofDartmouth and Greenwich ln England. He then servedexecutive officer In the Royal Navy for 20 years, during whichhe managed to pass his Iaw examinations. Hav lng done that,retired free the Royal Navy in 1970 and Joined the London-baseIlegal firm of L lnklaters and Palnes. He became a partner'1975. He practices mostly in shipping, aircraft and leasef Inane I ng.

Joe Macdonald Is frcm Cape Breton. He received hisdegree fran Dalhousie and a Master's degree in Iaw fran New yorkUniversity. Joe Is a partner r 1th Mc I nnl s, Cooper andRobertson, a Hal I f ax I aw f Irm. He pract I ces predominantly Incorporate and ccmmerclal areas.

I would now I lke to turn the podium over to Mr. Spencer.

E. S. SPENCER: Ladles and gentlanen, I am pleased to behere this afternoon. 1 would I lke to say that in my paper Ishall mention one or two things about I.iberian, Panamanian andUnited States law . I am not qual If led ln any of those, so lf Iam off the mark I would be very pleased if any Liberian orPanamanian lawyers amongst you, or any U.S. attorneys, wou!dlike to correct me.

While accurate figures are difficult to obtain, It appearsthat approximately 205 of the semi-submersible fleet and 35Sthe Jack-up fleet on order at the end of 1981 may not, atpresent, have employment. There w III need to be a considerableIncrease In demand of such units If el I rlgs which are availableare to find employment in the next 2 or 3 years.

Jack-up and semi-submers lb i e dr I I I lng r 1gs bear I ittleresemb I ance to convent lone I sh I ps but they are neverthelesscons I dered to be so. They are, In the ma ln, governed byleg I s I ation wh lch app I les to merchant sh I ps. Th1 s means thataccording to the country in which the rig Is registered andoperating, there wi 1 I be a wei I developed or perhaps not so eel Ideveloped system of law applying to the safety standards towhich the rig Is built and maintained, the crew required to manIt and those cred'Itors who are able to make claims againstrig as wel I as Its owner.

Th I s g I ves same ce r ta I nty an d assur ance to banks andleasing cmpanles who f inane rlgs. Firstly, the rig will brWI stared on a national sh I pp1ng register with th«hose f lag lt f I les and this wl I I be g<IINconclusive, ev idence of its ownership Seco ndly there « 1l I ba register upon w ich mortgages to secure loans ln favor offinancing Institutions can be registered, which «I I I estabi lshthe priority of one lender against another. You must re m barthat In certal n jurisdictions mortgages may needregistered otherwise than on a shipping register, such es thecanpanles register where the company Is registered, in order toprotect the charge against a 1 iqul dator or credl fore of0 ning ca pany. Thirdly. either statute or c se law «ouldIndicate to a f inancler how 1 ts mortgage wl I I rank Incompetition with other claims against the rig or Its owner «hlchmay constitute maritime or statutory I lens on the rig.

must be renembered that a person hav lng a claim forgoods or services suppl led to, or damage or Injury caused by, arig, unlike most other chattels or other pIeces of equipment,can and w Ill usually be more successful In bringing an action ~~ against a rig, Instead of an action jg IIIII.~ against theowner of the rig.The merchant sh lpplng legislation applying to the rig w I I Ialso give some protection to the owner, in certain cases of tossof I 1 fe, injury or damage to property caused on or by the rig,by anti tl ing the owner to I Imlt hi s I I ab I I I ty to a certainvalue. This ls designated In gold franks for each ton of therig's tonnage, unless it can be shown that such loss of life,injury or damage was caused by The actual fault or priv Ity ofthe owner.Let us now look at the purchase of rigs, «hlch are, In mostJurisdictions, considered to be personal chattels coming underthe class if ication of goods, unless special leglsiatlon apply I ngto ships takes than out of that category. One such exception Isthat the title to most goods when they are sold can betransferred by del Ivery . However, el I major maritime countriesrequire title to a ship to be transferred via bill of sale. Itls, therefore, the leg'Islatlon which app!Ies to the sale ofgoods which « I I I usually govern a contract for a sale of a rig,whether lt is second hand or a new construction.Careful attention Is to be paid to the conditions and«arrantles which are f irst titled, encumbrances, the rigcorresponding to its description and the quality or f itness fora particular purpose which Is Implied In sales contracts by suchlegislation. It is also Important to know the extent to whichany such conditions or warranties can be modified or excluded byagreement between the parties.Cons'Iderlng first the purchase of a second hand rig, theI966 edition of the Norwegian Sate Form or the 1977 edition ofNl ppon Sale Form, each being a standard printed contractcontaining 15 clauses to which additional clauses may be added,«1 I 1 usua I iy form the basis for a sales contract. Thesecontracts are designed for the sale of conventional shIps and

581

wl I I need amending to take account of a number of spfactors which apply to drl I I lng ships These are, firstly f

special

need to have an underwater survey of the submerged parfs, d�y~ the

the Impracti cab l I I ty of dock 1ng a dr I I I lngnormal iy be done with a conventional ship before del lvery.

Secondly, the transfer of spare parts and storesthe rig and the drl I ling unit which is mounted on fhe rigcost of which together with its spare parts and stores M b,'as much as 30$ of the cost of the rig. The loglsfic supplupp y ofspare parts and stores ls a major operation enfaii lng ~pufpufercontrol, delays of up to 9 months ln rece I v ing rap lac+�0 ders and the storage of a slgnlf IC nt n~ber of spare partpartsand stores ashore. The purchaser must therefore agreevendor on exactly what spares and stores he Is buy lngthey are located, and the ordering policy for spare parts z�dstores which the vendor Is to carry out between signingcontract for sale and transferring title to the rig. lf a iarg<number of spare parts are stored ashore, theytransferred in accordance with the law of the country Inthey are located, rlthout, if possible, paying taxes or dutieson the transfer.

Thirdly, it may be that the rig is being purchased forbenef it of a dril ling contract, the terms of which wil I be pfmuch greater ccmplexlty than the time charter party with which sconventional ship may be sold. The purchaser w I I I requIre foknow exactly the state of the contract at the time of transfer.Th'Is wll I entail the vendor's giving a number of warranties andr epresentatl ons rel atl ng to the prov is I ons of the dr I I 1 ingcontract. In addition, a separate novation agreenent betweenthe vendor, the purchaser and the operating or exp I orat ionampany «I I I be required.

The other standard terms of the sale form w I I I deal withthe payment of Ill deposit on signing of the contract, paymenfsof the balance, the release of the 10$ when transfer of title Ismade and the forfeiture of the 10$ to the vendor if thepurchaser should fal I to perform the contract.

In addition, a del lvery of a bl I I of sale, at the time whenthe bel ance of the purchase money Is pa I d or tl t I e istransferred, and, I f the reg I strat ion of the r I g Is beingchanged, a certl f lcate of deletion f ran the old register arerequired. Cancellation of the contract I f the rig becases etotal loss Is another provision which wl I l be Included. Anarbitration cl ause to deal with disputes and, undoubtedly, theaust imporfant clause, a warranty by the vendor that the r19w I I I at the time of del I very be f ree and c I ear of al Iencumbrances, maritime I tens, claims and debts, are included,together with an Indemnity in favor of the purchaser against allloss suffered by claims Incurred before, but In force aftertitle to the rig has been transferred.

In the case of a new bulldlng, the contract «II I be similarto a convent lore I shi pbui I ding contract, except thatequipment which Is to be specif Ied and procured by the owners maybe as much as a third of the cost of the rig, The purchase

price wil I be payable by four or f ive Installments. The firstpayable on the signing of the contract. The second, third

an4 fourth are PaYable at different stages of constru~certified by the Classl fleet'Ion Society. The final lnstal iment

paid slmul taneousIY with the transfer of title. A Bul lderlgCertificate w I I I replace the Bl I I of Sale and wl I I contain awarranty of freedom fran encumbrances and claims.

some Br I t I sh sh I pbul I ding contracts, the traditionalsystem 15 rata I ned whereby tl ti e to the part of the r Ig which lsbeing constructed and Paid for Passes to the owner, with thebuilder retaining a I len on the rig for unpaid purchase monies.However, this is fa I I lng out of favor w 1th f InanclelInstitutions and owners, who natural ly prefer to receIve a fuil-bi coded bank guarantee of the monies which they have alreadypaid, together with interest, If the contract ls cancel led ortha rig Is rejected due to the builder's default.

The shlpbui l ding contract wl I I set out a si 1 ding scale ofI iqul4ated damages payable to the meaner for delay In del ivery

minor failure of the rig to meet its speclf Ication. Anexcessive delay or a major fal lure wi I I entitle the owner toreject the r lg and cence I the bul I ding contract. I f thecontract ls so cancel led, or lf the builder becomes Insolvent,the contract w I I I prov I de for the owner to be repaId thePurchase pr I ce al ready pa I d, together w 1th Interest at acummerc lal rate. Thl s repayment w I I I be guaranteed by theRefund Guarantee.Other provisions of the contract will deal with approval ofdrawings, superv Islon and inspection of construction, tests,trials, documents to be del Ivered on delivery of the rig andinsurance ln case of damage to or a total loss of the rig. TheRefund Guarantee wll I not normally cover repayment to the ownerIf the rig becomes a total loss. It Is therefore important thatthe lnsurances should be comprehensive, covering builder'srisks, strikes, riots, civil commotions, war risks, removal ofwrecks and third party liability. The enount for which the rigis insured must take into account purchase money which Is beingpaid and the caemerclai rate of interest on It, which the ownerwlii be expected to get back In the event of a total loss. ToInsure that the owner w I I I receive the insurance proceeds andthat, if the builder becanes insolvent, they wll I not be claimedby a I iquldator or a receiver, the insurance pol icy should be lnthe joint names of the bui I der and the owner, with a tosspayable clause In the pol icy directing proceeds to be paid totha owner. In certain Jurisdictions where the doctrine of thirdparty benefit I les, It may be sufficient to have a loss payablecl ause.The bu I I der w I I I normal I y give a guarantee for any4«active mater lal or workmanship which ls dIscovered In the rig»4 notified to the bul I der within 12 months of del lvery. Thisw 11 I exclude consequential toss caused by such defect. 1Ihererig ls being purchased by a leasing company and bare boat~bartered to the operating owner, provisions should be made forthis guar antee to run In favor of the operating owner, untl I

such time as the bul lder Is Informed by the leasing companyit has repossessed the rig- It should theh run In favor of th

any theI

leasing canpany.Arrangements should also be made for the but ldtng

and the Refund Guarantee to be sfgned by way ofcontract

financing instttutlon whfch Is financing the bufidin f therig,

Turn fng to the actual f inanclng, an owner r f I I I hIn the cheapest possible manna~

also be cohcerhed with ke pfhg the operailhg costs of the rtlo Bs possfble. This Is co pattbfe with efficient oper~iand certain restrfctions wh fch legfslatlon and maritime trad

Iee

union practice Impose on him.There are a number of rays of gettIng cheap fInance,

depend upon where the rfg ls being built and the hat fonaiityresidence, for tax purposes, of the owning company. Cheapor credits are given by certafn governments under an OEI3 st~to assist thefr manufacturthg industries and their exports,Octal ls, for ai I of the 22 countries taking part In the scheeeare contained ln a yel low OECD book let whfch was publ ishmIearl ter this year. A typIcal exmnpfe Is a credit of up toof the cost of the rig, repayable by 6 monthly fnstal fments oyera period of 8 years fran the del ivery, at a present interestrate between S and 9$.

I f the owner const ders h imsel f to be an expert Inpredicting currency f luctuat tons, he may al so rish to exercfsehis fngenulty or hfs gamb l fng fnstlnct by having an alternativecurrency fac'I I lty In any loan agreement which he may take frae ecoeenerctal bank. Of course, here he may not always be a winner.

Tax and Investment allowances are available where the ownerls a resident for tax purposes in certain taxable Jurfsdlctions,These usual ly entitle the owner to receive a tax credit relatedto the aeount of the capital expenditure which he makes on ther I g. I f the orner, due to I ack of prof Its, has no terI tabt I tty, the ai lowances can be uti I Ized by a company whichdoes have a tax ilabII ity, whtch I shat I refer to as a financialowner. ln t'hts case, the f tnancfal owner purchases the rig,bare boat charters It to the operating orner and translates thetax credit which the financial owner receives fnto a subsidizedcharter rate for the operatfng owner.

keediess to say, no goverrment Is going to give away texhandouts to bare boat charterers who reside In tax have».Therefore, the owner has frequently to choose between restdfngfn a tax haven and operatfng its rig under a flagconvenience, or carryfng on Its busfness ln a taxableenvironment, with higher operating costs under a lessopportunist fIag, but wfth the advantage of being ableut t I I ze tax benef I ts and cheap f I nance ave I I ab I eresidents of the Jur lsd'fctfon.

Recently, usIng a cross-border leasing techniquedouble-dlpplng, lt ras possible for a British lessor to purch~an asset, to receive tax credits on its capital allowances25$ ln the first year, and 255 on a reducing balance

succeeding years, and then lease the asset fo a United $tates~pany which wli I also receive the appropriate U.$, f~ credlf

was a tax credit which was based on the aggregate of therenfa'I s payab I e dur I ng the lease period. However ~ thisInnovative method of financing «as dIsapproved of by the Britishinland Revenue and lt was stopped ln March of fhls year.

Flnanclal institutions have fir require nts about thesecurity which theY require to receive before lending theirmoney. TheY also have Preferences as to the flag under whichthe rig is fo be registered. A financing Institution willcertainly requ I re a mortgage over the rig and also an assignmentof the lnsurances ef fected on the rig. According to thef inane I el substance of the owner. other requirements mayeither a parent companY guarantee of the loan repayment � forimmaple, If the owner ls a subsidiary of a main ol I companyor, lf the owner has little financial substance, a good drillingc ntract so that the payments under the contract. When assignedfo the financier, will provide cash floe security fo servicerepayment of principal and Interest on the loan. In the case ofa single rig owning company, a f Inanclal Institution may alsorequire the shares of that company to be pledged fo If by way ofsecur I ty.Rl gs are s I ow-mov ing, cumbersoae structures and they maypay Infrequent v! sits to territorial waters where Judicl alacf Ion can be taken against thea. Moreover, they have adifferent pattern of employment when compared with conventIonalships. These aspects pose prob I ems to a mortgagee I f fhefinancing goes wrong and the security has to be enforced.

Comparing the advantages and disadvantages to certain typesof mortgages, we found that a Srltish Commonwealth mortgage wil Isecure a current account, which means that the amount securedcan vary In amount and change In currency, provided that It Iswithin the terms of the loan agremaent being secured . If theowner defaults, the mortgagee can make a private sale without aCourt order and he can also take possession of the rig without aCourt order and move it to the territorial waters of suitablejurisdiction, where rapid Judicial sale through the Court can becarried out. These powers compare favorably with a Liberian orPanamanian mortgage.A Llberlan mortgage does not secure a current account andonce paid down It ls ext'inguished. This may pose prob lens If Itsecures a multlcurrency loan, where one currency Is repaid andf' he loan Is redrawn In another currency. Ilords can be devisedwhich either maintain the loan ln Its original currency andcalculate the pr Incipal and interest with relation to analternative currency, or which convert the loan «Ithoutrepayment- However, to my knowIedge, there ls no decided caseon this point. There is a distinct reluctance on the part ofLiberian practitIoners to g'Ive a firm oplnlon that lt works.This means that most banks, as a matter of caution, required a~~pplement to the mortgage to be recorded each time the currency

loan is changed. There Is also doubt as to whether a'mrtgagee can take possession of a Liberian ship without a Courtorder,

A Panamanl an mortgage can secure a current account orrevolving credit feel I ity wh lch fluctuates, but the max Immaamount must be stated In the mortgage, and the mortgageinstrument must also have a clause which states that the changeln cul rency or the payment down of the loan shou l d not beinterpreted as discharging the security. Under Panamanian lm,the mortgagee may not take possession of a ship without a courtorderI and the Panamanian court may regard a private power ofsale as unenforcable and refuse to recognize It. An msendmenthas been proposed, under Panaman1 an I aw, to rect I f y thosedeflclencles, and we can only hope that lt wl I I be enacted lnthe near future.

If a f lnanclal owner Is purchasing the rig to bare hostcharter It to an operating company, then the f Inanclal owner an4a bank which Is lending money and which will take an asslgteaentof the benefits of the bare boat charter's security wll I requirethe charter to contain f lrstl y a 1 iqu I dating damages clausewhich, upon the charter being terminated as a result of default,will oblige the charterer to pay the financial owner an anacin+equal to his outstanding investment. This Is usually the esoun4of charter hire which would, up to the termination, have beenpaid during the remaining part of the lease period, discountedat an appropriate percentage to allow for the f lnancial owner'mreceiving his money back early.

Secondly, an obl lgation of the charterer to pay a simIIaresount If the rig becomes a total loss ls to be Included, whichls backed by Insurances for the same mount. Th lrdl y, acceprehenslve Indemnity fran the charterer to the f Inamcl a 1owner must be made ln respect to al l risks Including that ofownership. Final ly, a provision fs Included which wl 1 I hold thacharter hire payable by the charterer to take account of anychange In the rate of tax credIt during a lease period, or anyother factor which would al ter the returns of the f inamcl elowner while the rig Is on charter ~

In sane Jurisdictions, for Instance the United KIngdomfinancial owners require to be protected against every possiblesrisk. This Is on the basis that they are only entering thustransection to give the charterer the benef It of the capitalallowances or tax credits which the f lnanclal owner gets. I nreturn for such protections, the owner w I l I be prepared turebate up to 97.5$ of the residual value of the rig at the endof the charter period. In certain other Jurisdlctionmfinancial owners are expected to take same risks, and, Trareturn, they expect to participate In the residual value of ther lg.

I would now like to discuss the f inanclng pIcture lnpre-del I very and the post-de I I very per I od. Those of you whopractice f Inane lng w I I I note that I have dane this ln thasimplest possible form. I wl I I not mention I everage leesemmultiple lenders or col lateral security.

We «I I I start with the owner who has negot lated hl mbuilding contract with a builder and the Refund Guarantee «I~the builder's bank. He has to decide ~bather he is going to g~t.

the best deal by borrowing the money himself, or by going to aleasing company asking the leasing company to purchase the rigand taking It on bare boat or demise charter fran the leasingccmpany.The owner has the choice of rmalnfng the borrcwer «Ith itsdrilling contract, or changing pieces with a leasing company, asfinancial owner, and becoming the demise or bare boat charterer.lf the operating company becomes the bare boat charterer, then,of course, he takes the drilling contract with him.

Bringing the financing bank into the picture, lt makes Itsf Irst advance to the owner, which Is paid directly to thebuilder to satisfy the f lrst Installment on the buildingcontract. On making the advance, the financing bank takes asecurity, separate assignments, for the benefit of the buildingcontract, the Refund guarantee, the payments under the drillingcontract and, If there Is one, an assignment of all paymentsunder the bere boat charter, which Is, ln addition to thecharter hire, the Ilqu Idated damages which I spoke aboutearlier, If there is a default.If we go on to the post-dei lvery period when the rig lsdel I vered, the picture changes, and the secur I ty Is re-organized. If the loan Is outstanding between the f Inanclngbank, the owner, who Is Imminently about to pay the f inalinstallment and to take del fvery of the rig, can either be afinancial owner or a bare boat charterer, as I have previouslydescr ibad, either with the dr I I I lng contract or a dam Jsecharter.IIben the rig ls delivered, the f Inanclng bank takes:firstly, a mortgage over the rig; secondly, an assignment of theInsurances effective on the rig, and either takes or keeps lnplace the assignment ln the pre-del lvery period over thedrll I Ing contract or the bare boat charter. Final ly, againaccording to the substance of the owner, It mey also take aparent company guarantee of the repayment of the loan, as Iprev Iousiy mentioned, and pledge of the shares of the owner mayalso be Involved.

To end I would I Ike to mention a few points aboutinsurances whIch are of v ital importance to both the owner andthe financier of a rig, particularly, where there Is going to bee large claim, a total loss, or a large third party I lablilty.The types of Insurances for hull and machinery, war risks andprotection and indemnIty risks, the letter being basically thesave as third party liability Insurance, are virtually the sameto those on conventional ships, although the form of the clausesmay be considerably different.

Hull and machinery lnsurances are effected through brokers,with underwriters, or directly with insurance canpanias. Marrisks and protection of Indemnity risks can either be Insured onthe Insurance market or through a mutual Insurance association.There ls an additional risk of damage fromm pollution, which maybe caused by a blow-out fran a well which, If the owner beersthe risks, would require coverage. There Is a mutual insuranceassociation based In Bermuda which Is specifically designed for

the of I and exploration industries and gives covers e fonshore or of fshore property pol luti on, and a I so for brin Iunder control wild of I or gas wel ls or extinguishing of I

r n9 �9or gas

wel I f lres. There fs ai so a separate form of fnsuran~insurable on the market. which deals with the sme sort ofrisks.

As you have seen, the f inancler wfl I want to make sure thatIf there is a maJor casualty or total loss, the rig andInsurance proceeds wfl I go to repay the loan or the I lqufd<h,ddamages under the charter party. To achieve this,wl} I either be required to assign the fnsuranca to the f Inancinbank, or the bank as mortgagee wl I I be named as an Insured pearton the poi fcy. There wl I I be a loss payable clause dfrectithe underwriters to pay the proceeds directly to the f fnancinInstitutions. In scme Jurfsdfctlons, such as the UnIted State<where there Is a doctr inc of third party benef ltcontracts, the clause included ln the pol fcy states that theInsurance proceeds that are to be paid to the third partybe enforcabfe at law, without the need for that party to be wparty of the contract.

In the English Jurisdiction and other Jurisdictionsthe doctrine of strict privity of contract stlli holds good, If«III be necessary for the party who wants the proceeds tpparty of the contract. It Is therefore Important to know whichlaw is going to govern the contract of insurance.

Insurance policies can be avoided by the Insurer If thurshas been a breach of warranty at the time when they are effecte4or subsequently. The f inane fng bank or f fnanclal owner wliiobvfously wish to protect thmnsel ves against this. They canthis by taking out a separate mortgagee's or owner's Interestpolicy or by having a breach of warranty clause In the policy,which @mes then as the protected party.

it is Important to make sure that the separate owner'sfnterest pol lcy is not taken out by the same broker acting asagent, as lt may af fact the main pol icy. Otherwise, It seems tome, the actual or constructfve know ledge of that broker whIchvitiated the main fnsurance w I I I do the same for the owner's ormortgagee's interest policies.

The shipowner who owns a niwber of ships can reduce thecosts of insurance prmwlums by placing than through a captiveInsurance caapany which fs usual ly wfthfn lts own group. Inthis method, a smal I percentage of the rfsk ls retained In thecapt I ve Insurance company, and the rane f ning r I sks are re-insured on the market. Here, the question Is asked, what wll Ihappen I f the capt 1 ve Insurance caapany becomes I nso1 ventiFirstly, the seal I mount of Insurance which ft fnsured «I I I bwlost, but, secondly, and more fmportantly, If there Is a Iar9sclaim In the plpel lne from the re-lnsurers, then any I lquldaforor receiver wll I be In a position to ciafm the monfes comfn9under that claim unless they have been assigned to the f lnancln9Institution. Therefore, lt ls Important, where this situ«ionprevaf ls, to make sure that the re-Insurances are assigned tothe financing fnstltutfon, and that there is also a loss Payab

588

clause, sometimes cal led a cut through clause, which appears onfi ose re-Insurance pol lcles and whIch indicates how payzpnts areto be made.

Thank you veryhave made ref~ w I I I take th1 nmn

twodefense of I imitation of

I awpurposes

y Whenab I I I ty

"" important trig can be ca I }ed 8 ship If

Vota Ichar ferers d

based onqu I te

at the f I shen en,and other land lubbers have been adversely affected by a severedischarge or blowout, that the total mnount claimable by way ofdaeages would be based solely on the tonnage of the vessel.Regardless of the fact that a claim may, on Its face, be worth$10 ail lion dol lars, claimants may recover far less.

Limitation Is diff icul t to use in Canada because re are nota shlpowning country. Consequently, our Judges are reluctant tofind in favor of I imitation of I lab l I lty. They say: "What arethese people trying to doT They' ve caused $10 mli I lon dollars'worth of dmnage and here they are coming to us and saying wewould I lke to get off for a f lgure based on the tonnage of thisvessel, which ls, say, one mi I I ion dol lars."

Obviously, I imitation of I iabl I lty has a very severe ef facton people who may be adversely af fected by the operation ofoffshore ol I rlgs of f the coast of our country. Having saidthat, I should also say that It Is questionable whether or not ablew-out Is a situation which a court would find to give riseeven to the argument of I lmitat ion of I lab I 1 lty. In my v im,however, there are two or three old Canadian cases which make Itworth a try if you are acting on behalf of an owner.

I w1l I now cal I on Joe Macdonald.

JOSEPH MACDONALD: Lad les and gent I mnen, my task th Isafternoon is to draw your attention to sane types of legalconsiderations that may have a bearing on a drl I I rig or drl I Iship f inanclng transact!on but which are not of an admiralty

For those of you who are not layers, perhaps I candemonstrate that there Is sane Justif lcatlon for those yards andyards of c I auses, subparagraphs, sections, subsect 1ons, etc.,"" 1ch you w I I I f Ind In the documents ev I dancing any rl gfinancing transaction. To those of you who are lawyers, I hopey rmaarks w I I I be of some utl I lty In ranlndlng us al I just howeuch law there is out there to worry about.

propose to mentIon a number of Canadian Federaland Nova Scotia Provincial statutes neither because they

a utesaY are

models nor particularly horrfbie examples but ratherhave sane fmnfllarity with than.

I will avoid, for the most part, reference to tax ersbut would ask you to bear In mind that verypawerful force fn shaping a rig f inane 1ng trans~tf � Iattainment of certain tax resul ts for theInvolved.

In essence, a rig financing transaction partfcufarfybuilding, is a straight-forward situation. Yau ha�e a�who wants to get delivery of hfs machine and you have awho wants to get Paid. Unfortunately, the matterextremely canpfex free a documentary and legal point Qf vI~when the owner decides to use someone else's money to paythe builder.

Consider a hypothetfcal situation In which the transactfpnIs to be structured as a leveraged lease complying with therequfrenents In the United States Internal Revenuesuch a situation you could wel I find one U.S. bank representingthe equity and the fax benef its that go therewith!, a secondU.S. financial fnstftutfon actfng as trustee for the debt, nCanadian shlpbuf I der, an Intended registered owner whfch isPaneaanf an Company < perhaps the remnants of a pr I ol abar fadfinancing deal !, a long-term charterer which Is a DeiawarnCorporation and which Is a subs I d I ary of a European parentcmpany, an intention to register the vessel on the LiberianReg'Istry, a captive Insurance company which Is to provide thncover, the rig 'In Haf ffax, same spares fn Hal I fax, essentialparts of the drl fling equipment ashore In Aberdeen, and lawyerseverywhere.

The lawyers' function In this sltuatlan, Is to provide nnopin'fon that the documents are effective and enforceable. Ifot-«fthstandlng that the parties may choose the Iaw of, say, theState of New York to govern the principal agreenents, It willnot be possible to fgnore the law of var laus ather places lnrespect af the transaction. Spares, stores, and equipment whichhave nat been Incorporated In the rig are chattels or moveabfesand the law relating to their effective transfer and mortgagingwfl I usually be governed by the law of the place fn which theyare physical ly located at the time the transaction takes place.Slmf lar ly, untl I a new ly bul It r fg I s reg fstered scmewhera,perhaps even after that for shame purposes, a rig fs a chatteland regard must be had to the place where It ls when delIver'/occuf s,

The Powers end capacities of various corporate participantsto the transactfon will, ln large measure, be governed bYi aw of the Jur I sd I ct Ion at wh I ch they are respect I vs I YI ncorporated.

F tnal I y, the place 'fn the ocean where the vesselIntended to be worked Is Increasingly of concern In I fght of theextended Jur lsdi ctfon being asserted by var Ious countr les averad Jacent cont lnenta i shel f areas. There I s at I east

Laws relating to the transfer of title to goods;Laws impacting on the lending transaction;Laws giving rise to liens of other than an Admiraltynature;

affecting the abli Ity of the parties to carry out thetransaction; and finallyLaws hav Ing a possible bearing on the operation of the rig.

1.2.3.

4.

5.

LAIIS RELATING TO THE TRANSFER OF TITLE TO CHATTELS

For the most part, ln Canada, the laws relating to theaffective transfer of title either absolutely or by way ofliortgage of chattels are to be found ln the provincial statutes.ln sane Canadian provinces these laws have in recent years beenconsolIdated and brought up-to-date, in large measure borrowingfree our American friends the work they have done on theirIinlform Commercial Code. Such progress, however, has not yetreached Nova Scotia and accordingly reference must be had to

The ln Nova ScotIa is patterned on theoriginal English statute and codifies and, scmetimes, modifiesthe law merchant having to do with the sale of goods as It stoodIn England 'ln the letter part of the last century. It sets outsubstantive law on the sale of goods within the province whichapply to a transaction unless the written contract between theparties prov Ides dl f ferent r lghts. In real ity, the

or its equ I vai ent In the jur lsd let ion where theshlPbul tder Is located, should be consulted prior to thedraf ting and execut I on of the b u I I d 'I ng contract, but I tsPr ov Is lons shou I d be caref u I I y rev I awed, as a f Inane I ngtransaction approaches, to ensure that the rights of the buyeragainst the sel ler are ful iy understood. Similar considerationsaPPly with respect to goods, the supply of which Is not the

391

suggestion that national legislation requiring the employment oflocal personnel on rlgs operat!ng offshore of the Canadian easteast, for example,. Is raising In the mInds of sane operators aconflict between their obligations to conform with Canadian Iawon the one hand and their overriding obligation to ensure thatthe vessel is sea orthy on the other hand. Lend rs. whoseultimate repayment often depends on the continued operation of

rig, should consider expandIng the scope of the covenantscontained In the lendIng documents to make It clear to theOP rator that they want neither an unseaworthy vessel nor avesse I whose oper at I ons are restr I cted because of f a I I ure~ply with local manning requIrements.

Ai I of these dIverse legal regimes which may or do have abearing on a transactIon produce a need for that most charmingpf individual s, I oca I counsel .

I want now to talk brief ly about some of the range of localwhich may have a bearing on rig f! nanclng transactions and

I propose to do so under five headings:

responsibl I lty of the shipyard, such as the drl I I lng equipment.These chattels, which often form a very large part of the totalcost of the rig, are usually called buyer furnished equipment orBFE for short. Very often they are not, ln fact, furnished bythe buyer who ln a leveraged lease transaction may well be aNew York bank! but are be I ng sold to the buyer by aff 11 I ates afthe "real" owner. The terms of such intra-group sales are oftmnless clear than they might be, and care must be exercised toensure that the parties are ending up In the legal position ! nwhich they wish to be. A second statute of conslderabi eImportance Is the 5JJJg, gf Silly 5gf. In thIs province, that actgoverns the form of both absolute sales and Chattel Nortgagasand, generally speaking, wli I require the registration In thelocal Chattel Registry of at least any document which purpor~to Impose a charge or mortgage on spares, stores and BFE nextphysically located on the vessel.In sane Jurlsdlctions, the formalities of the transfer cdtitle of chattels other than by del lvery may requIre nore thanregistration of a document In correct form, Care shoul d betaken that the necessary procedures ln the Jurisdiction ln whichthe goods are I ocated at the time of c I oslng are f u I iyunderstood and compl led with.

In Nova Scotia, because of the QgD<I>49&og 8rktof the document is no longer particularly Important, as Iong asIt clearly mani fests an Intention to convey certain ldentl f i edchattels from one party to another either absolutely or by wmyof mortgage.I might digress here for a mcment to address a short war dto my American colleagues. Gentlemen, the rest of the war lddoes not necessarily understand what you are saying when yawtalk about "secur Ity interest." I realize that that Iscatch al I phrase used by the Uniform Cammerclal Code to descr ibea variety of interests which were formerly acquired by l endar,assignees, and conditional sel lers, but It Is, for instance, mconcept which fs unknown to the I aw of Nova Scotia. Ifha+ econditional vendor, for Instance, retains under the QggdlflgaaL.SIJji~i Is the "property" in the goods which are the subJect afthe contract. AssumIng there has been canpl I ence with Maregistration requlrenents of the BJj Js gf Sii~ 5gf., the rightof a Chattel Mortgagee are largely to be found in the common imwand are not necessarl I y the same as those which the lenderexpects to have under the Uniform Commercial Code.

One of the perennial problems for al I lawyers is a stat-utewith unintended effects. In Ifova Scotia we have a number ofthese which could bear upon a transaction of the sort we armdiscussing. The one I wish to mention Is the Dlrl& ~~LLCiiQSLgg-Mgd BaglaiadIaa ~i � a p i ace of leg I s I at Iondesigned to regui ate the door-to-door salesman. Unfortunatelythe legislation Is so drafted that, were there not an exempt Iomgranted by regulation, It would apply to the sale by shipyard ofa newly bul lt rig and potential ly to the sale of the bvyecrf urni shed equipment. The Act prov Ides certain r lghtsreclsslon to buyers which cannot be waived, and Imports certaimcontractual terms which are, to say the I east, InapproprI arha.

3Q2

Fortunate]y, an exemption was created which was wide enough tocover the transaction.Finally on this area, there is one federal statute to whichreference should be made, the Inthl s country, Import permits are requ ]red only for a veryrestricted range of goods and wl I I not usual ly pose a prob]en.Export permIts are, however, required, and permission to leaveharbour for the first tIme wl1 I not be granted by the Custansauthor Ity without one.

LAIS HAVING A POTENT]AL IMPACT ON THE LENDING ELENENTOF THE TRANSACTION

ln most cases, the f Inancla] Institut]on directing thetransaction «III wish to have all aspects of It governed by lawswith which that Institution is fanll lar. According]y, thedocuments evidencing the financing wl]I be stated to be governedby the law of, say, the State of New York.

To the extent, however, that the enforcement of thedocuments may fall to the courts of the Jurlsdictlon In whichthe goods are located, some consideration must be given tovarious local laws. Once the rig Itself has been registered asa vessel pursuant to the maritime law of sane country, therights of the lender against the vessel will be governed by therelevant maritime law . However, to the extent that spare partsand stores are located ashore, the law of the situs of the goodsmay we]] have application ln enforcement proceedings.S ]mllarly, laws under which the borrower or other parties to thetransectIon are Incorporated may have a bearing on the ultimateenforceabll Ity of the terms of the Agreements.

Law having to do with usury, consumer protectIon, interestrate disclosure, etc., are generally consIdered to be matters ofpublic po]icy and, nothwithstandlng the parties choice of, say,Mew York law to govern the contract, the courts of anotherJurisdiction may feei bound to modify that contract In I lght ofthe pub] Ic polIcy prevail Ing In the enforcing Jurisdiction.

Nova Scotia does not have any usury law as such, that ls tosay there Is no legislation In this province which limits theaeunt of interest which can be charged by a lender to a

, which, ln suitably vague terms, givesthe court power to rewrite the agrnxanent lf, havIng regard toa]I of the circumstances, the borrower has been mistreated. Theprovince also has legislation requiring disc]osure to theborrower of the so-called true cost of the loan; the Qansuim

the kind we are considering here but, nevertheless, one must beaware of this kind of legislation.

For many years, Canada has had an act called theThis Is federal legislation and I suppose represents a

very ear]y attempt to ensure that borrowers know what theborrowing ls costing them. That act Is in dIrect contrast tothe usury laws which are found in sane of the UnIted States, ln

393

that It speclf Ical ly permits parties to agree on any Interestrate they choose Section 2! ~

which should be born In mind. Section 3 provides that where ~rate of Interest is "flxedn the maximum rate recoverable Is 5$ .The second provision of concern Is Section 4 which requIres thatIf the rate of Interest Is expressed to be for a period of lesethen a year, no more than 5$ can be charged unless "The contractcontains an express statement of the year I y rate or percentayeof Interest to which such other rate Is equivalent."

Both of these provisions have caused sane concern withrespect to Euro-currency flnanclngs and It ls Important, In mvyview, If the transaction has any Canadian element at al I, that

Euro-currency transactions commonly eel I for the f Ixlng of theInterest rate to be by reference to the London Interbank OfferRate LIBOR! for the appropriate currency and term on a givenday. It ls necessary to make It clear that the rate is ln f~fixed by the lender and not by the market. The lender's scopesfor fixing Its rate can be, and usually Is, restricted.

With respect to the concept of a yearly rate or pel centaQeof interest, it Is to be observed that the word "yearly" ln theJJL9Mf~Lt means a 365 day year. Accordingly an agreenentpay Interest based on a 360 day year Is covered by therequlraaent to express an equivalent "yearly" rate.

One Canadian chartered bank uses the following phrasethis purposes

"the rate of Interest based on a 360 day year Isequivalent to a rate based on a calender year of 365days of 365/360 times the said rate."

Another aspect of local law which can have an Impact on thelending transact I on I s the quest Ion of currency end, f nparticular, whether Judgment can be obtained In a Canadian coartfor anything other than an amount of Canadian Dol lars.

In recent years the House of Lords has substantla I I yreversed the Iong-standing prohlb 1tlon In Eng land againstobtaining Judgment In anything other then Pounds Ster I lng aivd,In this country, courts frequently do make orders for therecovery of a debt In U.S. currency. There Is one troubles>mesection of the federal wh lch appearsto require that a statenent of money In legal proceedings shouldbe stated ln Canadian currency ~ Whether that I s the correctmeaning of SectIon 11 of that Act remaIns unresolved, ms doesthe question of whether, If that Is the meaning, the section isconstitutional ln so far as lt purports to Impose standards anthe varIous provincial courts.

Oddly enough, the lneaed I ate l y fo I l ow I ng section of theclearly permits the creation ln Canada

of ob I lgations denominated In another currency; hen~presumably, the usual clauses Inserted In I nternat ionmiborrowing agreements by which the borrower, In effect, praaiaem

394

to indemnl fy the lender ln respect of any currency conversionlosses arising on enforcement, are not contrary to publ ic pol Icyof Canada.Note, however, that both Nova Scotia and the Caned lanfederal law include a Gold Clauses Act prohibiting thedenomination of obl igations directly or indirectly ln gold.

Now I want to discuss brief ly the possible necessity ofrag l ster ing certain of the documents ev idencing the f inane ingtransection tn the Jurisdiction in which the goods are locatedat the time of closing, and I want to raise with you thequestion of whether the loan documents should not requ ire theboirower to seek further registrations if and when spares aremoved during the term of the loan. A typical example might wel Ibe a spare thruster unit for a semi-submersible, having, on itsown, a vaiue of a ml I I ion dol lars or more which would be movedfree one shore location to another to be reasonably convenientto the rig wherever It was working. Located ashore, that spare«I I I be subject to the laws of the place where it is locatedfree time to time. It Is quite I ikely that some f ii ing ofdocuments wi I I be required in that jurisdiction to ensure thatthe lenders' interest in the item wl I I be recognized in thatI ocat I on.Fven in the case of f irst del ivery of a new ly bui it rig andlts registration pursuant to the maritime law of some countryother than the place ln which it is built, lt may be prudent tocause a 8 I I I of Sale or other document of conveyance to berecorded in the appropriate pubi ic of f ice to avoid questions ofwhether local law wil I give full effect to the vessel being putunder, say Liberian registry. In Nova Scotia, such fll lng wouldbe made under the Qjlja gf Sale figi in the local Registry ofDeeds Office contemporaneously with the del ivery of the vessel.

In the case of spares brought Into the prov ince, thedocument evidencing the mortgage should be recorded within 50days at the Registry Office for the district in which the goodsare located. Alternatively, and depending on the form of thefinancing document, lt may be appropriate to register it under

GgrpgCnilaaa SuSuc&lfIS AilglairafjKI hate, as to which onefiling covers the entire province.lt may well be either desirable or necessary to f Ile copiesof the financing documents or some of them in the Jurisdictionin which the owning canpany is incorporated. It is understood,for Instance, the effectiveness of charges given by an Englishcompany depends upon their being flied with the EnglishCcmpanles Office.Whether or not various assignments wh Ich are usuailyinvolved in rig financing transactions, such as an assignment ofthe charter hire or a pledge of the operating agreement, arerequired to be flied in a particular Jurisdiction is often anice question and wii I require reference to the local law onassignments and the registration thereof, such as in 14ova Scotiathe basignlMni gf Qcek&slli>Mi.

LAWS GIVING RISE TO LIENS OF OTHER THAN AN ADMIRALTY NATURE

I cannot speak for other Jurisdictions, but In Nova Scotiathe Legislature has a propensity for creating I lens on, aacegother things, personal property and chattels, to secure eitherpubi lc revenues or public or private rIghts.

Where these I lens rank age Inst a vessel once I t Isdel lvered and registered under a foreign flag, I do not know. Ido know, however, that ienders and lawyers both do not have mdesire to find out what view a court might take of the question.Accordingly, It Is usual to take steps to ensure that there areno I lens outstanding against the vessel or spares or %EInmediateiy prIor to delivery.

Liens can arise under a variety of actsl accordingly, thausual practIce will be to have a checklist: first, of statutesto be rev Iewed to see whether a lien Is created ln respect ofthe particular type of vessel or spare parts you are deal ngwIth; and second, If an act does create a I len, a checkl 1st ofthe places at which the liens are recorded, to be examinedInenedlate y prIor to closing.

Sane examples of liens which can arise In Nova Scotl a wouldInclude:

a! Local or municipal taxes owned by the shipyard orothers involved In the transaction. Lifting the lienwill Involve having the shipyard or other party payIts local taxes prior to closIng.

b! Workers' Compensation -- In th Is ProvInce there Is analmost universal compulsory scheme of compensationwith annual assessments, based on his pay roll,payable by the operator of a business, such as ashipyard. The lien to secure the payment of theannual assessment Is very broadly drawn and indeed maynot be technically capable of being discharged at all.The Workers' Compensation Board, however, does notattempt to assert the lien as against goods such as arig which have been sold ~ ~ but the practice lsto obtain a certificate free the Board certifying thatthe shipyard Is up-to-date In Its payments.

c! Workers' Pay Protection � Under the Nova Scot aLabour Standards Code, a I en Is Imposed upon thegoods and chattels of an employer in favour of atribunal to secure vacation pay owing to empI~er'sworkmen. This lien has been judlcla ly held to ceaseto apply to goods sold In the ordinary course ofbusiness and accordingly is not a matter of concern.There Is, however, a posslbll Ity of another I Ienarising under the Labour Standards Code upon thecomplaint of a worker followed by an Order of TheTribunal to secure unpaid wages. Any lien of thIssort must be discharged by payment prior to del lvery.

d! The electric utility In Nova Scotia, which Is owned bythe Province, has a lien against the assets of an

596

Industry for the last 90 days worth of power supply.It is doubtful that this lien extends to goods sold Inthe ordinary course of business but the usual practiceIs to obtain from the power corporation a we Iver as ofthe date of the closing with respect to the rig.

e! Is basicallydesigned to provide protectIon to builders, suppliersand workmen In the buIlding constructIon busIness.However, the Act Is expressed to create a lien Infavour of workmen and material suppliers In connectIonwith the construction of, ~ aL4L, a ship orvessel. Insofar as the legislation attempts to dealwith the title of a vessel regIstered under the ~

It Is undoubtedly Ineffective as thefederal legislation has prlorlty. The situation withrespect to an unregistered vessel, however, ls qu Itedifferent and whether a valid Meehan!cs Lien can bedefeated by registration of the vessel under a foreignflag Is an unresolved question. Accordingly, thepractice would be to conduct the appropriate searchesand lf a I len of this nature were found, to requirethe builder to take the appropriate steps to have theI ien I I fted. f! I pranlsed not to drag taxes Into this discussion butI must ment 1 on the Prov I nc I al Sa I es Tax. At themoment, there Is an exemption fran the tax providedwith respect to vessel s! hence, no concern arises asto tax which might be payable with respect to thevessel . However, there Is a provision of the Actwhich imposes on everyone who se! I s ai retal I, anobt lgatlon to col lect the tax frcm those to whom hesel ls and to remit It to the provincial authorities.The amount collected by a seller and not yet remittedis secured by a lien upon al I of the sellers'property. Depending upon the nature of the businessconducted by the shipyard It may well be that there lsa lien for sane mnount on all of Its assets. It Isnot clear whether this lien disappears on transfer oftitle to goods such as the rig and, unfortunately, InNova Scotia It Is not possible to obtain easily anykind of an up-to-date certificate as to amounts whichmay be outstanding. As The amount outstanding Isusually small compared to the value of the rig, theproblem will In practice be Ignored, although thesolicitor may wish to make a qual If Icat!on to hisopinion. g! The f Inal lien to which I want to refer this afternoonls that provided to the NatIonal Harbours Board tosecure harbour and wharfing fees. As I understand It,they w II I not I et you I eave the harbour w Ithout pay!ngthe fee and accordIngly this is a matter «hIch shouldbe seen to at closIng.

597

The final point I wish to mention ln this section ls not,strictly speaking, a lien, bui could be of concern, particularlyto an Interim lender who Is expecting to receIve the proceeds ofany federal or prov Inc l al government grants or subsl diesassocIated with the construction of a vessel . Both the federaland provincial governments have given themselves a right of set-off under theIr respective Inccme tax acts and other legislationwhereby they may deduct fran any anount which may otherwise bepayable to, say, a shipowner by them any mount which theshipowner ores to either the federal or provincial crown .Accordingly, a party which expects to receive the benef It of anysuch payment coming from the government would be »ell advised tomake Inquiries respecting the state of accounts between, say,the shipowner and both the federal and provincial governments sothat the grant or subsidy does not arrive less some unexpectedenount.

LAINS AFFECTING THE ABILITY OF THE PARTiESTO CARRY OUT THE TRANSACTION

The corporate capacities of borrowers and lenders andothers Involved In a ship financing transaction will, for themost part, be governed by the corporate laws of the jurisdictionunder which the party in question Is Incorporated. The usualpractice Is to obtain copies of the corporate charter andby laws, appr opr late resolutions of Directors and Shareholdersif necessary! authorizing the transaction, evidence of thecontinued existence and good standing of the party ln its bc'Jurisdiction and an opinion of counsel qual lf led to practice Tnthat jurisdiction that the appropr I ate corporate proceedingshave been taken and that the party has the necessary corporatecapacity to carry out lts part of the transaction,

A question which al»ays arises when an aspect of atransaction touches upon Nova ScotIa Is whether one or more ofthe parties are required to be "qual If led to do business" inNova Scotia ln order to be able to enforce theIr rights underthe loan documents.

Unl ike some provinces In Canada, there Is no ob I 1gat1onthat a lender be registered to carry on business here In ordarto val Idly register Its security. Accordingly, the question ofwhether any of the parties to the transaction have to bereg I stered In Nova Scotia In order to make thei r contreatsenforceable here wl I I be a matter to be considered on a ca~ bycase basis.

Similar considerations apply If one of the parties is apartnership. In that case, regIstratIon may be necessary underthe Note thatthere Is conslderabl e doubt as to whether a partnership arI imited partnership may be registered as the owner of a vessmIunder the

It Is unlikely, but possible, that the activities of one ormore of the parties to the transaction In Canada may g1ve rfseto questIons under the Canada!

LAWS HAVING A POSSIBLE BEARING ON THE OPERATION OF THE RIGPerhaps more than any other group, those attending this

conference w I I I be aware of the ef forts of Canada and othermaritime states to extend the Influence of their lars onto thehigh seasI Beyond the traditional three mlle I lmit, beyond themore recent 12 mlle limit, and Indeed out to the edge of theContinental Shelf. I do not Intend to dIscuss ~bather theseassertions of Jur lsdlct ion are good or bad as a matter ofpolicy. Rather I want to concentrate my remarks briefly on someof the practical problems that can arise.There are two main federal statutes which are being used toenforce the poi icy of preferential treatment for Canadians Inof fshore developments. One Is the Canada!. The other Is theThere Is a I so, however, evidence that the Government ofCanada Intends to use al I of the statutes under Its Jur lsdlctlonto bolster the direct controls provIded by FIRA and COGA.The Is a place of legislationwhich gIves to the Federal Cabinet the right to permit or denypermission to a non-el l gib le person to either establ lsh a newbusiness In Canada or take over an existing Canadian business.Broadly speaking, anyone who Is not a Canadian citizen or landedImmigrant resl dent In Canada ls a non-el tgib le person.Campani es, a I though Canadl an Incorporated and Canadiancontrolled, may very wet I be "non-eligible" because of a degreeof foreign ownership. Non-el I gib l e persons who are alreadycarrying on business I n Canada are exenpt f rem the reviewprocess If they expand Into a fairly narrowly defined area ofrelated activities.The procedure to obtaIn approval calls for the provision ofInformation, scmetlmes ln voluminous quantities, to the ForeignInvestment Rev Iew Agency, which has only the power to make arecommendatlon to the Minister. The Minister Is free to acceptor reject the recommendatlon and, in any event, the full Cabinetmakes the dec'Islon.The governing cr l ter I on, which the Federal Cab inet Issupposed to use, ls the concept of "slgnl f leant benefit toCanada." It would be an understatement to say that thatcriterion provides the Federal Government with a good deal ofd I scr eiion.The Act Is we I I drafted to accomp I I sh I ts purpose ofpreventing avoidance. The most frustrating aspect of the Act Isthe very lengthy delay up to 9 months or even longer> entailed

the review process. The Act and its administration are thesubject of wide debate In Canada both pro and con. Whetherchanges w III result fran such debate Is Impossible to say.

As the Act presently stands, the bottce line Is this: anynoneligible person proposing to set up or take over a Canadianbusiness had better be able to demonstrate benefit to Canada lnterms of creation of new Jobs, the investment of new capitaland/or the transfer to Canadians of new technology and the morestate-of-the-art the technology, the better.

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What Impact wf I I thIs have on rig financing transactfonsTThere recently have been Indications that F I RA fs think ing ofconsidering rlgs working In the CanadIan econanlc zone offshoreas being a ploce in Canada to which employees report for work.If that Interpretation ls asserted and upheld, than the mov'amentof the rig Into Canadian waters by a non-eligible person will beconsidered the equivalent of the estabi ishment of a new businessfn Canada and wl I I be subJect to the review process with al I Itsattendant delays ~ Those delays by themselves could beof ensuring that only Canadian-owned dr I I I rigs or ships getwor k In the of f shore. As the number of Canadian r1gs 1 sI lmlted, the Immediate thrust of the FIRA efforts may wei I betoward Jobs for Caned f an res f dents and undertak ings to trainthem to a proper level of fmnfl larfty of equipment.

The more Inwaediate concern of offshore operators w f I I bethe requirements of the the I afestversion of whfch came fnto force on the 5th of Marchp 1982~which required those holdIng exp loratfon rights under pr l~legislation with respect to Canadian offshore areas to negotiatenew arrangmaents with the Federal Government.

The province of Nova Scotia and Canada have recentlY putaside the question of which of them owns or has Jurlsdfctfanover the Nova Scotlan offshore In favour of an Agreasentprovfdlng for Joint adminlstratlon of the area. This Agreementmeans that those exploring offshore Nova Scotia wil I now haveone agency with which to deal and the Nova Scotfan Provfnclmland Canadian Federal authorities will sort out any d lfferencesbetween themselves.

The Province of Newfoundland has declfned to enter intasuch a Joint admlnstratlon agreement and accordfngl y therecontinue to be two competing regimes and consequent uncertaintyfor those Investing In that offshore area.

The Ministers involved have made no secret of the fact thatthe Ieglslatlon Is Intended to Increase Canadian ownersh Ip,control, maployment and knowhow, and ft is accordingly to beexpected that the new Agreements with offshore explorers wl I Icontain many pref erentl al prov I s fons In f avour of Caned I enpur ches lng and mp I oymant.

The potentIal penaltIes for non-ccwapl fence with FIRA andCOGA are severe. In addition to monetary penal tIes, fal lure tacomply with F1RA when requ fred to do so can resul t ln anInjunction to cease operations or even an order requ1r lagdivestiture of the assets used In of fendfng business.

Under 13GA the ultimate penalty wf I I be the denial of tharight to oantfnue exploration or development work.

In I lght of the potential iy severe penal tIes Involved fnthe statutes, ft seams to me that It wll I be Important in thefuture that those who f fnance rfgs for use In Canadian waters oroffshore Canada review careful ly the FIRA status of the ow~and operator of the rig so as to ascertain that It Is perinlttexlto operate In the area of Intended operations,

With respect to COGA, present Indications are that Federalauthor I ties wi I I be requ lrlng Increased use of Caned 1 mn

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personnel and perhaps suppl fes by those operating ln theCanadian offshore. The permit holders wfll undoubtedly passthese requirements on to the operator fn the drilling contract,and tenders w fl I want to assure themse I ves that the addltfonalburdens involved in training Canadians or in adoptfng Canadlan-preference purchasing pol fcfes w f1 I not result In an adverseeffect on the cashf lowe from the dr if I lng contracts which are togo ln repayment of the lending.

I want to close by emphasis lng that the various examples ofCanadian law cited are Just that -- examples. Undoubtedly eachJur f sd I ct ion w fl I have its own set of rules and regulationswhich can or may impact on the structure of a rig financing and

hope these remarks w I I I serve to highlight some of the non-Admlral ty matters w fth wh ich you may be concerned.

DISCUSSION AND QUESTIONS

GORDON BECKER. I have some questfons to address to Mr.Spencer. I believe you have mentioned that a typicalconstruction contract for a drilling rfg often has a provisionin ft permitting the purchaser to have an inspector on theprem lses for the purpose of looking at, approv Ing ordisapproving certain aspects of construction. How does thepurchaser prevent himself fram having such a prov lsfon usedagainst him7 I had fn mind, following delivery, the purchaserasserting that scme of the vendor's warranties concerning therig have been breached. Is not the vendor in good position tosay: "well, your inspector approved such and such, and youcannot now turn around and claim that the work wasunsatisfactory or that the material was not proper materfal7"

My next question Is th Is, You menttoned that,Increasingly, the somewhat famlflar provision that title to thevessel, as Jt is being constructed passed to the purchaser, lsfal I fng Into disfavor. This prompts me to esk you whether atypical construction contract for a drilling rfg may have aprovision that permits the purchaser to withdraw the rig frcrnthe vendor's yard, say in case of Insolvency or bankruptcy onthe part of the vendor,

Lastly, the question about f Jnanclng relating to financingwhich Involves the bare boat charterer as welf as the owner ofthe drilling rig, We assume, of course, that there will be anassJgnment of charter hire by the owner to the lendinginstitution, that the bare boat charterer w if I consent to thisassignment. Are there any danger signals for which the bareboat charterer should watch fn this sftuation2 For example,would he be wise to insist on a provision that preserves hisright to set off from any payments assigned, amounts of moneydue from the owner to him under the terms of the bare boatcharter2

E. S. SPENCER: Taking the first question about theinspector fn the bufider~s yard, or as he Is more usually

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cal led, the supervisor. The supervisor under the contract Issaid to be there to supervise the construction and also to lookat the materials which are being used, to see that they are upto the speci f lcatfons In the bul I ding contract. The prov lslonsare usual ly such that If a supervisor finds that lt ls not beingbuf lt properly, or the materials are incorrect, then that matteris raised immediately with the builder, and a decision ls takenas to whether the builder ls correct or the supervisor iscorrect. If they cannot agree, then there is usually aprovision whereby the classification society decides who Isrfght and who Is wrong.

Therefore, mostly anything which Is raised by a supervisorwllI be corrected before the contract ls completed. However, Ithink you probably have a very good point that If the supervisorhas been there and he has allowed somethfng to go wrong orsomething to be Incorporated which he saId was ail right, thensubsequently, I think ft ls very unlikely that the purchaserwouId have good cause of action against the builder.

GORDON BECKER: Is there anything that' the purchaser can doto protect himself against this consequence2

E. S. SPENCER: Wefi, the supervisor ls there as his agentand, therefore, he is virtually bound by what his agent fsdoing. Either he gets a good chap there to be a supervIsor orelse he sacks him if he does not do what he ls told to do. I donot think that he can have hfs cake and eat it.

The second question was concerning a building contract,under which parts of the rig passed to the purchaser as he paidthe various Installments on the purchase price. There areprov Isfons written Into a contract such as that, which allow thepurchaser to go fn and use the facilities of the builder tofinish the vessel or finish the rig.

That was probably fine ln the days when ships were beingbuilt of wood and you need a few shlpwrlghts to f inlsh the work,but ln the day of the modern ship, It ls really quiteImpractical. There fs, of course, a prov Islon such as yousuggested, to allow the purchaser to take away his property Ifthe builder becomes insolvent. The problem with that, ofcourse, ls that lt may not be fn a state where he can take ltaway, or liquidator or receiver, may say It ls his or thecompany's. I think those are two of the maIn reasons why thattype of contract is now falling out of favor.

As for the third question regarding the assignment ofcharter hire under the bare boat charter. I was talkIng aboutthe f Inanclal bare boat or financial dern fse charter where,except at the end of the lease period, virtually all payments goone way, that Is, from the charterer to the owner. I cannotthink of any provision In that type of charter where thecharterer Is going to get any money until, under the terms ofthe charter, the rig Is soId and the sale proceeds are d Ivldedas they have been agreed In the contract.

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GORDON BECKER: Supposing the owner did not keep up thevessel's registry properly and the vessel became forfeited2That would be a situation where the charterer mfght wefi feelthat to keep on that charter hire would be an unfa Ir burden forhim to bear.

E. S. SPENCER: I suppose that in that type of contractthere are only two main obligations on the owner. The f lrst isthat he should give to the charterer the quiet enjoyment of thevessel during the charter period so long as the chartererperforms hfs obligations. The other is the one, that you havehfghllghted, is that the regJstration should be kept up.Certainly, once under the British Shipping Register, you do notreally have to do anything else during the time that lt Isthere, which would make lt come off the register, because allthings such as keeping ft in the right classfficatlon are theobligatfons of the charterer under the charter party. I supposethat is one of the main reasons why lt could be taken off theregister, because It does not fulfill the requirements of theDepartment of Transport surveyors. I would agree with you,theoretically, that Is one possib I I fty, but it fs very unlikely.

GORDON BECKER: Thank you.

WYLIE SPICER: I would like to ask Ashton O' Dwyer aquestion. I am wonderfng what the relationship Is underAmerican law between a clafm under the Joilaz hei by a seaman andrights to entitle hfm to worker's ccmpensation2

ASHTON O' DWYER: Well, If a seaman is covered by the 4QJIashe actually has two remedies against his employer. One Is

the remedy of maintenance and cure wh Ich Js awarded to theseaman who was injured in the service of the sh ip, withoutregard to fau It on his employer ' s part, and without regard tounseaworthiness on the part of the vessel. This maintenanceremedy ls an entitlement to a daily allowance which is intendedto compensate the seaman for the value of the food and lodgingthat he would have received aboard the sh Ip had he not beeninjured.

The rate of ma Intenance today ls an Issue that is beinglitigated all over the country. Until the last year and a halfor two years, the rate had been fixed at $8.00 a day, throughcustcm really, and the fact that contracts with unions and shipowners arbitrarily f Ixed this $8.00 rate. In today 's economywith what th ings cost and what lodging costs, $8.00 ls simplyunrealistic. At least, from the plaintiff's perspective.

Defense lawyers like myself have been able to demonstratethrough motion practice that you can, when you are feeding alarge group of men, IJve reasonably well on $8.00 a day .Unfortunately, none of the judges before whan this has beenIffigated in New Orleans has bought it. This has been proventhrough the testlmoney of economists, who have studied what food

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and lodging cost when the $8.00 a day rate came into vogue.Plaintiffs have had their economists project that same costforward. I bel leva the highest daily maintenance award so farIs in The neighborhood of $20.00 a day.

Part In parcel, with the maintenance remedy, is the remedyof cure, which Is the seaman's entitlement to medical expenses.These are due without regard to fault, If he is injured fn theservice of the ship, until he reaches a point of maximum medicalcure. That is, where he can no longer respond to treatment oruntil such a time as it is determined that his dfsease InIncurable. For instance, what happens to the poor fellow who lssuffering from cancar7 He was stricken in the service of aship. Maybe he worked on a chemical carrier, and his conditionIs terminal. The law says you cannot expect the sh Ipowner tocontinue to pay th is man until he dies. Consequently, there Isthe nonfault remedy of maintenance and cure and there fs thefault remedy of damages. You do not of fset the man's damages onwhat he received by way of maintenance and cure.

WYL IE SPICER: Sut, you can bring an action separate andapart frcm recovery of Worker's Compensation?

ASHTON O' DWYER: Yes, the seaman has no Worker'5Compensation remedy as such. He has the right to maintenanceand cure and the right to damages If his employer Is at fault ifthe vessel was unseaworthy.

EDGAR GOLD. Mr Chairman, I would like to try and returnfor a few moments to the question of def in I tion which you havewritten eloquently about, and several of the speakers today havealready referred to. I am wondering whether this dilemma willnot eventually be solved by the CMI convention which is, atpresent, being worked upon by IMO, the international Conventionof Offshore Mobile Craft which was produced in draft form duringthe Rio de Janeiro meeting of the CMI.

The discussion there showed that t'hese craft are not reallyships the way we know them, No more than the helicopter withinthe Jones hei parameters. It Is not so much looks, but it Isalso the operation. I thfnk that is the real key. These craftsare not being operated as ships,

The draft conventi on defines these craft as: "any marinestructure of whatever nature not permanently fixed into the sea-bed which a! ls capable of mov Ing or being moved whilstfloating in or on water, whether or not attatched to the seabeddur Ing operatfons, and b! Is used or intended for use ln theexploration and exploitation, processing, transport or storageof the mineral resources of the sea-bed or fts subsoil or inancillary actlvitiesiw lt would seem to me that a completelynew regime for these structures, because I refuse to cali themships, will perhaps solve this dilemma w 1th which we have beenfaced.

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WYL IE SPICER: I wonder If you have any conf ldence that theCanadJan government ls lfkely to adopt that conventfon2

EDGAR GOLD: Well, that Is an interesting quastfon, Wylfe.The only time the Canadian position has been tested was duringthe MARPOL discussions ln 1973 at IMCO. There was a very strongdiscussion between several of the Maritime countrfes on one sideand Canada on the other side. Canada argued that thesestructures should not be cl asslf fed as ships against the verystrong opposition of some of the Maritime countries. So, itseems that the Canadian position going back almost a decade Jsthat these are extra-terrftorfal craft rather than ships in anormal manner.

With respect to the question of limitation of IIab II lty, asn preconditfon to operatfng In the offshore, many of the oilcompanies enter Into operating agreements w 1th the governmentwhich prov ide str I ct I fabfl Ity prov fslons with respect to thingslike pollution. Whether or not those operating agreementsfmplnge on the rights of the owners or operators of rfgs to basedefenses on ihe basis of limitation of liability Js not entirelyct ear to me.

Neverfheless, there Is a very extensive regul story regimein this country whfch does attempt to prov Jde strict I I abl I ltyprovisions Jn some cases, by way of statute In the Worth, but Inother cases by way of operating agreements, which are requiredfor of fshore operation.

And, on behal f of the organizers of this particular sessionI would I fke to thank al I of you for coming.

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