Supply of Equipment for Marine, Offshore Oil and Gas (Part 1)

Contracting to supply equipment internationally requires a broad understanding of the issues involved and a comprehensive contracting strategy. Beside the usual contractual requirements applicable to domestic transaction, Parties will need to review and consider additional issues relating to: Country/Political Risk and Party Risk, Export and Import Requirements and Restrictions, Delivery and Shipping Terms, Price, Currency Exchange and Control, Payment Terms, Insurances, Documentation and Certificates, Taxes and Duties, Regulatory Requirements, Third Party Risks, Governing Laws and Jurisdiction, Enforceability of any Arbitration or Court Award and Warranty Issues. Contemporaneous with the issue of governing law, one will also need to consider any international or bilateral trade treaties or convention that may be applicable to their contract. This myriad of issues will certainly require a team effort comprising inputs and support from relevant personnel (estimators, commercial managers, finance/tax managers, lawyers or contract specialists, bankers, insurers, shipping agents, custom brokers, freight forwarders, engineers and other technical experts) to ensure that all pertinent factors are covered comprehensively.

The contracting process for international Supply of Equipment may be summarized broadly into 3 stages: namely, the Pre-Contracting stage, the Contracting stage, the Performance and Completion stage. This article provides a general view of the pre-contracting stage. At this stage, the Parties have to be very clear and careful in their communication, as they can inadvertently commit themselves to legally binding contractual obligations, through the words or language used. An example will be a letter of intent that could prove to be legally binding.

The Buyer initiates the process by sending a request for quotation (RFQ), inviting Sellers (or pre-qualified Sellers) to submit their quotation or bid for the supply of specific equipment. The RFQ will usually include an outline specification, drawings and other technical requirements. Upon receipt of the request from Buyer, the various Sellers review and consider the product range, competency, delivery schedule and other commercial and technical matters. Interested Seller(s) then prepares and sends their Quotation (with or without qualifications) together with Specification, Drawings and other required information to the Buyer. In their quotation, Seller will normally reserve a right to revise the quoted price after the expiry of a stipulated time frame.

The Buyer evaluates the various quotations and invites the most suitable Seller(s) for further discussion. For “off the self” items or less complicated equipment, further communication on clarification and revision will be done through emails or telephone calls. This may eventually lead to the contract signing. Where complex equipments are involved, the Parties will usually hold Technical Evaluation meetings to clarify and revise the Specification or drawings accordingly. The various revisions to the Specification and drawings will be dated and numbered. The Seller will usually indicate a design freeze date, after which any further modification to the design or Specification will be at the Buyer’s expense. Where the equipment is to be integrated with other equipments, computer systems or machines, the vendors of these equipments should also be invited to such meeting to sort out integration and other technical issues.

After the discussion, outstanding items are usually incorporated into a letter of intent setting out the preliminary points of agreement and those that requires further action or discussion. This is usual, as the Seller may need the letter for manufacturing and other essential planning. The Buyer may also need the letter for preliminary discussion with their Sub-Buyer or financiers. Once the conditions and requirements in the letter of intent have been addressed, the Parties will turn their attention to negotiating and finalizing all outstanding contractual and technical details. Usually, this will involve teams from both sides, comprising commercial, legal and technical personnel. It is usual to have two separate teams, one handling the technical issues and the other attending to the negotiations on commercial and contractual issues.

After signing of the contract signing, events will normally be in accordance with the following sequent namely; Payment, Furnishing of Security Documents (where applicable), Seller commences manufacturing of equipment, pre-shipment inspection or factory acceptance test, Shipment of equipment, Receipt of equipment, Inspection of equipment, Installation, pre-commissioning, Commissioning, Completion and Warranty issues.

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