The BP/Deepwater Horizon accident spells a word of caution for oil & gas service and supply companies: T&C standard warranty may expose you


Following the Deepwater Horizon oil spill BP formed an investigation team in order to identify the causes of the accident. The Investigation Team identified a well integrity failure as the factor triggering the chain of events leading to the spill, and pointed out that Halliburton could have identified the flaw. Predictably, Halliburton rejected BP’s conclusions and asserted that well owner is responsible for designing and testing.

The conflicting views of BP and Halliburton outline a relevant question: what is or should be the extension of contractor’s responsibility for the performance of the good/service?

The warranty provisions used by the major oil companies commit the contractor to all-embracing obligations:“fit for the purposes specified in the CONTRACT”,“high quality and workmanship.” Such wording places ample and open-ended liability in the shoulders of contractor.

It is questionable that in the context of equipment and services delivered for a complex, hazardous activity such as offshore E&P "fitness for a particular purpose" type warranties represent a realistic and fair allocation of risks between the oil company and contractor.

Manufacturers of mission-critical computer programs(e.g.MS SQL, Oracle DB, SAP)face liability issues similar to those of O&G contractors: malfunctioning of those applications will bring a business to a halt. However,the examination of the standard warranties provided for computer programs shows that the IT industry adopted a benchmark entirely different from the O&G industry. Instead of the open-ended warranties used by the O&G industry, the IT industry standard warranties are closed ended. Software manufacturers guarantee that their product will perform the functions described in the documentation. Because of such definite scope warranty claims can be determined against specific tests and metrics.

The Articles makes the case that the O&G industry should replace the current open-ended warranties with closed ended warranties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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