Practical Limitations of Suspension Rights in Complex Oil and Gas Projects

Suspension rights are a standard feature of EPC contracts in oil and gas projects, designed to give owners a degree of flexibility, particularly when circumstances are such that mechanisms like termination and variation alone, are not viable for efficient situation management. Whilst the triggers and compensation payable for the exercise of suspension rights are usually clearly defined in the contract, the operational impact can slowly erode project momentum if prolonged and is often an afterthought during contract negotiations.

Typical Suspension Framework

Carefully drafted EPC contracts will approach suspension as having its own distinct framework within the contract. This will generally include setting out the following details for clarity between the parties:

• who can suspend and on what grounds (for example, for convenience or due to breach)
• notice requirements and suspension duration
• consequences (time and/or cost relief v’s no relief)
• obligations during the suspension period
• if standby rates apply or if demobilisation is required

Adopting a framework approach aims to ensure that the parties are clear on what triggers suspension, the price of suspending, and the intended way forward thereafter.

Neutral Right to Suspend – Is It Really Neutral?   

When the contract provides suspension rights to each of the parties involved, it is perhaps tempting (at least in the immediate instance) to conclude that such an approach creates a neutrality between the parties, providing a level playing field when it comes to exercising suspension rights. In the context of complex oil and gas contracts, which are inherently subject to external disruption, suspension rights can (and often do) become strategic weapons.

Mitigations to Suspension

Several approaches can be taken in the contract to mitigate and manage adverse impacts incurred because of suspension, including but not limited to standby compensation and time relief. However, there are various instances that can often be overlooked by such mitigations and losses incurred can be unrecoverable as a result.  By way of example, pre-agreed standby rates generally price for inactivity during periods of suspension, whilst remaining silent on the costs associated with restarting the work. As such, and in the absence of express drafting to counter the position, the financial impacts associated with restarting the work tend to be absorbed operationally by the contractor. To alleviate exposure to these costs, careful consideration of mobilisation and demobilisation costs should be considered during contract negotiations.

Concluding Remarks 

The right to suspend is an important and powerful component in complex contracts (such as EPC contracts). Whilst the right to suspend can usefully operate to preserve the legal position agreed between the parties contractually, consideration must also be given to the operational realities during any prolonged period of suspension. It must be borne in mind, that suspension will freeze the contract but not the project. Short periods of suspension may be more easily absorbed (but not always), whereas repeated or prolonged periods of suspension can have more profound adverse impacts to the wider project (and indeed the other operations of the parties).