Australia: EPC Contracts In The Australian Renewable Energy Sector – Wind Farms, part 5

(c) Contractor's perspective

The main reason for a contractor insisting on a project company being subject to an exclusive remedies clause is to have certainty about its potential liabilities. The preferred position for a contractor will be to confine its liabilities to what is specified in the EPC contract. For example, an agreed rate of liquidated damages for delay and, where relevant, underperformance of the wind farm. A contractor will also generally require the amount of liquidated damages to be subject to a cap and for the EPC contract to include an overall cap on its liability.

(d) Project company's perspective

The preferred position for a project company is for it not to be subject to an exclusive remedies clause. An exclusive remedies clause limits the project company?s right to recover for any failure of the contractor to fulfil its contractual obligations to those remedies specified in the EPC contract. For this reason, an exclusive remedies clause is an illogical clause to include in an EPC contract from the perspective of a project company because it means that the project company has to draft a remedy or exception for each obligation - this represents an absurd drafting position. For example, take the situation where the EPC contract does not have any provision for the recovery of damages other than liquidated damages. In this case, if the contractor has either paid the maximum amount of liquidated damages or delivered the wind farm in a manner that does not require the payment of liquidated damages (ie it is delivered on time and performs to specification) but subsequent to that delivery the project company is found to have a claim, say for defective design which manifests itself after completion, the project company will have no entitlement to recover any form of damages as any remedy for latent defects has been excluded.

The problem is exacerbated because most claims made by a project company will in some way relate to performance of the wind farm and PLDs were expressed to be the exclusive remedy for any failure of the wind farm to perform in the required manner. For example, any determination as to whether the wind farm is fit for purpose will necessarily depend on the level and standard of the performance of the wind farm. In addition to claims relating to fitness for purpose, a project company may also wish to make claims for, amongst other things, breach of contract, breach of warranty or negligence. The most significant risk for a project company in an EPC contract is where there is an exclusive remedies clause and the only remedies for delay and underperformance are liquidated damages. If, for whatever reason, the liquidated damages regimes are held to be invalid, the project company would have no recourse against the contractor as it would be prevented from recovering general damages at law, and the contractor would escape liability for late delivery and underperformance of the wind farm.

(e) Fail safe clauses

In contracts containing an exclusive remedies clause, the project company must ensure all necessary exceptions are expressly included in the EPC contract. In addition, drafting must be included to allow the project company to recover general damages at law for delay and underperformance if the liquidated damages regimes in the EPC contract are held to be invalid. To protect the position of a project company (if liquidated damages are found for any reason to be unenforceable and there is an exclusive remedies clause), we recommend the following clauses be included in the EPC contract:

1. " If clause [delay liquidated damages] is found for any reason to be void, invalid or otherwise inoperative so as to disentitle the Project company from claiming Delay Liquidated Damages, the Project company is entitled to claim against the Contractor damages at law for the Contractor's failure to complete the Works by the Date for Practical Completion.
2. If [ ].1 applies, the damages claimed by the Project company must not exceed the amount specified in Item [ ] of Appendix [ ] for any one day of delay and in aggregate must not exceed the percentage of the EPC contract Price specified in Item [ ] of Appendix [ ]."

These clauses (which would also apply to PLDs) mean that if liquidated damages are held to be unenforceable for any reason the project company will not be prevented from recovering general damages at law. However, the amount of damages recoverable at law may be limited to the amount of liquidated damages that would have been recoverable by the project company under the EPC contract if the liquidated damages regime had not been held to be invalid (see discussion above). For this reason, the suggested drafting should be commercially acceptable to a contractor as its liability for delay and underperformance will be the same as originally contemplated by the parties at the time of entering into the EPC contract.

In addition, if the EPC contract excludes the parties rights to claim their consequential or indirect losses, these clauses should be an exception to that exclusion. The rationale being that the rates of liquidated damages are likely to include an element of consequential or indirect losses.

Force Majeure

(f) What is force majeure?

Force majeure clauses are almost always included in EPC contracts. However, they are rarely given much thought unless and until one or more parties seek to rely on them. Generally, the assumption appears to be that "the risk will not affect us" or "the force majeure clause is a legal necessity and does not impact on our risk allocation under the contract". Both of these assumptions are inherently dangerous, and, particularly in the second case, incorrect. Therefore, especially in the current global environment, it is appropriate to examine their application.

Force majeure is a civil law concept that has no real meaning under the common law. However, force majeure clauses are used in contracts because the only similar common law concept – the doctrine of frustration – is of limited application. For that doctrine to apply the performance of a contract must be radically different from what was intended by the parties. In addition, even if the doctrine does apply, the consequences are unlikely to be those contemplated by the parties. An example of how difficult it is to show frustration is that many of the leading cases relate to the abdication of King Edward VIII before his coronation and the impact that had on contracts entered into in anticipation of the coronation ceremony.

Given force majeure clauses are creatures of contract their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly and in the event of any ambiguity the contra proferentem rule will apply. Contra proferentem literally means "against the party putting forward". In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it. The parties may contract out of this rule.

The rule of ejusdem generis, which literally means "of the same class", may also be relevant. In other words, when general wording follows a specific list of events, the general wording will be interpreted in light of the specific list of events. In this context it means that when a broad "catch-all" phrase, such as "anything beyond the reasonable control of the parties", follows a list of more specific force majeure events the catch all phrase will be limited to events analogous to the listed events. Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.

The underlying test in relation to most force majeure provisions is whether a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party. There are generally three essential elements to force majeure:

• It can occur with or without human intervention
• It cannot have reasonably been foreseen by the parties
• It was completely beyond the parties? control and they could not have prevented its consequences.

Given the relative uncertainty surrounding the meaning of force majeure we favour explicitly defining what the parties mean. This takes the matter out of the hands of the courts and gives control back to the parties. Therefore, it is appropriate to consider how force majeure risk should be allocated.

(g) Drafting force majeure clauses

The appropriate allocation of risk in project agreements is fundamental to negotiations between the project company and its contractors. Risks generally fall into the following categories:

• Risks within the control of the project company
• Risks within the control of the contractor
• Risks outside the control of both parties.

The negotiation of the allocation of many of the risks beyond the control of the parties, for example, latent site conditions and change of law, is usually very detailed so that it is clear which risks are borne by the contractor. The same approach should be adopted in relation to the risks arising from events of force majeure.

There are two aspects to the operation of force majeure clauses:

• The definition of force majeure events
• The operative clause that sets out the effect on the parties? rights and obligations if a force majeure event occurs.

The events which trigger the operative clause must be clearly defined. As noted above, it is in the interests of both parties to ensure that the term force majeure is clearly defined.

The preferred approach for a project company is to define force majeure events as being any of the events in an exhaustive list set out in the contract. In this manner, both parties are aware of which events are force majeure events and which are not. Clearly, defining force majeure events makes the administration of the contract and, in particular, the mechanism within the contract for dealing with force majeure events simpler and more effective.

An example exhaustive definition is:

An operative clause will act as a shield for the party affected by the event of force majeure so that a party can rely on that clause as a defence to a claim that it has failed to fulfil its obligations under the contract.

An operative clause should also specifically deal with the rights and obligations of the parties if a force majeure event occurs and affects the project. This means the parties must consider each of the events it intends to include in the definition of force majeure events and then deal with what the parties will do if one of those events occurs.

An example of an operative clause is:

1. " Neither party is responsible for any failure to perform its obligations under this Contract, if it is prevented or delayed in performimg those obligations by an Event of Force Majeure.
2. Where there is an Event of Force Majeure, the party prevented from or delayed in performing its obligations under this Contract must immediately notify the other party giving full particulars of the Event of Force Majeure and the reasons for the Event of Force Majeure preventing that party from, or delaying that party in performing its obligations under this Contract and that party must use its reasonable efforts to mitigate the effect of the Event of Force Majeure upon its or their performance of the Contract and to fulfil its or their obligations under the Contract.
3. Upon completion of the Event of Force Majeure the party affected must as soon as reasonably practicable recommence the performance of its obligations under this Contract. Where the party affected is the Contractor, the Contractor must provide a revised Program rescheduling the Works to minimise the effects of the prevention or delay caused by the Event of Force Majeure
4. An Event of Force Majeure does not relieve a party from liability for an obligation which arose before the occurrence of that event, nor does that event affect the obligation to pay money in a timely manner which matured prior to the occurrence of that event.
5. The Contractor has no entitlement and the Project Company has no liability for:
6. 1. any costs, losses, expenses, damages or the payment of any part of the Contract Price during an Event of Force Majeure; and
   2. any delay costs in any way incurred by the Contractor due to an Event of Force Majeure."

In addition to the above clause, it is important to appropriately deal with other issues that will arise if a force majeure event occurs. For example, as noted above, it is common practice for a contractor to be entitled to an extension of time if a force majeure event impacts on its ability to perform the works. Contractors also often request costs if a force majeure event occurs. In our view, this should be resisted. Force majeure is a neutral risk in that it cannot be controlled by either party. Therefore, the parties should bear their own costs.

Another key clause that relates to force majeure type events is the contractor?s responsibility for care of the works and the obligation to reinstate any damage to the works prior to completion. A common example clause is:

1. " The Contractor is responsible for the care of the Site and the Works from when the Project Company makes the Site available to the Contractor until 5.00 pm on the Date of Commercial Operation.
2. The Contractor must promptly make good loss from, or damage to, any part of the Site and the Works while it is responsible for their care.
3. If the loss or damage is caused by an Event of Force Majeure, the Project Company may direct the Contractor to reinstate the Works or change the Works. The cost of the reinstatement work or any change to the Works arising from a direction by the Project Company under this clause will be dealt with as a Variation except to the extent that the loss or damage has been caused or exacerbated by the failure of the Contractor to fulfil its obligations under this Contract.
4. Except as contemplated in clause [ ].3, the cost of all reinstatement Works will be borne by the Contractor."

This clause is useful because it enables the project company to, at its option, have the damaged section of the project rebuilt as a variation to the existing EPC contract. This will usually be cheaper than recontracting for construction of the damaged sections of the works.

Operation and maintenance

(h) Operating and maintenance manuals

The contractor is usually required to prepare a detailed Operating and Maintenance Manual (O&M manual). The EPC contract should require the contractor to prepare a draft of the O&M Manual within a reasonable time to enable the project company, the operator and possibly the lenders to provide comments, which can be incorporated into a final draft at least six months before the start of commissioning.

The draft should include all information that may be required for start-up, all modes of operation during normal and emergency conditions and maintenance of all systems of the facility.

(i) Operating and maintenance personnel

It is standard for the contractor to be obliged to train the operations and maintenance staff supplied by the project company. The cost of this training will be built into the contract price. It is important to ensure the training is sufficient to enable such staff to be able to efficiently, prudently, safely and professionally operate the wind farm upon commercial operation. Therefore, the framework for the training should be described in the appendix dealing with the scope of work (in as much detail as possible). This should include the standards of training and the timing for training.

The project company?s personnel trained by the contractor will also usually assist in the commissioning and testing of the wind farm. They will do this under the direction and supervision of the contractor. Therefore, absent specific drafting to the contrary, if problems arise during commissioning and/ or testing the contractor can argue they are entitled to an extension of time etc. We recommend inserting the following clause:

1. " The Project Company must provide a sufficient number of competent and qualified operating and maintenance personnel to assist the Contractor to properly carry out Commissioning and the Commercial Operation Performance Tests.
2. Prior to the Date of Commercial Operation, any act or omission of any personnel provided by the Project Company pursuant to GC [ ].1 is, provided those personnel are acting in accordance with the Contractor's instructions, directions, procedures or manuals, deemed to be an act or omission of the Contractor and the Contractor is not relieved of its obligations under this Contract or have any claim against the Project Company by reason of any act or omission."

Spare parts

The contractor is usually required to provide, as part of its scope of works, a full complement of spare parts (usually specified in the appendices (the scope of work or the specification) to be available as at the commencement of commercial operation.

Further, the contractor should be required to replace any spare parts used in rectifying defects during the defects liability period, at its sole cost. There should also be a time limit imposed on when these spare parts must be back in the store. It is normally unreasonable to require the spare parts to have been replaced by the expiry of the defects liability period because that may, for some long lead time items, lead to an extension of the defects liability period.

The project company also may wish to have the option to purchase spares parts from the contractor on favourable terms and conditions (including price) during the remainder of the concession period. In that case it would be prudent to include a term which deals with the situation where the contractor is unable to continue to manufacture or procure the necessary spare parts. This provision should cover the following points:

• Written notification from the contractor to the project company of the relevant facts, with sufficient time to enable the project company to order a final batch of spare parts from the contractor
• The contractor should deliver to, or procure for the project company (at no charge to the project company), all drawings, patterns and other technical information relating to the spare parts
• The contractor must sell to the project company (at the project company?s request) at cost price (less a reasonable allowance for depreciation) all tools, equipment and moulds used in manufacturing the spare parts, to extent they are available to the contractor provided it has used its reasonable endeavours to procure them.

The contractor should warrant that the spare parts are fit for their intended purpose, and that they are of merchantable quality. At worst, this warranty should expire on the later of:

• The manufacturer?s warranty period on the applicable spare part
• The expiry of the defects liability period.

The project company should be aware that the contractor may be purchasing the spare parts from the Original Equipment Manufacturer (OEM). The OEM will have typically imposed non-negotiable warranties on the spare parts that the contractor will try to pass-through to the project company. This should be resisted on the part of the project company. However, the project company should be prepared to pay higher prices for those spare parts to reflect the greater risk the contractor will be accepting in place of the pass-through of the OEM warranties.

Interface issues

In some circumstances, a split contract structure may be used to achieve a lower overall contract price than would be achieved under an EPC contract. For example, a structure with a BOP contract and an equipment supply contract may be used. However, if a split structure is used, it is critical that a single point of responsibility is provided. If not, the project company will be left with interface risk which will impact on bankability.

Matters that are critical to providing a single point of responsibility are:

• Providing that no claim is available by the contractor against the project company arising out of an act or omission of any other contractor
• Preventing split contractors from having the ability to make a claim on the project company due to the default of one of the other contracting entities (e.g. equipment supply contractor claiming against the project company for a default caused by the balance of plant contractor).

If a split contract structure is used, we recommend inserting the following clauses:

DISPUTE RESOLUTION

Dispute resolution provisions for EPC contracts could fill another entire paper. There are numerous approaches that can be adopted depending on the nature and location of the project and the particular preferences of the parties involved.

However, there are some general principles which should be adopted. They include:

• Ensuring that the dispute resolution process is aligned with that under the PPA
• Having a staged dispute resolution process that provides for internal discussions and meetings aimed at resolving the dispute prior to commencing action (either litigation or arbitration)
• Obliging the contractor to continue to execute the works pending resolution of the dispute
• Not permitting commencement of litigation or arbitration, as the case may be, until after commercial operation of the wind farm. This provision must make exception for the parties to seek urgent interlocutory relief i.e. injunctions and to commence proceedings prior to the expiry of any limitations period. If the provision does not include these exceptions it risks being unenforceable
• Providing for consolidation of any dispute with other disputes which arise out of or in relation to the construction of the wind farm. The power to consolidate should be at the project company?s discretion.

We have prepared a paper which details the preferred approach to be taken in respect of dispute resolution regimes in various Asian jurisdictions including the PRC, Philippines, Thailand, Vietnam and Taiwan. You should consult this paper, or ask us for a copy, if you want more information on this topic.

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