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; and
- 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 2 aspects to the operation of force majeure clauses:
- the definition of force majeure events; and
- 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. Please refer above in this paper for discussion of the concept and definition of events of force majeure in the context of the RE IPP Programme.
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 Event of Force Majeure is an event or circumstance which is beyond the control and without the fault or negligence of the party affected and which by the exercise of reasonable diligence the party affected was unable to prevent provided that event or circumstance is limited to the following:
- riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or not) acts of terrorism, civil war, rebellion, revolution, insurrection of military or usurped power, requisition or compulsory acquisition by any governmental or competent authority;
- ionising radiation or contamination, radio activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radioactive toxic explosive or other hazardous properties of any explosive assembly or nuclear component;
- pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds;
- earthquakes, flood, fire or other physical natural disaster, but excluding weather conditions regardless of severity; and
- strikes at national level or industrial disputes at a national level, or strike or industrial disputes by labour not employed by the affected party, its subcontractors or its suppliers and which affect an essential portion of the Works but excluding any industrial dispute which is specific to the performance of the Works or this Contract."
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:
- "Neither party is responsible for any failure to perform its obligations under this Contract, if it is prevented or delayed in performing those obligations by an Event of Force Majeure.
- 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.
- 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
- 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.
- The Contractor has no entitlement and the Project Company has no liability for:
- any costs, losses, expenses, damages or the payment of any part of the Contract Price during an Event of Force Majeure; and
- 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:
- "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.
- 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.
- 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.
- 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
Operating and Maintenance Manuals
The contractor is usually required to prepare a detailed Operating and Maintenance 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 6 months before the start of commissioning.
The draft should include all information which may be required for start-up, all modes of operation during normal and emergency conditions and maintenance of all systems of the Facility.
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 Facility 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 Facility. 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:
- "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
- 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."
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; and
- 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; and
- 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.
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:
- 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 Facility. 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; and
- providing for consolidation of any dispute with other disputes which arise out of or in relation to the construction of the Facility. The power to consolidate should be at the project company's discretion.
APPENDIX 1 EXAMPLE CLAUSES
Part I - Performance Testing and Guarantee Regime - Wind Projects - RE IPP Programme
1 COMMERCIAL OPERATION PERFORMANCE TESTS, COMMERCIAL OPERATION, POST COD PERFORMANCE TESTS AND FINAL COMPLETION
1.1 The Contractor may notify the Owner at least 21 Days before a Unit or Units will, in the reasonable opinion of the Contractor be ready for the issue of the Notice of Commencement of Unit by the Owner under the Power Purchase Agreement. The Contractor must not provide a notice under this clause more than 180 Days before the Scheduled COD.
1.2 As soon as the Unit or Units are, in the reasonable opinion of the Contractor, ready for the issue of the Notice of Commencement of Unit by the Owner under the Power Purchase Agreement, the Contractor must give a notice to that effect to the Owner.
1.3 Not later than 7 Days after receipt of the Contractor's notice under clause 1.1, the Owner must either:
1.3.1 issue the Notice of Commencement of Unit to the Buyer under the Power Purchase Agreement (with a copy to the Contractor and the Lenders); or
1.3.2 notify the Contractor that the Unit or Units are not ready for the issue of the Notice of Commencement of Unit under the Power Purchase Agreement and indicate any defects.
1.4 If the Owner notifies the Contractor of any defects in accordance with clause 1.3.2 the Contractor must promptly correct those defects and the procedures described in clauses 1.1-1.3 must be repeated until the Owner issues the Notice of Commencement of Unit to the Buyer under the Power Purchase Agreement.
1.5 During the Early Operating Period, the Contractor is responsible for the Operation and Maintenance of the Unit or Units and all related parts of the Works and the Facility, including providing and training all staff and personnel required to Operate and Maintain the Unit or Units and all related parts of the Works and the Facility.
1.6 Despite the issue of the Notice of Commencement of Unit to the Buyer under the Power Purchase Agreement and any other provisions of this Contract to the contrary, the Contractor remains responsible for care, custody and control of the Unit or Units and all other parts of the Works and the Facility until the Commercial Operation Date.
1.7 In consideration for the Contractor Operating and Maintaining the Unit or Units and all related parts of the Works and the Facility during the Early Operating Period and for complying with its other obligations under clauses 1.2-1.6, the Owner must pay the Contractor 50% of the net profit (after tax and the Owner's costs arising out of the operation of such Unit or Units and the generation of the Early Operating Energy have been deducted) derived from the Early Operating Energy Payments received by the Owner under the Power Purchase Agreement in respect of the Early Operating Energy generated from such Unit or Units. Following receipt of the Early Operating Energy Payments, the Owner must provide the Contractor with a statement setting out the relevant Early Operating Energy Payments received together with a detailed calculation of the Owner's net profit derived therefrom and the Contractor's share of such net profit. The Contractor's share of such profit will be held by the Owner in an interest bearing account until the Contractor becomes entitled to receive such payment in accordance with clause 1.8.
[Drafting note: the drafting of this clause will depend on the incentive/reward structure proposed for each contract, and should be reviewed on a project-by-project basis.]
1.8 The Owner must pay the amounts due to the Contractor under clause 1.7, plus the interest accrued on such amounts, on the date which is (i) 6 Months after the Commercial Operation Date, provided that the Post COD Performance Guarantees up to that date have been met or Performance Liquidated Damages payable have been paid, or (ii) such earlier date on which this Contract is terminated, and following receipt by the Owner of a Tax Invoice for those amounts from the Contractor.
1.9 The issue of a Notice of Commencement of Unit to the Buyer under clause 1.3.1 does not:
1.9.1 operate as an admission that all the requirements of Commercial Operation in respect of the Unit or Units have been met;
1.9.2 prejudice any of the Owner's rights, including the right to require the Contractor to satisfy all these requirements;
1.9.3 guarantee that the Unit or Units will be connected to the System or that Commercial Operation will be achieved; or
1.9.4 entitle the Contractor to any payment under clause 1.8 unless and until the Owner receives corresponding payments under the Power Purchase Agreement.
1.10 After completion of Commissioning, the Contractor must give the Owner at least 7 Days prior written notice that the Equipment, Works and Facility (or any component part of the Works and Facility) are ready for the Commercial Operation Performance Tests.
1.11 As soon as reasonably practicable after receipt of a notice under clause 1.10, the Owner must issue a notice to the Contractor specifying the date for commencement of the Commercial Operation Performance Tests if such date is not identified in the Program and/or Schedule 8 (Tests).
1.12 The Contractor must notify the Owner at least 70 Days before the whole of the Works will, in the opinion of the Contractor:
1.12.1 reach the stage of Commercial Operation; and
1.12.2 be suitable for the issue of the Facility Completion Form by the Independent Engineer under the Power Purchase Agreement.
[Note: Clause 4.5.1 of the Power Purchase Agreement requires at least 60 Days' notice of the Owner's intention to issue the Notice of Commencement of Facility. This has been lengthened to 70 Days in this Contract to provide the Owner with time to assess this written notice and then pass it onto the Buyer]
1.13 As soon as the whole of the Works have, in the opinion of the Contractor, satisfied each of the preconditions for achieving Commercial Operation, including that the Facility Completion Form has been issued to the Owner by the Independent Engineer, the Contractor must give a notice to that effect to the Owner.
[Note: The Owner requires the Facility Completion Form as a precondition for issue of the Notice of Commencement of Facility to the Buyer under clause 4.5.3 of the Power Purchase Agreement]
1.14 Not later than 10 Days after receipt of the Contractor's notice under clause 1.13, the Owner must either:
1.14.1 issue a Certificate of Commercial Operation stating that the Facility has reached Commercial Operation and the date on which the Facility reached Commercial Operation; or
1.14.2 notify the Contractor that the Facility has not achieved Commercial Operation and indicate any defects and/or deficiencies.
1.15 If the Owner notifies the Contractor of any defects and/or deficiencies in accordance with clause 1.14.2, the Contractor must promptly correct those defects and/or deficiencies before the Last COD and the procedures described in clauses 1.13 and 1.14 must be repeated until the Owner issues a Certificate of Commercial Operation.
1.16 No payment and no partial or entire use or occupancy of the Project Site, the Works or the Facility by the Owner (whether during the Commercial Operation Performance Tests or otherwise) in any way constitutes an acknowledgment by the Owner that Commercial Operation has occurred, nor does it operate to release the Contractor from or otherwise affect any of the Contractor's warranties, obligations or liabilities under or in connection with this Contract.
1.17 Upon the issue of the Certificate of Commercial Operation, the Contractor must handover care, custody and control of the Facility to the Owner.
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