Essential Clauses In EPC Contracts For Energy Projects

Characteristics of Energy Projects:

• Large in scale;
• Technically complex;
• High value;
• High risk;
• Have an environmental impact and therefore must comply with regulations;
• Long in duration;
• Require ongoing performance guarantees.

Given the nature of these risks, it is incredibly important to get the contract-drafting right.

Risk Allocation within the Project:

Essential Contract Clauses:

1. The Scope of Work and Specifications

• It is common for the Employer and Contractor to disagree about what is included within the scope of the contract;
• Different considerations apply depending on whether the Employer or Contractor is responsible for the design;
• From the Contractor's perspective, it is important to remember that in most Design Build/Turnkey standard contracts, including the FIDIC Silver Book, the Employer's Requirements take priority over the tender/Contractor's proposals;
• Clear wording is required if there is to be a departure from the Employer's Requirements.

2. Contract Price and Payment Terms

• The contract price and payment schedule should be set out within the contract;
• It is necessary to consider the impact of the Construction Act (Housing Grants, Construction and Regeneration Act 1996) where it applies, such as payment timescales, and the form of Payment/Pay Less Notices etc, and incorporate these provisions accordingly;
• The contract should clearly set out the circumstances in which the price can be adjusted and the method of calculating the value of adjustments.

3. Time for Completion and Liquidated Damages

EPC Contracts typically provide:

• Advance payments to cover initial costs;
• Interim payments based on progress milestones;
• Retention money to be released upon successful completion and commissioning.

Time for Completion:

• The Time for Completion clause specifies the deadline for the contractor to complete the work. It includes provisions for extensions of time in case of delays not attributable to the Contractor;
• An EPC Contract should provide detailed mechanisms for claiming extensions, recognising that certain delays, such as those caused by unforeseen physical conditions or Employer's variations, may warrant an extension;
• This is a key area for risk allocation for matters such as ground conditions, or adverse weather.

Liquidated Damages:

• These are intended to be compensation for losses or damage resulting from the Contractor's failure to meet contractual obligations, such as delays in project completion or failure to achieve performance standards;
• The sum of damages is pre-determined and should be set out in the Contract.

Types of Liquidated Damages ("LADs"):

Considerations when agreeing LAD clauses:

• Some jurisdictions require LADs to be genuine pre-estimates of loss, and will hold them to be invalid if they are punitive rather than compensatory;
• It is important to record the calculation and rationale for the amount agreed where possible;
• Consider whether there should be an overall cap on the LADs to prevent them spiralling out of control;
• Consider if they are allowed under the governing law;
• Consider whether there is a duty to mitigate under the governing law.

4. Performance Guarantees and Warrantees

In a Performance Guarantee provision, the Contractor guarantees that the project will perform to an agreed standard.

Common metrics:

• Output capacity – minimum power generation
• Efficiency
• Emissions
• Durability/longevity
• Operational availability

Failure to comply with these may trigger performance LADs.

• Warranties may cover workmanship, equipment and performance;
• The warranty will have a set duration;
• There may be exclusions for matters such as wear and tear;
• Money may be retained as security for compliance with the guarantees and warranties;
• Alternatively, a performance bond from a third party might be required.

5. Insurance and Indemnification

It is important to consider whether to implement insurance to cover the following risks:

• Contractor's All Risk – against damage to the project;
• Erection All Risk – covers erection and installation of plant and machinery;
• Professional Liability – to cover against design risks;
• Third Party Liability;
• Worker's Compensation;
• Environmental Liability;
• Delay in Start-up

• The Employer may seek indemnities in respect of any and all losses;
• It is important to achieve an appropriate risk allocation.

6. Change Orders and Variation

• Where a change in the Employer's requirements is instructed, it is likely that there will be an entitlement to additional time and money for the Contractor;
• It is important to set out how changes are to be authorised, so as to avoid any argument that there has been an implied change;
• So far as possible, the method for calculating the time and cost consequences of a change should be agreed in advance; the method should be in the Contract, and when a change arises, the time and cost consequences should be agreed before it is formally instructed.

7. Termination and Dispute Resolution

• It is important to set out the circumstances in which either party is entitled to terminate the contract;
• Most contracts will provide that the contract can be terminated/determined in the event of a default by the other party, which has not been remedied;
• Some contracts will also give a right to the Employer to terminate for convenience (i.e. for no reason);
• The contract should set out the consequences of termination in detail;
• In high-value, long term projects, it is important to have robust dispute resolution mechanisms;
• In modern FIDIC contracts, there is a DAAB (dispute avoidance and adjudication board) procedure;
• EPC contracts may also contain stepped and/or split procedures;
• It is important to include some sort of interim dispute resolution mechanism to allow the contract works to continue;
• In the absence of a dispute mechanism, the default option is litigation, and that is likely to bring everything to a halt.

8. Limitation of Liability

• Contractors need to consider limiting their liability for breach of contract;
• Limitation clauses may cap liability for total damages;
• They may also exclude certain types of losses (such as pure economic loss, loss of profit etc);
• It is also important to consider limiting the duration of liability to a fixed period.

Conclusions:

• Standard forms of contract provide a balanced approach to risk allocation;
• Understanding the structure and effect of standard forms is essential in dispute avoidance and management;
• Key clauses can be altered to shift the balance of risk, but care must be taken to avoid unintended consequences;
• For large scale and long-term projects, the use of dispute avoidance and adjudication boards is highly recommended.

This topic was discussed in our webinar 'Essential clauses in EPC contracts for energy projects with Brandon Malone of Ampersand Advocates (UK) and Management of energy projects with the FIDIC Silver Book with Adriana Spassova of EQE Control OOD (Bulgaria)' in May 2024. Click hereto view the webinar and presentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.