Shining a light on the risk involved with renewable energy projects

Shining a light on the risk involved with renewable energy projects

Bill Barton of Barton Legal explains why renewable energy projects need lawyers that can be a benefit and not just a cost

Barton Legal was established as a specialist construction and engineering practice, with expertise in all forms of large projects, in particular energy. As its reputation grew, introductions came its way to other energy projects such as solar and biomass, with an increasing international element.

While the UK market is not as strong as it once was due to planning and funding issues, there is a huge appetite for energy projects across the globe.

Clients want lawyers who understand and can advise on the contractual process, as well as the the commercial issues and risks of these energy projects. But they also want lawyers who can negotiate and draft complex, technical contracts in situations where significant hurdles in the form of risk allocation, cost, and performance have to be agreed and resolved first.

Negotiation

The advice required by clients in renewable energy projects is complicated by the number of parties involved, the division of risk and the complexity of the different work aspects.

Unlike general construction projects, there is a high degree of negotiation of contract terms and a greater knowledge and appreciation of the probable and possible risks. The contracts used may well be based on FIDIC (the standard used by the International Federation of Consulting Engineers), but are frequently bespoke, to reflect the developer or promoter’s experience across previous projects.

As with the vast majority of construction and engineering projects, the ultimate desire of the developer or promoter is to pass as much risk as possible to the contractor and their team. They also want strong and clear delivery requirements to couple the transfer of any risks.

The most obvious of these is ground risk. By its nature, no one truly knows and understands the risk once the ground is disturbed. Clients will spend varying amounts of money up front on ground investigation and soil surveys. However, the true benefit of these is often lost as they will have been instructed prior to the involvement of lawyers.

A good lawyer knows they are expensive, but seeks to ensure that their work and involvement is of value to all parties and not just their client. They can ensure that the overall project is delivered on time and budget. This is done by making sure that contract documents, risks and liabilities are clearly drafted, and accurately reflect the parties’ actual requirements.

A project that fails is of no benefit to anyone. That point is often lost on lawyers who are more focused on their bill than an ultimately happy client.

Because ground investigations take place early in the process, there can be a tendency to engage the company on standard terms that do not provide for warranties, the assignment or novation of the appointment, and with very limited insurance and liability coverage. That is invariably because a long-term view has not been taken as to what will be required by the contractors and funders down the line.

Much time will be lost later and considerable costs will be incurred, when that appointment has to be renegotiated to obtain the comfort required.

Ground is critical. Whatever is dug up has to be moved or replaced or fi lled in, and once ground is disturbed that may set in chain a series of reactions that may or may not have been foreseen. No one wants to take that risk. It is by its nature unknown and consequently difficult to quantify and control.

Early investigations are therefore essential to provide as much information and comfort to the parties as possible.

Hence the need for reports that are passed to the contractor to be backed by a sensible and adequate level of insurance or warranty. With that initial hurdle crossed, a contractor will be prepared to enter into more detailed negotiations in relation to the other problems surrounding access roads, turbine bases, excavations for plant and machinery.

Different approaches to risk

Ground risk helps to demonstrate the balance between the parties of their approach to risk. The client simply does not want that risk. They know the funder will not want that risk and so it has to be passed to the contractor. The contractor might not want the risk, but knows it is ultimately heading their way. The skill is to understand what that risk actually is, to ensure their price covers it and that if something should go wrong that there is a back-up plan. That back-up plan is often the warranty or insurance provided by the initial ground investigation engineer.

Delay is another issue but can cover a multitude of sins. It might be the fault or responsibility of the contractor, it might have arisen from variations or change orders, or it might be weather or some other risk, normally described as Force Majeure. The important thing here is to start with clear definitions and once again to get the parties to set out clearly what they are – and are not – prepared to take as a risk.

Take weather. This can be snow, rain, wind or excessive temperatures. The problem is that weather delay will normally result in an extension of time for the contractor but no additional costs. The client needs to understand the impact of that on their programme, as well as their intended take over and commissioning dates.

If they allow weather delay to be claimed too easily then the completion date may be missed. The contractor will not be paying liquidated damages for delay, and usually the generation of the project output (let’s say electricity) which is the most valuable asset to the client, will be delayed.

So the client needs to incentivize a contractor not to seek to take advantage of weather delay. That can be done by setting thresholds that must be crossed before weather delay can be claimed. For example, they can agree to carry on working a number of hours with temperatures above or below a certain level in a fixed period of days, or when wind speeds are consistently above a certain level for a minimum number of hours. The aim here is to encourage the contractor to work through problems and not to use a two hour “delay” to claim a day.

Liability caps

The issue of delay will also feed directly into liability caps for most projects. A 100% contract value liability cap may be the norm, but increasingly exclusions to this will mean that liquidated damages are not within the cap. Some, or all, of the other contract liabilities may also be excluded and those must be fully understood as to the specific circumstances when that exclusion will or will not apply, the extent of the exclusion and the reasons why.

This may be a crucial issue that is overlooked by the parties until the project documents come to be reviewed by the funder.

If revisions are required at that stage they can be painful and expensive to agree, causing delay to final execution and souring the relationship between the parties at a critical time, just before the commencement of works.

One of the primary problems in all projects and their associated documentation is poorly defined events and contract terms, arising from a lack of detailed discussion between the parties.

It is a common refrain for parties to say, once a problem has actually arisen, that the wording is not what they intended or meant. They say that they did not understand that in the circumstances that have arisen that the outcome would be such and such. Well, it can then be asked: why didn’t your lawyer ensure that the contract says what both parties intended?

The role of a good lawyer is not just to extract liabilities and obligations from a contractor, but to ensure that those liabilities and obligations are understood and are held by the party best able to control and manage those risks.

Bill Barton is a director at Barton Legal

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