The new wave of renewable disputes - How can commercial parties protect themselves
25 July 2022
Background
Nobody can fail to appreciate the increased reliance on renewable energy projects that underpins the energy transition. The conflict in Ukraine and renewed desire globally to ensure that energy needs can be met without dependence on Russia are likely to add to the rush to develop and commercialise new renewable technologies and to upscale existing technologies such as solar, wind and wave power. Subsidies may be offered or increased in order to attract the necessary investment into the sector, and history has shown that such financial incentives – if too successful and thus subsequently scaled back – can give rise to public international law disputes.
But we also expect to see a new wave of commercial disputes. Players in the renewables sector can and should be anticipating and mitigating against those disputes now.
Why will commercial disputes arise?
New technologies have a habit of not working exactly as intended. Commercial disputes are already arising out of the failure of kit to work as planned and, in some cases, as warranted.
It is also true that old technologies applied to new and more challenging environments have a tendency to throw up problems. There can be no guarantee that, for example, steam turbines which have worked well in 50 MW solar thermal plants will perform in the same way when incorporated into plants with production capacities of 150 MW or larger. The pace of change in the renewables sector will mean less time and effort is spent ironing out problems, thus increasing disputes risk.
The substantive areas of disputes risk on renewables projects arise in various ways.
Those who design, manufacture, finance, own, supply, operate and offtake from renewables projects should be giving thought now to why and how those risks arise and how to mitigate them in order to ensure that 'disputes risk' is kept to a minimum.
Key steps for mitigating the risk of commercial disputes
| Mitigating step | Explanation |
|---|---|
| Conduct thorough due diligence on proposed suppliers | Understanding any limitations on the contractor and imposing clear standards of execution and performance is key. For example, supplying particular equipment for use in an onshore wind project will not necessarily mean that the supplier is suitably qualified and experienced to provide equipment for use in an offshore project. |
| Require sub-contractors to give appropriate financial security for their performance | If a sub-contractor fails to deliver as promised, it can be much simpler to call on a bond or parent company guarantee than to commence dispute resolution proceedings to claim payment. Consider carefully how such bonds and guarantees are worded, including when they might be triggered and whether they are 'on demand' or liability must first be proven. |
| Take steps to understand the technology to be deployed and any challenges imposed by the operating environment | Geographical and climatic conditions can vastly affect the performance of the plant and reliability of certain equipment. Ideally, the contract should clearly allocate who bears the risk of unexpected changes in the weather conditions. |
| Properly define 'performance' for the purpose of any testing and final acceptance obligations | Careful consideration should be given to performance calculations. Questions that should be asked include: what is measured, how it is measured, by whom it is measured, how frequently it is measured and, when adjustments should be allowed, how to account for competing causes in the event of a performance shortfall. |
| Where the operator is not the EPC contractor, impose obligations to ensure a smooth and effective handover | Ensure that any third party operator being considered is suitable for the role and consider whether any express obligations can be placed on the EPC contractor to provide training and documentary resources (such as O&M Manuals and operating procedures), and the level of detail required in such documents. |
| Draft clear obligations as regards operational and maintenance records | Splitting the operation and construction roles can itself be a driver of disputes – it is not unusual for contractors and operators to seek to 'blame' one another for underperformance or defects. The extent to which operational data will be accessible and to whom is an important consideration if the parties are to be able properly to defend their position. |
| Draft a clear defects regime | The lack of any standardised set of contracts in the renewables sector can mean that bespoke contractual defects regimes can be subject to ambiguity. Clear wording is needed to define when the contractor's rectification obligations apply (and come to an end) and the timeframe in which the contractor remains responsible for the costs of defects. |
| Ensure any dispute resolution provision is valid and enforceable | Any dispute resolution clause needs to be fully considered and properly drafted in order to ensure that it is effective and enforceable. Opting for arbitration as the mechanism by which disputes will be resolved can be particularly advantageous for renewables projects with an international dimension. |
| Include in your contract alternative dispute resolution mechanisms as a mandatory pre-condition to arbitration | A renewables project will often involve a decades-long working relationship between participants, so getting the right people together to discuss a dispute before an arbitration is commenced can avoid the need for a dispute altogether. However, careful wording is needed to avoid surprise, delay and costs escalation when one party seeks to argue that the pre-arbitration steps are mandatory. |
| Ensure treaty protection | For individuals and companies investing in renewables projects outside their home jurisdiction, thinking at the outset about how to protect themselves from adverse state action is paramount. This means ensuring that foreign investor protections set out in bilateral and multilateral investment treaties apply. |
When a dispute is unavoidable
Of course, it might be that particular disputes are unavoidable. It is therefore crucial that a properly drafted and fully enforceable dispute resolution provision has been included in the contractual documents. Depending on the chosen dispute resolution forum (i.e. the courts or arbitration), it might be possible to adapt the procedure in order to suit the parties' interests (including negotiating express confidentiality obligations and providing for site visits in order to ensure decision-makers fully understand the technology at issue and the bigger commercial picture). Early legal advice is invaluable, both on the drafting of dispute resolution clauses and as to strategy as and when problems start to arise on projects.
Conclusion
The drive to Net Zero and energy independence from Russia will inevitably result in more commercial disputes between the different players involved in renewable energy projects. There are lessons to be learned from experiences to date which can ensure that dispute risk is mitigated and does not distract from the underlying commercial and environmental end goals of ending dependency on fossil fuels. Seeking specialist legal advice from the outset is key to managing disputes efficiently and cost-effectively where they cannot be avoided.
Our specialists are available to discuss any of the issues raised in this article, or more generally. Please use the contact details set out below.
Authors: Emma Johnson, Lucy McKenzie and Georgina Warden
