Sector - Energy, Fuel & Utilities
The challenges in the construction of energy projects
Perhaps the most critical issue in all energy construction projects is the need for the completion of the project by a specified date. We speak with James Brown from law firm Haynes & Boone about at the potential legal disagreements which could, and have, occurred.
The contractual documents will accordingly impose on the party that is to undertake the relevant works a binding deadline for their completion, and will typically contain other associated contractual provisions that are concerned with this end-date for completion. The legal consequences of late performance can be very significant indeed. Hence issues concerning time and whether works have been completed within the required is probably the ripest area for disputes in respect of energy construction projects.
In the first instance, a failure to perform on time may initially give rise to an obligation on the party in default to pay compensation to the innocent party. It is a very common feature of contracts concerning the construction of energy projects for the contractor in certain circumstances – usually late performance – to have to pay “liquidated damages”. English law does not permit clauses that penalise late performance (or indeed any other failure to perform as required) but provided the clause in question is not a penalty, then such a clause would typically be upheld by the English courts. Although these clauses impose an obligation on the party that is “late” in its performance to pay compensation to the other, such clauses can be regarded commercially as for the benefit of both parties (ie: both the paying party and the recipient) because they provide greater certainty as to the consequences of a specified failure to perform than would otherwise be the case (since otherwise the “innocent party” would have to establish a breach of contract by the late performing party, that it had suffered loss caused by the breach and that it had taken steps to minimise the loss suffered by it – ie: to mitigate it). Even in the absence of a liquidated damages clause, a failure to perform on time may well give rise to damages at common law.
Instances of delayed performance, however, may give rise to even more significant rights than an entitlement to damages (whether liquidated or not). So for example, many contracts will provide for an express contractual right to terminate the contract upon some specific period of delay and/or such a right may arise at common law.
The potential for a serious legal dispute to arise in respect of an alleged failure to perform by the time required is therefore extremely great because so much will often be at stake. At the root of many such disputes will be the interpretation and operation of the typical contractual provisions that provide for (in certain circumstances) extensions to the time by which a party is otherwise contractually obliged to complete its performance. Thus, construction contracts will typically provide for the time for performance to be extended when a party’s ability to perform is hindered by circumstances that are beyond its control, for example by “acts of God”, such as poor weather, flooding, fires etc, or other events of force majeure. Whether a force majeure event had prevented a party from performing its contractual obligations, albeit in the context of offshore drilling operations, was in July 2018 the subject of an English High Court judgment in the case of Seadrill Ghana Operations Limited v. Tullow Ghana Limited. Haynes and Boone CDG, LLP acted successfully for the drilling contractor in establishing that Tullow had not been entitled to terminate a long-term drilling contract for what it contended was force majeure, namely the issuing of a drilling moratorium, with the court determining that this in fact had not been the sole cause of Tullow’s inability to perform its contractual obligations. As a result, Tullow was required to pay Seadrill Ghana US$270M on account of its having terminated the contract for convenience rather than force majeure.
Construction contracts in the energy sphere will also typically anticipate the possibility that the employer, as the recipient of the contracted-for performance, may well during the contract need or wish to instruct changes or variations to the goods/services to be provided under the contract. For example, a wind-farm operator may contract for the construction of an offshore maintenance/accommodation platform but may direct certain changes to the design of that platform subsequent to the signing of the relevant contract and during the course of its construction. It may be that such changes will impact not only on the eventual costs of the yard in constructing the platform and transporting it to the offshore site, but also on the time taken to complete its construction. In respect of such eventualities, it is common for contracts for energy construction projects to provide a contractual mechanism which provides for the adjustment of the contract price and/or the time for completion of the contract in the event of such instructed changes. Similarly, such contracts will typically provide that the contractor shall be entitled to an extension of the time for completion where the employer has failed to perform as it is required or has otherwise hindered the contractor in its performance of its obligations.
A common cause of difficulties, however, is that parties will commonly in practice not follow the necessary contractual procedures for claiming an extension of time, in which case there may be a dispute as to whether the time for completion has nevertheless been extended. Or one party may seek an extension of time in circumstances in which there is a dispute about whether an alleged delaying event was indeed an event of force majeure or was rather some event that was within the reasonable control of the party seeking the extension of time. Disputes will often arise as to with whom responsibility lies for delays on a project – with particular difficulties arising when there may be fault on both sides – with the parties falling into conflict over whether the contractor’s time for performance has actually been extended, such that the contractor’s performance is not late under the contract, or whether it is beyond the time required. Where the issue is whether, as a result of late performance, a right to cancel the contract or reject the goods has arisen, such disputes will likely be hard fought and often costly, particularly if a great deal is at stake (for example, the matter may concern a contract for the construction of an offshore drilling rig having a price of up to US$1Bn, with the buyer usually having the right upon some specified period of delay in delivery by the builder to cancel the contract and to be paid back its instalments and interest if construction of the rig is not completed).
Matters of timing and delay are therefore absolutely critical issues in energy construction projects and will be of significant focus in the drafting of the contracts. The aim is to avoid costly and time-consuming disputes about these issues by as far as possible agreeing clear contractual provisions that provide for as much certainty as possible as to the legal position when things go wrong, as they often will. However, with the best will in the world, it is in the nature of these projects to give rise to disputes in which event it takes skilled legal practitioners to resolve them.
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