Legal Outlook Energy & Resources Disputes Episode 4

Renewable Energy Disputes – transcript

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Transcript



Michael Harrison:
Welcome, everyone. My name is Michael Harrison. I'm a senior partner in the energy resources and infrastructure group at Ashurst. This is the next in a six-part series of podcasts on renewable energy disputes. In this series are market leading renewable energy disputes lawyers, share with us lessons learned from acting on renewable energy disputes, in particular, how to avoid disputes. And if they do arise, how to manage them.

In the last part of this podcast series, we heard from partners, David Wattam, Emma Johnson, and Jeremy Chenowith about some of the trends in renewable energy disputes, as well as what the future might hold in terms of disputes in this area. Today, I'm pleased to speak to partner, Georgia Quick and senior associates, Harsh Harry Harran about the types of issues that give rise to disputes and renewable energy projects, and tips on how to avoid them. And if they do arise, how to manage them and to prevent their escalation.

Georgia, Harsh, welcome. We're going to continue to use the development phase, construction phase and operational phase as the framework for this podcast. Starting with the development phase, Harsh, can you tell me about this phase, in general, in the context of renewables project? And in doing so, what kind of issues and disputes do you find typically arise?

Harsh Harran:
Certainly, Michael. Thank you. So I think, like all large projects, the development fees for renewable energy project is probably the most crucial. Primarily, it would involve obtaining the relevant licences, permissions, and consents that are required for the project. Now, obviously this depends on what you're building, what part of the world you're building it in, but sort of things that I'm talking about are environmental approvals, planning consents, land use agreements, access approvals, and such.

Now, obviously without this critical stage of a renewable energy project, the project cannot proceed. You need to have the required approvals. But this is not always a straightforward process, and that's particularly in the case of renewable energy projects because they're typically in greenfield locations that require a lot of space and that can have an environmental impact, which may be difficult or uncertain process.

A really good example of this has wind farms, and difficulties in obtaining the required permits can lead to delays in approvals. And as a consequence of those delays, there's a knock on effect all along the contract chain because deadlines are not met and expectations are frustrated. Naturally, this will lead to disputes, and those disputes take on an interesting dynamic and become particularly challenging and complex because of the trophy of flagship nature of these projects and because governments are trying to meet the net zero targets. As Jeremy mentioned last podcast, this introduces a political dynamic and a level of public scrutiny that often doesn't exist in other projects, particularly at this phase of development.

Michael Harrison:
Thank you, Harsh. Given that those are issues that we're aware of and we know occur, not infrequently, have you got any advice as to how you might avoid those issues or at least manage them if they arise and take the form of a dispute?

Harsh Harran:
I think the probably the obvious in short answer is that there needs to be significant forward planning and due diligence before committing to the project. And you would know this better than anyone at someone who regularly advises clients on this. Spending time and effort upfront and understanding what the regulatory and legal landscape is for a prospective project is time and money well spent. Understanding the regulatory and legal aspect means not only knowing what permits will be required for a project, but also the timescales when they can be expected to be received, what sort of terms and conditions might be imposed, what rights you may have if your permits are delayed, denied, then subsequently buried by the government.

The one thing that we're increasingly discussing with clients investing in renewable energy projects outside the home jurisdiction is how to structure their investments to ensure that regulatory risk during the development phase can be minimised and where possible that means both engaging in effective investment planning, which I know is covered in the last podcast, but where an investment involves a long-term contract with the state or a state owned entity, a concession agreement, or a PPA again, good examples. You could have some sort of contractual stabilisation clause.

And as you know, Michael, these clauses essentially seek to fix the relevant regulatory regime applicable to the investment, or at least the effect of that regime to give certainty to an investor by preventing the government from subsequently varying the regulatory landscape. Certainty is crucial for the development phase or for the entire project, given the significant investment that is typically required.

Michael Harrison:
Points well-made, Harsh. And there are obviously other issues that arise, but I think that that kind of covers the key elements in relation to the development phase. So turning now from the development phase to the construction phase, Georgia, this is clearly an area of key risk. And the construction period itself is an area of probably the highest risk in projects until completion is achieved and operation is achieved. In the same vein as we've looked at with Harsh, what are the types of disputes that you come across on renewable energy projects most frequently?

Georgia Quick:
Thanks, Michael. Certainly, it's fertile ground for disputes and we're pretty busy at the moment in our disputes practise. The dispute issues that you see are fairly similar to some of the standard large project disputes. Invariably, time, cost and quality will come into play, but there are some other more unique aspects to the renewable sector. I like to say that there's a quite unique intersection of contracts here that time for a disputes lawyer, as I say, provides fertile ground. So you see, you have the APC contract. And any subcontracts, you have connection agreement and interface works contracts. You have a PPA or off take agreement. Invariably, finance documents, have the joint venture agreement and then a flow on agreement. So there's a lot of different contracts that are intersecting and a lot of scope for interface issues and disconnects.

Now, if you add all of those contracts to the added complexity and the sensitivity of connecting to a national grid, then you have quite a lot of areas for dispute. What you will always see where new technologies are being developed are issues with the development of those technologies. They often don't perform, as you would know, quite as the parties will all have hoped. There have been a lot of technological advances in the renewable sector and we continue to see some of those are causing challenges during the commissioning and performance testing phases, which will have a significant time and cost consequence. So it might be that we're talking about offshore wind turbine foundations, perhaps failing to comply with the industry standards for corrosion protection. It might be a boiler that can't tolerate the chemical makeup of the feedstock a biomass plant. And when these things happen, the knives will quickly come out in terms of allocating responsibility for the delay and cost consequences.

Now, I touched on the issue of the heavy regulation, but we've really seen that as a big issue. We've got heavily regulated industries and a crucial need to maintain grid stability. And what you have is new and often disparate energy sources, and in Australia, constantly adding to the grid. So the modelling that's required is changing every month and the registration and commissioning processes have taken much longer, up to a year longer than proponents would have expected. I mentioned the connection agreement is one of the suite of contracts in play. Sometimes it's not obvious who's responsible for the work that's done under the connection agreement, as opposed to the work's done under the construction contracts. And we've seen some interesting disputes arise in relation to that.

A final issue is getting reliable information. So a lot of the information necessary to do the modelling in the first instance is design the renewable project. And in the second instance, to connect to the grid. May not be forthcoming in a timely manner, or as complete a matter as proponents need. Regulators have been overrun. They haven't been as responsive as parties have hoped, and they've often required additional equipment to ensure stability. That's led to parties testing force [crosstalk 00:09:36] change in or causes in particular. So that's what we're seeing a lot about. Finally, and I think I'm taking up a bit too much time here, but there's some lots of different types of disputes arising. The simple fact that, and this is similar to Harsh's point, these renewable projects are often being built in remote locations, which really adds to the complexity. Some of the environments of offshore wind, for example, you really can't think of anything much more challenging than building in those sorts of environments. So invariably, that will lead to disputes.

Michael Harrison:
Thanks, Georgia. And I can certainly reiterate the risks that arise in relation to connection to the grid. As Georgia said, it is critical that roles and responsibilities are clear in relation to that connection. And as more renewable electrical energy is built out, whether it's solar or wind or any other form of energy, that connection and grid stability is going to be key. So it's likely to be an area of continuing disputes over time. So clearly, there's significant scope for disputes during the construction phase. So in your experience, Georgia, what are the ways to avoid, or at least to minimise the impact of disputes if they do arise?

Georgia Quick:
If I could avoid disputes entirely, I'd be a very wealthy woman, but there are certainly some strategies for minimising disputes. Obviously. Claims and circumstances will change and claims will arise on projects. But really, it's how you manage it to deal with those claims and avoid them escalating into significant disputes. There's probably three key areas that I would suggest that party's focused more on. The first is due diligence as to their contracting parties. So that applies to joint venture parties. Choose your joint venture parties wisely. Consider whether there's an alignment of interests and objectives in relation to the project. As a principal, choose your contractor wisely. Do your due diligence as to their experience, as to the depth of resources that they have available for this actual project. And as the contractor, understand your principal and the market in which you're going to be operating. So you understand the regulatory environment, you understand who will be calling the shots at head office and all of those dynamics.

The next area of key focus is very obvious, and in your key value week, Michael, is understanding the risks and clearly discussing them and looking at how they're allocated. I think it's easy to look to pass risk onto a counterpart, but where disputes arises where they've often been unfairly allocated to parties that can't really manage the risks. The net result may end up being good if you've passed the risk on, but the ride may be more unpleasant as a party seeks to recover during the project delivery phase when unfortunate circumstances arise. Similar to what Harsh said, spending time up front, thinking about it properly, drafting the documents carefully will obviously avoid a lot of the problems in the first place.

Now, I know for you in the renewable sector, there are no standard form model documents at the moment and so we do see a broad spectrum of risk allocation, and really just have to spend that money up front. The third issue is to do with the administration of the contract. One issue here is making sure that there's sufficient [inaudible 00:13:06] ... contract from the outset. Quite often, parties haven't got their administration teams sort of ready together at the outset and they sort of fall behind early on in it, and it can actually exacerbate issues. You need to engage with your contractual parties early. You need to grapple with issues that arise as quickly as you can. You need to have clear and frank communication between contracting parties. And that is partially having the right forums for those discussions, whether it's the onsite forum, as well as the installation forum, so that people know what's happening.

And also, good contract administration. So that might be, as a contractor, getting your notices in on a timely basis. So there's no need to have a dispute about whether a notice was submitted, but in fact, you can actually get down and assessing what has actually arisen. And if you're the principal, making sure you're timely in responding to those notices. As far as administration, we kind of have a little bit of a catch phrase that says, "We'll be firm and fair, but most importantly, probably be consistent so your counterparties know how certain provisions will be dealt with and how they will be dealt with on the project." Really, surprises are the thing the parties can deal with the least.

Michael Harrison:
Thank you, Georgia. That was very helpful. And again, just by way of emphasis, it is important that both parties have the right people on their team at the right time, and that they're able to manage and engage in relation to any issues that do rise, as Georgia says, in a timely and consistent manner. So having hopefully, navigated the construction phase, we come to the point at which the infrastructure hopefully is capable of use. And now, we move into the operational phase. Now, obviously the mechanics for the transition into operation, but also the operation itself, will depend upon the technology used. But Harsh, I wonder if you could give us an overview in relation to the common type of disputes that you come across in a situation where we're into a longer term operational phase.

Harsh Harran:
As you rightly said, this obviously depends on the technology used. And the other point to notice that the operational fees in renewable energy projects is very long. So it is very difficult to anticipate every type of dispute that might arise. But I think broadly in terms of the disputes, we're seeing the three main categories. The first one that I'd like to talk about is in relation to political factors. Now, I know I mentioned this a little bit before, but it is something to be born in mind because it may not be forefront in the minds of the participants in the project when they are about to embark on the venture. But political factors do often result in a change to the legal landscape during the course of its operational life, and it might be things like introduction of laws that require a percentage of the plant personnel to be nationals, or certain local supply requirements.

And we are now frequently seeing disputes arise where the operator is seeking the additional payment as a consequence of particular regulatory change during the operational life that's made it more expensive for the operations to be carried out. The second category is probably the first in terms of chronology, which is disputes that arise from handle or from construction contractors to the operation and maintenance contractors. Mostly, this is in relation to quality issues. So the disputes that we see arise is where the maintenance contractor would say that certain issues constitute defects for which the construction contractors are responsible. But on the other side of the coin, the construction contractors would say, "No. Actually, this is arising due to a failure to properly operate and maintain." And therefore, the maintenance contractors are responsible.

And these are issues that are probably more prevalent in renewable energy projects rather than any other because as Georgia mentioned, there are new technologies involved and the rapid pace with which these technologies are changing often result in disputes in this area. So I think it's just something that sponsors need to bear in mind and they need to think in advance about how they can avoid any sort of gap where this interface risk exists. The last category of disputes that we're seeing arise is in relation to variations, or rather alleged variations to operation and maintenance contract. An example is where a maintenance contractor considers that a certain type of work goes beyond maintenance. It might seek to claim this as a variation. When it comes to sort of long-term contracts, these variations become particularly difficult to price. So that's a separate challenge in and of itself. How do you price a variation that's going to have an impact over the next decade, two decades?

And obviously, everyone would like to avoid variations, but I don't think that that's possible because they do inevitably arise. It is however, possible to perhaps manage the manner in which the rise in reduce the risk of disputes and that's where trying to agree upfront the methodology that will price the variation. So what information of contractor will be required to provided supportive evaluation team, potentially fixing levels of profits? Essentially, setting parameters for how a variation claim can be made and agreed. And if those parameters are set up, then hopefully there wouldn't be any surprises during the term of the contract. So I think those are the three main categories of disputes that we commonly see, but obviously, they are by no means exhaustive.

Michael Harrison:
Again, thanks, Harsh. That's very helpful. In the context of both the construction phase and also to a lesser extent, the operational phase, there's also going to be oftentimes disputes that arise from providers of goods, which are then used either in the construction of the project or during the operational phase. Now, in the context of the operational phase, that's obviously delay and non supply type risks, but also one area that I think we've seen increasingly is that certainly in the COVID environment where there has been a scarcity of some supplies, we've seen some suppliers basically requiring increased costs and then seeking to pass those onto the project. So I just wonder if that's something that you've seen kind of play out, Georgia, and if so, how it's played out?

Georgia Quick:
Thanks, Michael. We have seen a number of inquiries in relation to solar panels suppliers demanding increased prices. We have also seen on a number of projects, the pass on all of significant claims with supply, and how they play out really depends on the terms of the contracts. So it will depend if the contracts have a price escalation or price review clause, which will operate where there's been an increase in input prices. The operation of these causes is relatively straightforward and it can be a good way of avoiding surprises during the term of the contract or avoiding those escalating into disputes because there's no mechanism really for dealing with the price increase. In the absence of the price escalation or price review clauses, then we see counterparties looking at other forms of relief that they might be able to utilise such as forced measurable hardship or changeable causes in particular.

And that again, will depend on the reason for the increase in the price and the particular relief that's provided under the clause. And there's quite a few nuances to how you can engage the relief in [inaudible 00:21:12] and change in law clauses in particular. In the practise, we have seen that there's been a relatively pragmatic approach taken in relation to some of the COVID-19 related issues, perhaps out of necessity, that the parties are all facing these issues and somewhat understanding of them and there's a need to move the project forward. Where it hasn't been so straight forward to resolve the matters have really escalated into proper disputes is where you see parties trying to maximise the relief that they obtain off the back of the COVID-19 triggers, but perhaps using them to mask other issues that are a play, and those are the ones that haven't been so capable of being resolved.

Michael Harrison:
Thank you, Georgia. Well, we certainly heard, certainly from my perspective, a broad cross section of different types of advice, very practical advice from both Georgia and also from Harsh in terms of avoiding disputes in the first place, and then managing them if they do arise. I understand that in the last podcast, the participants Emma and Jeremy were asked to provide some war stories. I'd really like to hear some war stories from you in terms of particular challenges that you faced and the way in which you dealt with them heroically.

Harsh Harran:
Thanks, Michael. I'll take that one first. I'm going to give you a story about a very interesting dispute that we were instructed on quite recently, and we were instructed by the owner of a wind power generation complex and we were asked to advise in relation to the termination of an agreement to operate and maintain the facility. Now, what made this particularly interesting to work on were two things. One was the context in which the matter or the dispute arose. The operation and maintenance contract had been entered into approximately four to five years prior to the completion of the facility. And now that completion was nearing, technology had advanced so much that the owner of the facility could get the operation and maintenance services for a fraction of the price. And what the shows is something that we've sort of discussed earlier and we've touched upon earlier, is the rapid growth of renewables technology and the importance of bearing that in mind before you enter into contracts. So that, I thought, was quite interesting and it shows you how renewable energy projects are different from other construction projects.

The second reason why this matter was particularly interesting was the grounds of termination, potential grounds of termination that we were asked to consider. And in this instance, it was the failure of the operator to have been mandatory government approval required for the work. Now, in the facts of the case, we found that the ground wasn't made out. And obviously, in this case, as I mentioned before, the construction hadn't completed. So there was a different factual background here, but it does highlight the risk that getting the government approval to perform the requisite works or provide the necessary services can be a significant hurdle, and it is something that participants need to be thinking about upfront so as to avoid wider disputes that could have really quite significant consequences for the parties.

Michael Harrison:
Thanks, Harsh. And again, I'm just underlining the point, I think that's a very well-made point in particular. It goes back to kind of where we started in terms of understanding the approvals that you required, but also really understanding them and how they're going to be obtained. Georgia, I was just going to ask you if you got any war stories.

Georgia Quick:
Well, you started earlier by asking for heroics and I wasn't expecting that. [inaudible 00:25:00] I'm not sure that we're often engaged in heroics. It's not everybody's favourite part of the job. And it's the funny one in the renewable sector because we all really like, I think it's something that our teams all really like being involved in, but obviously we're involved in the somewhat unfortunate part of the project. The matter that I thought I would tell you about to some extent has a good result because it did resolve without a full blown dispute, and so that's a good story. And I would say part of the heroics is having a consistent approach. So part of the approach here was being consistent with the administration of the contract. So we supported the project team once the issue had arisen for a period of at least 12 months. And the project team was able to be very consistent with its position in relation to a very significant variation claim.

This one had a number of the ingredients that I mentioned in terms of all of the intersections of contracts. There was an issue about the connection works and who was responsible for certain equipment. There was an issue between the joint venture parties, that they were able to work their way through, but it did add a dynamic. It was a renewables projects, and it did require a significant piece of additional equipment and a very big claim for a variation and an extension of time. I think the extension was 12 months and significant costs for the addition of a harmonic filter. What was interesting also, is that industry practise changed in the time from the contract's inception to the delivery phase. So what was obvious now wasn't obvious possibly to the parties at the outset.

So there were some differing views from the technical experts that we had providing advice in relation to industry standards and industry practise. That was an interesting part to it. We had the issues with the regulator and information provision as well coming into play. And we had some pretty harsh misallocation in the contract itself to deal with one aspect that is worth bearing in mind. There's the carefully thought and the obvious risk allocation components, but a big part of what may have turned this actual dispute was some of the knock-on quantum components. So here, we had a concurrent delay provision that was quite significant, and it's worth bearing in mind that there are some other sleeper causes that can have quite significant impact on the way disputes play out, and you really need to look at some of those practical aspects in your extension of time clauses as well.

Michael Harrison:
Thanks, Georgia. That was really helpful and informative. Likewise, Harsh. I think that's all we have time for today. If any of our listeners want to get in touch with Georgia, Harsh or myself, our details are on the Ashurst website, Ashurst.com. Our next podcast in the series covers the all-important question of, which dispute resolution mechanism is best suited to resolve particular types of disputes under contracts? My partner, Dan Brown, will be interviewing our Singapore disputes partner, Michael Weatherly, and senior associate, [inaudible 00:28:18] from our Dubai office. To ensure you don't miss any future episodes, do subscribe now on Apple Podcasts, Spotify, or on your favourite podcast platform. While you're there, please feel free to keep the conversation going and leave us a rating or review. Until next time, thanks for listening.

Speaker 4:
If you enjoy Ashurst Legal Outlook, why not check out our other two podcasts series as well? Ashurst Business Agenda tackles the big strategic issues that business leaders face. And ESG Matters Ashurst reveals how business leaders arise into mounting environmental, social, and governance challenges. You can listen and subscribe to Business Agenda and ESG Matters wherever you get your podcasts.

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