Managing risk in energy projects

Contractors are under a huge amount of pressure to deliver energy projects accurately and efficiently. So, they need to make sure they understand whether they are agreeing to meet general or specific requirements. Richard Twomey explains.

Hugely expensive and with a multitude of moving parts, it’s a very long shot to expect any large build based energy project be delivered completely on time and to plan. There’s an element of risk baked into almost every energy project – and you need only to picture this fairly usual situation to understand how.

A contractor is asked to tender for a project which contains a series of stringent requirements, with the customer even specifying the exact design they want to be delivered. The contractor builds to the customer’s design, knowing that – inevitably – it contains some imperfections, but assuming that the customer will be understanding of this and allow some flex around the requirements.  Fast forward six months, a year or maybe even longer – and the customer lodges a complaint that not all of their requirements have been met.

A recent ruling concerning an offshore windfarm by the UK’s supreme court has highlighted just how much contractors carry this risk in energy projects.

MT Højgaard v Eon Climate and Renewables

In the case of MT Højgaard versus Eon Climate and Renewables, the contractor, MT Højgaard, agreed to deliver the turbines for a wind farm to specified criteria, which included conformity with an international design standard for offshore wind turbines known as J101. The contractor also agreed to design the turbine foundations so that they would have a lifetime of 20 years without planned replacement. J101 provided a mathematical formula to calculate aspects of the foundation structure, but this unfortunately contained an error meaning that the foundations built were about ten times weaker than required.

Corrective works commenced immediately when it became apparent that the foundations were failing.  And, so, the question arose, who was liable to foot the £26 million cost of the remediation?

Total responsibility lies with the contractor

The court found that the contractor was liable for the failure to provide a design that was capable of ensuring the turbines would have a lifetime of 20 years without planned replacement. It was no excuse that the design had been prepared on the basis of international standard J101, even though the customer had required conformity with J101. In other words, the contractor was liable for an error in the international standard which rendered the turbine design unable to meet other contractually agreed criteria.

The case sets a precedent that total responsibility lies with the contractor to ensure that the item produced complies with the prescribed criteria, even if the customer specified the design. Is it any different if the customer “assured” or “approved” the design prior to build?  Probably not. It is likely that the courts will require all contractors to meet the stated requirements. That is, after all, what they signed up to deliver.

Key takeaways for contractors

It won’t be possible to avoid every dispute, but there are several important points that contractors should take away from this case:

• Understand exactly what you are agreeing to deliver.  If you are being asked to deliver to seemingly inconsistent or highly challenging requirements, it is better to address these upfront.
• Be realistic about what you can deliver. If you promise to deliver projects to requirements that you cannot meet – whether that’s down to commercial or other pressures – then you must understand that you are facing potential claims from the outset.
• Insert limitation of liability clauses into your contracts. These can be an effective way of mitigating prospective claims, even if you are unable to understand the scope of potential issues pre-contract.
• Pre-empt future disputes. The prospect of future disputes ought to place a greater focus on the effective operation of change control, notice provision and other contractual mechanisms around acceptance and waiver.  This applies to both the customer and the contractor / service provider.
• Practice proper record keeping. The prosecution and defence of claims depends primarily on two things: (1) the contractual background and (2) the provable factual history of the project. The party that can best evidence its side of the story will inevitably have a substantial advantage. Proper record-keeping and keen contract management are critical to this.

Contractors are under a huge amount of pressure to deliver energy projects accurately and efficiently. So, they need to make sure they understand whether they are agreeing to meet general or specific requirements. And the more complex the project, such as an offshore wind farm, the more careful they need to be. Where they agree to meet specified criteria, contractors need to ensure they can and do meet those criteria – even where they are working to international standards or to a design approved by the customer.

The legal action in the case above began in November 2013, and went through two appeals before the final decision was reached this year. It couldn’t be clearer that the costs – both in terms of money and time – of getting it wrong are tremendous.