Effective contract structuring for European offshore wind
Offshore wind is relatively a higher risk proposition than land-based projects. How can pitfalls be avoided in the offshore landscape? We assess EPC, multi-contracting and alliance propositions.
By Heba Hasham
Unlike typical marine applications, which have a long-standing and clear contract procedure from bid to completion, the offshore wind industry does not. Initially, engineering, procurement and construction (EPC) contracts followed the standards described by the International Federation of Consulting Engineers (FIDIC), and contractors would introduce their own experience and standards to a project.
“The wind industry as a whole is still experiencing growing pains. This is evident when considering that existing structures used by wind farms were designed and built with the experience gained in the oil and gas industry,” explains Daniel Krisch, managing director of Group2E, a Germany-based engineering consultancy servicing the maritime and industrial sectors.
EPC model not ideal?
According to Mark de la Haye, senior associate at Ince & Co, an international law firm and a leading legal-services provider to the offshore marine sector, currently EPC contracting is less common than multi contracting in offshore wind due to the amount of risk involved.
“Under this model, the EPC contractor takes on more risk, because they are undertaking to design, manufacture, construct and install an entire working offshore wind farm. This model, also known as turnkey contracting, has not been used extensively in the context of offshore wind farms to date, because few commercial entities are large and sophisticated enough to offer an EPC contract for an entire offshore wind farm,” explains de la Haye, who regularly advises offshore wind farm contractors on the drafting and negotiation of, as well as claims arising from, a range of contracts.
According to Krisch, however, the advantage of an EPC contract from a project company’s point of view is that the contractor takes full responsibility for project completion time and performance, design quality, and cost of compilation if it’s a lump-sum contract. On the other hand, the disadvantage of the EPC model for a project company, he says, is that the detailed design is the contractor’s prerogative.
“When a client seeking an offshore transformer station places an order with a contractor, the process for development and delivery is usually not clear,” notes Krisch. Such a scenario, he points out, is usually due to the project company’s lack of experience.
“The EPC contractor, with more than 30 years’ experience, knows this situation and the project company starts to pay. Accordingly, in an EPC contract, great care needs to be taken that the project company specifies and defines the design parameters and deliverables, including consumption of utilities and emissions.”
Another reason the EPC contracting model is not highly favoured nowadays could be due to the fact that it was used on a number of the earlier European offshore wind farms where the parties had negative experiences. EPC contractors did not fully appreciate the extent of what they were taking on and thus there were delays and disruptions.
“The most prevalent contracting model being used today in the European offshore wind sector is multi-contracting,” notes de la Haye. “Under this model, the developer, usually the utility company, will enter into a range of individual contracts with different contractors, and the contractors will then usually enter into separate contracts with subcontractors.”
In addition to multi-contracting and the less common EPC contracting, another approach that exists but hasn’t been applied yet in practice is alliance contracting.
De la Haye explains: “Under an alliance contract you would have a group of companies that would involve the developer together with a host of contractors and possibly equipment suppliers. It’s a collaborative approach but in reality it hasn’t really taken off in the offshore wind sector.”
If the alliance succeeds in delivering the project on time and on budget, all of the members of the alliance get to share in the gain, usually by way of an incentivized bonus payment. Conversely, if the project is delayed or runs over budget, everyone within the alliance must be prepared to suffer financially.
For alliance contracting to succeed, a high degree of trust and transparency is required, and it should also be noted that this model requires experienced and financially robust contractors to get off the ground.
Problematic areas and how to avoid them
When it comes to contract structuring, according to de la Haye most issues arise due to poor drafting. “Looking at the individual issues that cause problems within contracts, a key one is the liability regime – whether you have a knock-for-knock provision and, if so, how that is drafted.”
“Also within the liability regime you can have problems with consequential loss exclusions and limitation of liability caps if these are not drafted clearly.”
The second common issue that he often sees is linked to the responsibilities for problems arising out of seabed conditions that were not expected or forecast. Similarly, responsibility for adverse weather risk during the project’s lifetime also needs more attention when drafting contracts.
Another common issue relates to the responsibility matrix; while most contracts will have such a matrix, it can often conflict with the contract’s general terms and conditions.
Lastly, provisions for delays and variations also represent potentially problematic areas. Ideally, a contract would have a very clear mechanism dealing with what is to happen in the event of delay, yet often this is not drafted as clearly as a lawyer would like it to be.
“Related to that is the variation order mechanism. Most contracts will have provisions dealing with variation orders, but we often see these clauses are not clearly drafted, which could lead to a host of problems,” notes de la Haye.
Indeed, this was the main issue in a recent case that was heard before the English court, involving MT Højgaard A/S and E.ON. The dispute was regarding the interpretation of the variation order provisions within the contract.
What’s to blame?
It’s worth looking at the reasons behind the occurrence of such conflicts in offshore wind contracting. The fact that the industry is still evolving is certainly a key contributor, but more importantly is that many of the European utilities developing offshore wind projects come from an onshore civil construction background.
“They’re very familiar with building onshore power stations and with the contracts that would be used for such projects. But when you’re carrying out construction in a challenging and constantly evolving offshore environment, there are many complex issues that the utilities are not used to dealing with onshore, and that’s one of the key issues we encounter,” explains de la Haye.
Another problem not limited to the wind industry, he notes, is when there are competing interests from various different parties, which can result in tension and conflict within the eventual contracts.
“In an onshore wind farm, for example, a financier will have certain requirements that they want to see in the contract; the project company will have its conditions; and on top of that, the contractor will want to include certain requirements of their own. This often results in a number of competing interests that could, if the contracts are not thoroughly considered and carefully drafted, lead to ambiguity and subsequent discrepancy”.
Krisch similarly states: “A conflict may arise when the contractor brings a different set of standards that are also applicable to the project. At best, this difference represents a communication failure. At worst, this disparity between the contractor and client exploits the youth and inexperience of the wind industry”.
Although every project is unique, de la Haye stresses that an open and honest dialogue should be maintained throughout the project as a general principle.
“It’s very important that the parties discuss any issue that arises as early as possible and try to reach an agreement on how it should be resolved, rather than ignoring it and hoping it will go away. Because, chances are, if any such issue is unresolved it will not simply go away and will, on the contrary, lead to a much bigger dispute at a later stage.”