Author: Kevin Mehi
The spread of COVID-19 has caused a number of public health and economic challenges, and has also raised a number of questions and concerns around the contractual obligations of project developers, project owners, land owners, contractors, subcontractors, suppliers and other stakeholders with respect to renewable energy projects.
Major issues for these various stakeholders include: (1) contractors, subcontractors and suppliers being unable to perform their contractual obligations; (2) significant delays in project schedules and other key deliverables; and (3) project developers and investors being unable to make payments when due. Any party unable to deliver, perform or make payments under a contract is at risk of defaulting under the contract, which could result in termination, liability for damages and other remedies.
The following discusses certain key contractual provisions that may apply in light of the current COVID-19 pandemic, and has been prepared in an effort to assist various renewable energy project stakeholders in determining their contractual rights and responsibilities relating to such potential non-performance, delays and non-payments.
1. FORCE MAJEURE CLAUSES
A force majeure (Latin for “superior force”) clause is a staple clause in many renewable energy project agreements. Generally (but not always), this clause may excuse a party from failing to perform some or all of its obligations under a contract if the failure to perform was impossible due to some unforeseeable event. While the wording of a force majeure clause in renewable energy project agreements varies from one contract to the next, these clauses typically include the following:
- The clause typically states what constitutes a force majeure. Often, this includes specific examples (such as fires, floods, acts of God, ), and may state that any event that is “beyond the reasonable control of the parties” will constitute a force majeure. The clause can also contain carve-outs and exceptions (i.e. events that do not constitute a force majeure), such as a party’s inability to make payments when due.
- The clause is triggered by a party failing to perform its obligations under the contract (or sometimes by being delayed in performing its obligations under the contract).
- The clause also provides consequences for a force majeure. Typically, if a force majeure made a party’s performance of its obligations under the contract impossible, then the failure (or delay) is excused for the duration of the force majeure (with a corresponding extension of any affected project schedule). In some contracts, the parties may also be able to terminate the contract, seek reimbursement or reduce the scope of work to be performed.
Although this depends on the particular language of the clause, COVID-19 may be considered to be a force majeure if the clause identifies a force majeure to include any event that is “beyond the reasonable control of the parties”. Alternatively, the clause may identify a specific event (such as a pandemic, epidemic, public health crisis, order of public authority, disease or illness) that may capture the current COVID-19 pandemic.
If the COVID-19 pandemic is considered to be a force majeure, then the key question is whether COVID-19 caused the performance of some contractual obligation to be impossible. This is highly fact-specific and depends on the obligation in question and the particular renewable energy project. The key consideration here is whether performance is truly impossible (as opposed to simply being inconvenient); Canadian courts tend to take a strict approach in determining what is impossible.
Another consideration is whether a particular contractual obligation is impossible due to an event that is indirectly caused by COVID-19. For example, suppose that a turbine supplier has entered into a Turbine Supply Agreement with a wind developer to provide wind turbines for a project and the force majeure clause of that agreement doesn’t cover COVID-19, but does cover supply chain interruption. If the turbine supplier is unable to procure the gearboxes for the turbines due to a shutdown of the gearbox sub-supplier’s manufacturing facilities due to COVID-19, this could be considered a supply chain interruption and could excuse the turbine supplier’s failure to supply the wind turbines to the developer.
2. DOCTRINE OF FRUSTRATION
If a renewable energy project contract does not contain a force majeure clause, or if the force majeure clause is not applicable to the COVID-19 pandemic, then the common law doctrine of frustration may alternatively apply to excuse a party’s non-performance of the agreement.
For frustration to occur, there must be a supervening event or change in circumstances that makes a party’s performance of a contract “a thing radically different from that which was undertaken by the contract” (Naylor Group v Ellis-Don, 2001 SCC 58 at 53). A number of common law jurisdictions in Canada, including British Columbia, Alberta, Saskatchewan and Manitoba, have codified or supplemented this doctrine through provincial legislation. For example, if a solar developer entered into a lease for rooftop space from a hospital to facilitate a rooftop solar project and the hospital needed to restrict the solar developer’s access to the hospital indefinitely due to COVID-19, the hospital may take the position that even if there was no force majeure clause in the lease the contract is frustrated.
For more information about force majeure clauses and the doctrine of frustration, please see our COVID-19 and Excusing Non-Performance of Contractual Obligations and Questions and Answers Regarding Force Majeure Clauses blog posts.
3. ADJUSTMENTS TO PROJECT SCHEDULES
A project schedule is often included in renewable energy project agreements, particularly those relating to engineering, procurement and construction (EPC). Project schedules are often explicitly stated in an agreement and contain a number of target dates (including completion dates and commercial operation dates). Schedules may also set out certain milestone dates and can be tied to payments.
During the COVID-19 pandemic, contractors and suppliers may be at risk for missing key dates and deadlines in their project schedules. Additionally, contractors and suppliers who are paid for milestone achievements may lose out on revenue for the foreseeable future. Project owners and contractors should both be aware of the provisions in a contract that address these risks and issues:
- Contracts may require the parties to act reasonably and in good faith when agreeing to a project schedule (or amendments to the project schedule). Where such a provision is included in a contract, it is likely “reasonable” for a contractor to require an extension in light of the current pandemic, and equally “reasonable” for the project developer to agree to such an extension.
- In some contracts, contractors are able to adjust a project schedule by changing the scope of work, such as by issuing change orders or variation orders. However, contractors should be mindful that most contracts require the parties to agree to a change order – and that some of those contracts allow a project developer to arbitrarily refuse a change order.
- Some contracts may contemplate contingency time periods or funds to mitigate unforeseeable delays and risks such as those caused by the COVID-19 pandemic. However, these contingencies may be absent, or may otherwise be insufficient to address scheduling problems caused by the pandemic.
4. DELAY CLAUSES
Delays in Delivery or Performance of Work by Contractor
While a force majeure clause may specifically mention delays in the performance of a party’s contractual obligations, some contracts also contain separate clauses that address delays in delivery or the performance of work. These additional delay provisions are often included in contracts that contain specific milestones or schedules, such as EPC, consulting and other service contracts for renewable energy projects.
Generally (although not always), these clauses provide that if a reasonable delay occurs and the contractor is not at fault for the delay, then the contractor may be granted an extension of time to deliver or perform the work. For example, the standard form construction contract of the Canadian Construction Documents Committee (“CCDC”) contains the following clause:
If the Contractor is delayed in the performance of the Work by a stop work order issued by a court or other public authority and providing that such order was not issued as the result of an act or fault of the Contractor or any person employed or engaged by the Contractor directly or indirectly, then the Contract Time shall be extended for such reasonable time as the Consultant may recommend in consultation with the Contractor. The Contractor shall be reimbursed by the Owner for reasonable costs incurred by the Contractor as the result of such delay.
Pursuant to the above clause, if a health authority issues an order to stop work on a project site such as a wind farm (or an order restricting workers from working closely with others on wind farm construction sites) as a result of COVID-19, then the wind farm construction contractor will likely get an extension of the time to finish its work under the contract.
Subcontractors and Suppliers
If a subcontractor or supplier is delayed in performing its work, then the subcontractor or supplier will need to determine if its contract contains a delay provision that may grant the subcontractor or supplier an extension of the time to deliver or perform its work. Alternatively, the main contract may contain a delay provision, and the subcontract or supply agreement may contain a clause stating that the provisions of the main contract apply “mutatis mutandis” – meaning that the provisions of the main contract apply as if they were written in the subcontract or supply agreement.
However, what happens if the subcontractor’s delay is not excused by a delay provision?
Often, the failure of a subcontractor to perform gives the contractor the right to terminate the subcontract and to retain a new subcontractor. However, this depends on the particular clause which has been negotiated. In some cases, a contractor does not need any reason to terminate a subcontractor and can immediately terminate the subcontractor without consent of the project developer. This type of clause is beneficial to contractors during the COVID-19 pandemic, since it provides the contractor with flexibility to find a new subcontractor who may be able to deliver or perform work in a more timely manner.
Other project agreements may give the project developer the ultimate right to decide on subcontractors and suppliers to be used. While this is normally beneficial to a project developer, the COVID-19 pandemic might force project developers with such agreements to contribute additional resources to obtain new subcontractors and suppliers who can deliver or perform in a timely manner. As a result, particular attention needs to be paid to these types of project agreements where owners have sole and unfettered discretion to approve or reject subcontractors and suppliers.
5. DEFAULTS BY OWNERS AND LENDERS
The current COVID-19 pandemic also introduces potential financial difficulties for project developers and lenders. Due to the economic downturn currently being caused by the pandemic, many businesses are seeing drastic reductions of their revenues and are being forced to lay off employees or make budget cuts to compensate for the decreased revenues.
For project developers, there is an increased risk of being unable to pay contractors and suppliers for materials and work on any given project, or of becoming bankrupt or insolvent. While project contracts typically do not contemplate a large number of events of default by a project owner, the events of default that are usually contemplated are highly relevant and include non-payment (unless cured within a certain number of days), bankruptcy, insolvency and other financial difficulties. The remedies for any particular breach will depend on the contract itself, but generally give the contractor the right to terminate the agreement and sue the project owner for damages.
This risk may be exacerbated where the project developer is relying on financing from an investor who is unable to advance funding due to similar economic struggles. Financing structures will vary between different projects, and will depend on the particular loan and security documents in place between the owner and investor. However, a project developer should generally be aware of its rights and remedies if an investor does not advance funds when due, and whether there is any basis for shifting liability to an investor for any claims by unpaid contractors.
6. TERMINATION CLAUSES
Regardless of the type of contract, renewable energy project agreements typically contain termination provisions, which offer a right of termination in favour of either or both parties. Although the particular termination rights of any party will depend on the wording of the contract itself, termination clauses often contemplate the following:
- Contracts typically provide each party with a right to terminate due to the other party’s default. This usually requires the non-defaulting party to send notice of termination to the defaulting party. The defaulting party may be given a cure period, which is a set amount of time (such as a week or a month) to cure or fix its default. If the defaulting party is able to cure its default within this time, then the termination does not take effect. However, if the defaulting party is not able to cure its default within this time, then the contract is terminated.
- Whether one party’s default under a contract is serious enough to give the other party the right to terminate is typically detailed in the contract itself. Defaults giving rise to a right of termination often include non-payment, and a party’s failure to perform its material obligations under the contract (such as a seller failing to supply electricity under a power purchase agreement, or a utility failing to interconnect to the grid). As noted above, defaults can be excused by force majeure or delay provisions.
- Contracts usually provide each party with an immediate right of termination if the other party experiences certain financial difficulties, including bankruptcy, insolvency, receivership, and creditor arrangements/compromises. Parties are generally not afforded the opportunity to cure these defaults.
Given the current COVID-19 pandemic, whether or not any particular action (or omission) by a party constitutes a default that could give either party a right of termination will depend on the wording of the termination clause, and the action/omission. For example, the following is a standard termination clause from a CCDC fixed price contract that provides a contractor with a right of termination:
If the Work is suspended or otherwise delayed for a period of 20 Working Days or more under an order of a court or other public authority and providing that such order was not issued as the result of an act or fault of the Contractor or of anyone directly or indirectly employed or engaged by the Contractor, the Contractor may, without prejudice to any other right or remedy the Contractor may have, terminate the Contract by giving the Owner Notice in Writing to that effect.
Pursuant to the above clause, if a health authority issues an order to stop work (or an order restricting workers from working closely with others on construction sites) as a result of COVID-19, then the contractor will have a right to terminate the contract after twenty (20) working days.
Additionally, contracts may provide a party with a right to terminate for convenience (i.e. for any reason, or no reason at all). Typically, the party seeking to terminate is required to deliver notice to the non-terminating party, and to wait a certain amount of time (such as 30 days) before the termination becomes effective. Renewable energy project contracts typically provide this right to the project developer, but not to the contractors or land owners. This clause can be useful for project developers who need to cut ties with certain contractors or land owners due to project delays or financial difficulties during the current pandemic.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.