Constructing Renewables: 2023 Highlights and Lookahead

2023 has been another challenging year for the renewable energy sector, with the construction of renewable energy projects continuing to be impacted by macroeconomic issues including inflation, market disruption, and supply chain constraints. In this post, we look at the key contracting and procurement trends to emerge from 2023, as well as some notable developments in standard form construction contracts and English case law that are likely to be relevant to those involved in the construction of renewable energy projects. Click here for a PDF version of this post.

Key contracting and procurement trends

Macroeconomic issues

The construction market is moving very quickly as the industry faces a number of headwinds, potentially making the closing out of contracts on acceptable terms the most challenging they have been in a long time.  For example:

• Inflation – rising inflation and the knock-on impact on the cost of borrowing has demanded flexibility on pricing rather than relying on main contractor risk pricing. For costs particularly sensitive to inflationary pressures, clients are looking at price adjustment clauses linked to specific indices as well as potentially using prime cost items, or provisional sums converted to fixed prices on an open book basis when subcontract packages are bought and early procurement.
• Market disruption – the market generally is more alive to the risk of major unforeseen events (including pandemics and epidemics) following the impact of Covid, the situation in Ukraine and, in the UK, Brexit. Where it is inefficient for risk to be transferred, clients have focussed on ensuring that contracts require enhanced programme information to assess relief available for retained risks (which have ranged in scope from narrow relief for disruption to labour operations on and offsite through to broader relief for disruption to manufacture and/or delivery of goods and materials).
• Supply chain constraints – the situation in Ukraine continues to impact the availability of some materials. Uncertainty has been increased by supply constraints affecting manufacture and transportation. Some clients and contractors have purchased materials in advance to ensure they are available when required (leading to issues around storage of the materials, vesting agreements and advance payments). In the UK there are some concerns about a skills shortage which could have a longer-term impact on delivery of projects. There have been some tentative signs of contractors asking for time relief but our experience has been that contractors have not pressed the point beyond those raised around Brexit, Covid and Ukraine.

Procurement trends

As attitudes to risk change, closing out contracts requires an adaptable approach which helps the supply chain without jeopardising project appraisals and the need to secure contracts which meet the expectations of clients and investors, as well as ensuring the right balance is struck between risk and value for money.  Ways in which this has manifested include:

• Moves towards disaggregation of contract packages for an increasing number of asset classes – both client-led (for example to create efficiencies in pricing, secure direct engagement with OEMs to manage inflation and programme risks, secure efficiencies in arrangements for spares and maintenance, encourage innovation or mitigate main contractors' weakening balance sheets) and supplier-led (for example due to increasing reluctance to assume a wide range of risks).
• Increasing use of incentivised pricing (including target cost with moderated gain/pain sharing) for less well-defined scopes, such as complex civil or installation works or innovative design.

Purchasing clients are bringing increased focus to embedding sustainability requirements in procurement processes and engagement with supply chains to drive and access potential ESG benefits. Example of this include:

• Enhanced focus on supplier's ESG credentials at pre-qualification/ITT stage. It is envisaged that there may be more focus on local supply to reduce carbon in transportation.
• Earlier supplier involvement to secure input into key decisions related to carbon reductions (for example design decisions and supplier selection). Direct engagement with specialist sub-suppliers requires careful structuring to manage a transfer of related risks to any turnkey EPC contractor.

There remains a challenge to find the right balance between potentially substantial upfront investments in early supplier involvement and in innovative construction materials, technologies and processes and the financial savings and wider ESG benefits that could be achieved from them.  One trend is to involve key suppliers in the equity for a project.  A supplier taking an equity stake should be more structurally aligned with the interests of other investors and sponsors and induced to take actions beneficial to the project, including finding efficiencies and savings in whole life costing. However, clients looking at these arrangements need to be alive to managing the potential for conflicts of interest.

Developments in standard form construction contracts

New FIDIC offshore wind contract announced

In July 2023, FIDIC announced that it is developing a new contract specifically designed for offshore wind farm projects. FIDIC intends this to be adaptable for various offshore wind farm project locations, requirements and delivery methods. It also aims to enable proper interface and alignment between main contracts and subcontracts. The anticipated date for publication is the end of 2025.

NEC4 contract amendments

The NEC4 suite of contracts were updated at the beginning of 2023. Key changes included amendments to the cost components to address working from home, clarifying the client's rights to use documents prepared for design, flexibility added to the early contractor involvement option (X22), and clarifications within the adjudication procedure. Optional clause X29 has also been incorporated into the main contracts, which allows the parties to set climate change requirements.

New IChemE Blue Book

IChemE published its new standard form of contract for the provision of engineering, procurement and construction management (EPCM) services, known as the Blue Book, in spring 2023. This is the first standard form to reflect this contracting route, though other publishers may follow suit.

Speed Read: Notable cases from the English courts

Single or aggregate cap(s) on liability?

Drax Energy Solutions Ltd (formerly Haven Power Ltd) v Wipro Ltd [2023] EWHC 1342 (TCC)

Drax concerned the interpretation of a bespoke limitation of liability clause in a software services agreement. After the Supplier (Wipro) failed to meet milestones, the Customer (Drax) terminated the agreement and brought various claims against the Supplier, who counterclaimed for damages. The court considered whether the clause provided for a single aggregate cap on the Supplier's liability (as argued by the Supplier) or multiple caps for each of the Customer's claims (as argued by the Customer). The distinction was significant as it would limit the Customer's recovery to £11.5 million under a single cap, while multiple caps would allow for a total claim of £31 million. The court found in favour of a single aggregate cap, limiting the Customer's potential recovery.

Practical takeaways:

• Take special care when drafting exclusion/limitation of liability clauses, particularly when incorporating formulae (as opposed to specific amounts) in the mechanism for limiting liability.
• Whilst Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 remains the leading authority on the interpretation of exclusion/limitation of liability clauses, the interpretive outcome of a particular clause will turn on the actual language used.

The pitfalls of downloading clauses from head contracts

Kajima Construction Europe (UK) Limited and another v Children's Ark Partnership Limited [2023] EWCA Civ 292

This was an appeal case concerning the enforceability of an alternative contractual dispute resolution procedure (DRP) and the consequences where one party bypasses the DRP and initiates court proceedings. The dispute involved a hospital redevelopment project on which Kajima was engaged by the Project Company as the design and build contractor. Defects were discovered close to expiry of the contractual limitation period, and so the parties entered into a standstill agreement to enable rectification works to progress. A disagreement subsequently arose about extending the standstill agreement, leading the Project Company to bring high court proceedings against Kajima. Kajima applied for the claim to be dismissed, arguing that the Project Company failed to comply with the DRP. The DRP provisions contained various drafting peculiarities having been imported from a head contract and required disputes to be resolved by a "Liaison Committee" before formal proceedings could commence. The Project Company argued that the DRP was unenforceable, while Kajima contended it was both enforceable and a precondition to commencing proceedings. The Court of Appeal upheld the first instance decision and found that the DRP was a condition precedent to formal proceedings but was not enforceable.

Practical takeaways:

• Importing contractual provisions from head contracts involves more than a simple downloading exercise – special attention needs to be given to ensure that the original drafting is appropriately adapted to reflect the relationship of the parties under the relevant (sub)contract.
• Whilst courts generally try to uphold parties' agreements, where there is a dispute about the enforceability of alternative or bespoke DRPs which are being relied on to defeat or delay court proceedings, the courts have not shied away from concluding that such provisions are unenforceable.

Limitation and contractual claims for defective design

Lendlease Construction (Europe) Limited v AECOM Limited [2023] EWHC 2620 (TCC)

This was a dispute involving the construction of a new hospital oncology centre. Lendlease, the main contractor, was engaged by the Project Company under a design and build contract, while Aecom was hired by Lendlease to provide mechanical and electrical services under a separate consultancy agreement. In different proceedings, Lendlease was found liable to the Project Company for certain design defects for which Lendlease sought to pass down liability to Aecom, claiming Aecom had breached its design obligations under the consultancy agreement. Key issues in dispute included the nature and scope of Aecom's design obligations which, in turn determined whether Lendlease's claim was statute barred. The court found that Aecom's design responsibilities extended beyond mere provision of design, but that Lendlease's claims were statute barred as no act or omission had occurred on or after the earliest date on which the cause of action needed to have accrued in order for Lendlease's claim to be in time. The claim was therefore dismissed.

Practical takeaways:

• Precisely when a cause of action accrues in breach of contract cases involving defective design depends on the nature of the relevant design consultant's obligations under their contract:
  • Where the consultant is a "pure designer" whose responsibility is limited to the provision of design, the cause of action for breach of contract is likely to accrue at the point that it hands over its design to the contractor.
  • However, where the consultant's obligations continue after the provision of its design and it remains responsible for, e.g. reviewing design, coordinating and/or overseeing construction as a whole, then the cause of action might accrue at the latest on practical completion.
• Where the limitation period for claims is close to expiring, parties may need to rethink the usual sequence of pursuing supply chain claims and to consider instead bringing them before or concurrently with related claims arising from the main contract.

For more information, please contact James Doe, Christian Leathley, Thierry Tomasi, Tim Healey, Becky Johnson, Noe Minamikata or your usual Herbert Smith Freehills contact.