In petrochemical projects, the engineering, procurement and construction (EPC) contracts are often negotiated after the technology licenses have been negotiated between the technology licensors and the project owner.
Both sets of agreements are also typically settled before financing is sought for the project. Given the significant interrelationship between the EPC contracts and license agreements, and common lender requirements for the bankability of such project documentation, these timing differences may give rise to a number of issues. We identify below some of these issues, and then discuss potential solutions to address them.
Issues for the EPC contractor
The primary issue for the EPC contractor is the extent to which it assumes liability for performance guarantees that depend on third-party technology. If the EPC contractor fails to achieve a performance guarantee due to technology issues, then it may be liable to the project owner without corresponding recourse to the technology licensor. As such, an EPC contractor will carefully consider (i) its experience with the relevant technology and relationship with the technology licensor, (ii) the track record of such technology, (iii) its ability to make a claim against the technology licensor and (iv) the scope of the performance guaranteesand corresponding liquidated damages provided by the technology licensor in assessing the liability for performance guarantees that the EPC contractor is willing to assume under the EPC contract.
A second consideration for the EPC contractor is the intellectual property indemnities provided under the technology license agreements, on the one hand, and the EPC contract, on the other, and whether and to what extent they differ. An EPC contractor would generally not want, for instance, to be subject to a higher cap on its indemnity obligations than that set forth in the relevant technology license.
Issues for project owners and lenders
From the point of view of project owners and their enders, a principal consideration is the extent to which the risk of technology failure is assumed by the project owner. To the extent the EPC contractor does not assume all or any portion of the technology risk, the project owner (and by extension its lenders) will be exposed to technology risk to the extent that the project owner suffers damages in excess of the (typically low) liability caps contained in the technology license.
Project owners and lenders will also be concerned that the project's rights to the technology continue uninterrupted during and after construction, as well as in circumstances in which the lenders have exercised their security and stepped into the shoes of the project owner. Project owners and lenders will be concerned about any possible grounds for termination of the technology license agreements that result in the loss of the technology, at least without having some ability to try and preserve the relevant licenses.
EPC contractor's enforcement rights
With respect to the issue of the EPC contractor's ability to make a claim against the technology licensor, solutions seen in the market include the EPC contractor and the project owner agreeing on a novation of such agreements to the EPC contractor during the construction period with a novation back to the project owner following project completion (or earlier if the EPC contract terminates prior to such time). The EPC contractor, project owner and technology providers may also enter into a tripartite agreement that gives the EPC contractor a joint right to enforce certain provisions of the license agreements. The EPC contractor may alternatively subcontract directly with the technology provider or another subcontractor with whom the technology provider has a relationship in order to obtain coverage of the technology risk.
From a risk-allocation perspective, project owners/lenders will prefer that technology risk be fully "wrapped" by the EPC contractor, such that the EPC contractor assumes responsibility (via performance guarantees and liquidated damages) for any technology failure. Such a structure provides the project owner/lenders with access to the typically higher liquidated damages and liability caps of an EPC contract and mitigates the risk of the EPC contractor attempting to disclaim liability for the failure to achieve a performance guarantee by blaming technology issues.
Even in circumstances where the EPC contractor is not the technology provider, it may be willing to wrap the technology if it is able to enter into direct arrangements with the technology licensor, as discussed above. In addition, even if the technology licensor does not fully backstop the EPC contractor's related performance obligations or the EPC contractor is not otherwise able to obtain recourse against the technology licensor, the EPC contractor may be willing to bear some technology risk if it has strong and longstanding relationships with the technology providers and/or significant previous experience with installing the relevant technology.
Alternatively, if the EPC contractor is not willing to wrap certain technology, project owners and lenders may nonetheless take comfort from other factors such as the proven nature of the relevant technology or the terms of the technology license. Lenders may also look for project sponsors to provide sponsor support in respect of any perceived uncovered risks or, indeed, for large-scale complex projects, may require a completion guarantee that covers all completion risks, including the technology risk. Because petrochemical projects generally involve a number of different types of process technology, it is not uncommon for different approaches to be taken for each of the different technologies needed for the project.
Preservation of licenses
Lender concerns with respect to ensuring the project's uninterrupted rights to the technology may be, and often are, addressed by the lenders seeking direct agreements with the technology providers, which require the technology providers to provide the lenders with an opportunity to cure defaults and avoid termination of the technology license agreements, and, if necessary, the right to step into the shoes of the project owner to (among other things) preserve those agreements.
Being aware of these potential issues and giving them due consideration sufficiently in advance of negotiating the relevant agreements will help project owners successfully address such issues and avoid potentially time-consuming and costly delays—for example, in re-opening negotiations on the technology license agreements if required by the EPC contractor for it to fully wrap the technology, or re-opening negotiations on the EPC contract if the lenders are not satisfied with the level of technology risk to the project.