Factory shutdowns in China (the world’s largest solar module and panel manufacturer), together with various other restrictions imposed by government authorities worldwide as a result of the outbreak of the coronavirus known as COVID-19, are having a significant impact on the ability of suppliers of critical equipment for solar developments to perform obligations under supply agreements. This in turn has caused production delays across the solar supply chain and analysts warn of supply shortages and corresponding price hikes that may, at a minimum, diminish the profit margins of developers and impact investors, lenders and other project participants. To avoid typical contractual repercussions in such circumstances, including liquidated damages for delay or termination, suppliers have been seeking relief by claiming force majeure. The full impact of these delays should be considered in light of the entire contractual structure. In some circumstances, there will be a gap between the relief that certain project participants are entitled to, relative to others. And in circumstances where developers / owners have contracted directly with solar equipment suppliers, they may be in the contradictory position of simultaneously defending against, and claiming, relief for force majeure under different contracts.
What are force majeure provisions?
In common law countries, force majeure provisions are typically a creature of contract (whereas in China or civil law jurisdictions, they are governed by statute) and will be governed by the applicable rules of contractual construction. The meaning of force majeure and the operation of such provisions will therefore depend on the precise contractual terms of the provision as well as the governing jurisdiction. The first port of call for any party seeking to invoke, or defending against, a claim of force majeure, will therefore be to review the terms and requirements of each contract carefully.
A typical force majeure provision will usually contemplate a limited set of circumstances that will entitle an affected party to relief from performance of its contractual obligations. Clauses typically require that the event or circumstance was not (a) reasonably foreseeable by the claiming party, (b) avoidable by the exercise of due diligence on the part of the claiming party, and (c) a result of a breach of the claiming party’s obligations under the agreement. Instead of, or in addition to, defining a force majeure event, many force majeure provisions may exhaustively or non-exhaustively list examples of force majeure events, such as extreme weather events, actions by governmental authorities or natural disasters, and/or list examples of events that are excluded as being force majeure events.
Considerations when analyzing force majeure exposure
- Notification and Reporting Requirements
- Force majeure provisions often specify a time frame within which the affected party must notify the non-affected party, together with other stipulations including the form and content of a claim of force majeure and ongoing reporting obligations.
- Parties should be mindful of any time bars included in the force majeure provision as a failure to comply with those may preclude a party from invoking force majeure. Any failure to comply with ongoing reporting requirements may serve to limit the relief available to the affected party.
- Some force majeure provisions provide that the event must have occurred after the effective date of the relevant agreement in order to constitute force majeure. This can present issues in interpretation when the timing of the event is difficult, or impossible, to establish with certainty, such as the outbreak of COVID-19, or any resulting travel or shipping restrictions, particularly as new outbreaks are occurring on an almost daily basis.
- Where, as is usually the case for solar development projects, there are several agreements in a chain of contracts that may be affected by delays at the source supplier, parties should ensure they have complied with their notification obligations under the agreements in the contractual chain to avoid being time-barred.
- Gaps in the contractual chain
- Ultimately a careful analysis of the precise terms of the relevant force majeure provisions will be required to determine if the event claimed will in fact constitute a ‘force majeure event’ within the scope of each force majeure provision.
- Parties should consider the entire contractual chain of agreements; they may be exposed where downstream agreements (such as the construction contracts or the power purchase agreements) do not provide for equivalent relief to that in the upstream contracts.
- Carefully analyze whether there are any geographic restrictions in the force majeure provision; it is not uncommon for force majeure relief to be limited to events or circumstances at the location in which the key obligations of the parties are to be performed, for example, the site at which the solar facility is being constructed.
- In such circumstances, the impact of COVID-19 on a China-based module supplier creating delays in construction of a solar facility in the United States may not entitle the facility’s developer to relief under its construction contract or power purchase agreement.
The double-edged sword in solar developments
Particularly in the context of solar development projects, where key materials and equipment, including solar modules and transformers, are being sourced from countries affected by this strain of coronavirus, it is important to consider how delays in obtaining such materials and equipment can create issues and liability further down the chain, particularly where relief may not be equivalent or where the force majeure provisions in downstream contracts are narrower in the scope of their operation.
Developers are typically subject to contractual consequences in their power purchase agreements for failure to achieve commercial operations by a longstop date (which may be fixed and not subject to force majeure relief). Typical remedies can include liquidated damages and rights of the offtaker to terminate, severing what can often be the main revenue stream of the project. A developer’s exposure is increased to the extent that such liquidated damages cannot be passed through to the contractor under the construction contract because such contractor has been relieved of liability as a result of the force majeure event affecting its equipment supplier, meaning the developer may have no recourse to liquidated damages that might otherwise have provided a remedy to the developer in the event the schedule was delayed. This is of particular concern with power purchase agreements that only allow relief if the force majeure event impacts the site itself, rather than parties further back in the chain of agreements.
In solar development projects, a developer’s exposure is often compounded where the developer contracts directly with key solar equipment suppliers (rather than the construction contractor taking the risk of delays in equipment delivery). In those cases, where delivery of the solar modules and/or transformer (for example) to the project site is delayed, the developer may be forced to defend against an equipment supplier’s claim for relief due to the relevant force majeure event, while simultaneously seeking to claim force majeure relief from contractual penalties arising from the delay that may be provided in the construction contract and/or power purchase agreement.
These risks are a forceful reminder that force majeure provisions should be carefully negotiated to contemplate the unique risks of the project to which they relate. Accepting any gaps in force majeure relief between upstream and downstream contracts should be avoided unless the specific gap is a risk the project participants understand and are willing to price into their transactions.
The exact nature and potential risk exposure in the event of coronavirus affecting a party’s ability to perform, and the potential relief and exposure under existing force majeure provisions in the relevant agreements, will vary from agreement to agreement and jurisdiction to jurisdiction. Often, the evaluation of the risk exposure and available remedies will involve a multi-jurisdictional analysis and care should be taken in responding to force majeure claims as the contractual and commercial puzzle may not be straightforward. Finally, despite the observed disruptions, new contracts are being entered into on a daily basis and careful consideration should be given to the way owners, offtakers, constructors, suppliers and other market participants approach the negotiation and drafting of new force majeure provisions in the current environment.