We have all heard the saying that ‘nature is the best teacher’. For the developers of solar power plants, the recent floods in Gujarat may well be the testimony to this fact. These floods apart from causing widespread loss to property and lives of people have also resulted into severe damages to the solar power plants situated in Gujarat which will take days if not weeks to restore. Additionally, parts of the plant itself were submerged in water during the flood. The aftermath of this situation for a developer is twofold – (1) incurring of cost and expenses to repair the damages and restore the plant, and (2) generation losses over several days/ weeks till the time the plant is not fully restored.
Force Majeure – An Undervalued Risk
It is situations like floods that are ordinarily understood as Force Majeure under the EPC agreements, being events which are outside the control of parties involved. While the Gujarat flood serves as a grim example of a force majeure event, it is only one of the many factors beyond your control, which may affect your plant significantly.
As Force Majeure events are viewed as an unlikely event, insufficient attention is paid by developers to this risk even though such event may severely impact the plant and bring about significant losses and liabilities including generation losses.
A snapshot of major outcomes and consequences likely to arise due to a force majeure event is provided below:
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Challenges Involved In Handling Force Majeure Events
As a result, the manner of handling of consequences in the aftermath of such events is often inadequately or not provided at all in the EPC agreements. Lack of clearly defined obligations or ambiguities in the agreement often (a) lead to dispute or litigation with the EPC contractor with respect responsibility regarding restoration of the plant, or (b) force the developer to bear all the expenses and liabilities in connection with the restoration to minimise losses.
However, post Gujarat floods, it is clearly evident that force majeure risks though ‘a low probability event’, are definitely practical reality and more often than not, result into substantial damages and liabilities for a project owner that needs be effectively handled to minimise losses.
Therefore, it is important for you to use this opportunity to analyse various challenges that may have to be encountered in restoration of a plant and rectification of defects upon occurrence of a force majeure event.
Some of the challenges inherent in dealing with Force Majeure situations are as follows:
- What is the ambit of force majeure and what situations are covered under force majeure?
- What if the force majeure event has resulted from an act, omission or default of a third party not within the control of either party?
- To what extent are parties excused from performing their obligations under the agreement?
- Which party is responsible for assessment of damages?
- Which party is responsible for restoration of the plant or remedy the defects in plant and equipment resulting from the force majeure event?
- Which party shall bear cost for such restoration and rectification?
- Does the position on responsibility remain same both during and post-construction of project?
- Time period for assessment and carrying out the restoration work.
- Manner of agreeing on the final scope of and cost and expenses pertaining to restoration activities.
- Time period for payment of costs and expenses incurred on restoration activities.
- Effect of force majeure on guarantees provided under the EPC agreement, e.g. defect liability, performance ratio guarantee, availability guarantee.
- Effect on delay liquidated damages.
- Ability to appoint third party contractor for undertaking site restoration.
EPC Agreements – An effective tool for managing risks of Force Majeure
EPC agreements are one of the tools that can be used by project owners to effectively manage, share or minimise the risks in construction, development and operation of a power plant. Therefore, provisions relating to force majeure in the EPC agreement should be carefully thought through and drafted to ensure that they adequately cover measures listed above for handling of aforesaid challenges, instead of treating Force Majeure as a standard clause that cannot be changed.
Learn from the Nature – Next Step
Take this opportunity to turn back and look at the force majeure clauses in your EPC agreements. Analyse to what extent the challenges listed above are captured in your agreements and guard yourself against the risks associated with a force majeure event.