Proposed by the National Development and Reform Commission (hereinafter referred to as “NDRC”) and drafted by China National Institute of Standardization and China Energy Conservation Association, the General Technical Rules of Energy Performance Contracting (hereinafter referred to as "GTR") was released as a national standard (standard No. GB/ T 24915-2010) in August 9, 2010 and has entered into force since January 1, 2011. GTR provides the terms and definitions of the wording, types of contract, technical requirements and content of Energy Performance Contracting (hereinafter referred to as “EPC”) template contract. With the introduction of GTR, the terms and technical requirements of EPC have been unified from the technical perspective and thus providing better information on the performance of EPC. GTR also provides important technical support and basis for the implementation of EPC projects, industry management and incentive policies issued by relevant authorities.
According to Article 1 of the Supplemental Notice of the General Office of NDRC and the General Office of the Ministry of Finance on Issues Concerning Granting Financial Rewards to EPC Projects, the energy performance contract signed after October 20, 2010 shall be executed in a format provided by GTR. Therefore, it should be noted that if an Energy Service Company (hereinafter referred to as “ESC”) applies for government’s financial incentives, then reference should be made using the template contract provided in GTR. Despite the fact that GTR went into force on January 1, 2010, the reference to the template contract should be made retrospectively. Furthermore, Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Value-added Tax, Business Tax and Enterprise Income Tax Policies for Promoting the Development of the Energy Services Sector provides that one of the requirements for ESCs to enjoy the tax preferential policy for EPC projects is that the format and content of energy performance contract shall be drafted in accordance with the Contract Law and GTR.
It should be noted that GTR only requires the parties to follow the format of the template contract. Parties of the contract can freely modify and supplement any terms and conditions in accordance with their specific needs and demands regarding the project. In view of this, lawyers are allowed to optimize the terms and conditions of template contract according to the diversity of their clients’ interests. The following analysis then focuses on the application of these terms and conditions from the ESCs’ perspective.
Template contract allows the parties to define the specific term and wording of the contract on their own. Apart from the general terms such as “project”, “assets”, as long as the standard of service and scope of liabilities are concerned, technical concepts should also have precise definition. Such concepts include "operation defect", "assets damage", "pilot run", "material adverse effect" and etc.
II. The construction period of EPC project
According to Article 11.4 of the template contract, energy users have the right to terminate the contract upon a written notice if the construction period has exceeded to the agreed time frame. Therefore the construction period clause is of particular importance and shall be devised with full consideration of the facts that ESCs have to undertake preliminary investment of equipments (whether purchased or leased) and that the project confronts the risk of failure to obtain approvals from relevant authorities or failure to apply for financial awards granted to EPC projects.
III. Exclusive Service
Although there is no exclusive service clause in the template contract, such clause can be inserted into the purchaser’s obligations under the contract as agreed by both parties to become a protection of ESC, under which the purchaser shall not grant express or implied consent or permission to third party’s investment, construction or operation of assets or projects similar to those of the contract, nor shall the purchaser acquire from the third party products or service similar to those provided by ESC.
IV. Amendment to the project
Template contract stipulated three conditions as to the amendment to the project, namely: 1) any occurrence of situation beyond the reasonable expectation of ESC during the construction period of the project which resulted to a need to amend the original project solution; 2) any modification to the project for the purpose of optimizing the performance of the project and increasing the Energy Savings Benefit; and 3) any decline in energy efficiency caused by the removal, replacement, modification, cease or reduction in operation, addition or dislocation of its equipments, facilities and site by the energy user. As to the third situation, the template contract stipulates that energy user shall indemnify ESC against all losses arising out of the decrease in Energy Savings Benefits; but ESC has to bear the associated costs under the other two circumstances. Taking into account that ESCs’ initial judgment of the investment and Energy Savings Benefits of the project is based on the diagnosis of energy consumption, the amendment to the project may have material effects on the Energy Savings Benefits. Therefore both parties shall also re-negotiate the method and ratio of Energy Saving Benefit under the first two circumstances.
V. Method to deal with project assets upon termination of project
According to the template contract, the project shall be ceased to be in operation immediately upon termination of the contract. The method to deal with project assets can be reached by agreement of both parties in the contract or its appendix. To be specific, the methods may vary depending of the circumstances of termination.
- If the termination is caused by the energy user or as a result of amendment of the project due to the third circumstances mentioned in IV above, the energy user shall, within a certain period of time after termination of the contract, indemnify ESC with all the expected benefits to be obtained as a result of the performance of the contract. Upon the full receipt of the indemnification amount, the purchaser shall possess the ownership of the project assets.
- If the termination is based on force majeure events or the failure of the project in obtaining approval caused by the changes of authorities or policies, the energy user shall indemnify the ESC against all of its losses according to the residual value of the project assets listed in the ESC’s accounting books within a certain period of time after such termination. Upon the full receipt of the indemnification amount, the purchaser shall possess the ownership of the project assets.
- If the termination of contract is caused by the ESC, the ESC may, upon reasonable requests of the energy user, restore the site condition to its original condition, in which the expenses shall be borne by the ESC, and the purchaser shall give reasonable assistance to the ESC. If the ESC fails to perform the above-mentioned obligations within a certain period of time upon receipt of the energy user’s notice for restoration to original condition, the energy user has the right to dismantle the relevant equipments on its own, and any expenses occurred as a result of this shall be borne by ESC. It should be noted that due to the fact that losses caused to the energy user may not be measured, a cap should be put to mitigate ESC’s expenses, or the calculation formula should be defined, or a fixed amount should be stipulated. For the same reason, it is also proposed to define a detailed calculation formula as to the expected benefits to be obtained by the ESC under the contract, including the fixed expenses and profits, etc.