Be prepared for new technology defects

Like any sector using evolving technologies, the offshore wind industry has suffered product defects and costly legal disputes. As design evolution continues, lawyers Steve Nichol, Theresa Mohammed and Helen Stuart advise on what to look out for when preparing project contracts.

Dispute Problems with foundations at the Greater Gabbard wind farm in the UK resulted in legal action
Dispute Problems with foundations at the Greater Gabbard wind farm in the UK resulted in legal action

Since their relatively recent birth, offshore wind farms have been involved in various design and construction defects claims. While the evolution of appropriate contractual arrangements goes on, recent disputes show that contracts are still far from perfect.

A pertinent example is provided by the dispute between the Greater Gabbard owners, GGOWL - the joint venture between utilities SSE and RWE - and its contractor, US construction giant Fluor. When problems with some of the monopile foundation appeared at the site off south-east England in 2011, GGOWL asked Fluor to repair them. Fluor made a £300 million (EUR359 million) claim against the joint venture, arguing that the reworking of the foundations was a design change. GGOWL counter-sued, alleging that 52 out of 140 transition pieces were defective. The dispute was settled in May, but its details remain undisclosed.

Foundation trouble

This was not the first time design issues have arisen over turbine foundations. At the 630MW London Array, the largest offshore wind farm built to date, a new, conically shaped grout connection has been used after concerns arose in 2010 over standard grout-based joints to connect foundation parts. IHS Emerging Energy Research had reported that the grouting had started to dissolve on more than 60% of Europe's offshore turbines, leading them to shift on their foundations.

The conical connection is now the industry standard for offshore wind projects, but with the continuing pace of evolution in design and technology, further design defects may yet become apparent.

The ability of turbine designs to withstand extreme weather and changing sea conditions have been identified as problems in many cases. Extreme weather conditions have caused about four fifths of all North Sea offshore turbines to sustain failing grouted connections; dissolved and cracked grouting has caused the turbines to shift on their foundations. Violent storms have also caused North Sea monopile turbines to experience bending movement within foundation parts, causing some to tip and no longer stand vertically.

Also, risks posed by seafloor conditions such as scour and sand-dune migration are frequently underestimated. A 2005 survey conducted for Danish research group DHI showed that the scour protection for certain turbines had sunk by as much as 1.5 metres adjacent to the turbines' foundations, causing exposure of the power cables from the turbines.

Some technological developments, such as floating foundations, may eliminate some of the current common defects but will undoubtedly give rise to others. Equally, as reliability improves, designers will face increasing pressure to produce designs that will operate with reduced maintenance, which may in turn lead to an increase in claims associated with a failure to achieve higher maintenance targets.

Common contractual arrangements

Offshore wind farms are usually owned by a joint venture or project company, and there is a complicated suite of contractual documentation that needs to be negotiated for each project. Typically, a project company will have to put into place: a construction contract; an operation and maintenance (O&M) agreement; a fuel supply contract; and financing and security arrangements with the funder.

Engineering, procurement and construction (EPC) contracts are the most common form of construction contract in the sector. Under an EPC contract, the main contractor accepts full risk for the project. The contractor will hand over the wind farm to the joint venture when it is ready for operation.

An EPC contract allows the owner to procure the project under a single contract with a single point of responsibility for engineering design, procurement and construction. In terms of any defects, a single point of responsibility is more beneficial to the owner because ascertaining which party is responsible for the defect should be straightforward. However, the contractor's price will undoubtedly be higher to accommodate the higher level of risk involved. EPC contracts aim to have a fixed programme, a fixed price, plus guaranteed performance and reliability levels.

There are standard-form EPC contracts, but many firms use bespoke forms or heavily amended standard forms, given that no standard form has been specifically drafted for the sector. The most common standard form used is FIDIC, but the International Chamber of Commerce also has a standard EPC contract that can be amended and used. However, it can be costly to negotiate amendments, leading to some industry players calling for a suite of standard contracts for the wind sector. Usually, under EPC contracts, contractors will want to put in place overall caps on their liability and limit their liability for delays and compensation for any resulting losses. Such caps are normally linked to the contract price.

Another option is multi-contracting, where the project is divided into several contract packages. This means less risk is passed to the contractor and therefore a greater risk remains with the owner. While this may reduce the cost of the works, the allocation of risk makes it less popular with funders. This arrangement lacks the benefit of a single point of responsibility and fixed cost.

Defining defects

Not all contracts define what is a defect. Essentially, a defect is work that fails to comply with the requirements of the contract. They can be caused by a design problem or faulty workmanship, or both. Given the time and cost implications of defects, parties should consider their potential impact at every step of the process.

At the procurement stage, the owner needs to ensure that the scope of work is clearly defined. The design/construction/performance standards required for completion should be fully set out in the contract. If multi-contracting is used, the owner should ensure that the scope of works and specifications across the contracts are fully co-ordinated so that the separate packages come together to form the complete project. The owner may also want to enter into collateral warranties with sub-contractors so that, in the event of the main contractor becoming insolvent, it can bring a claim in respect of any defects direct against the relevant sub-contractor.

All parties should ensure the works are regularly inspected so that, if necessary, tests can be carried out and any defective works can be rectified at an early stage. At completion, the owner needs to ensure that specifications have been met, any issues are recorded and that the works are free from patent defects.

If, however, a latent defect is discovered after completion or takeover, the owner should check how long it has been since takeover/completion; ascertain what the contract provides and whose is responsibile for the defect; and keep contemporaneous evidence of the defect and any costs incurred as a result of it.

Most EPC contracts state that the contractor is obliged to repair any defects that occur within a certain period (usually 12 or 24 months) from takeover, usually at its own cost if the defect was the contractor's risk. If the defect has come to light after the expiry of any defect notification period, the project company is entitled to employ others to remedy the defects, but if it does not give the contractor the opportunity, it will only be entitled to recover what it would have cost the original contractor to remedy the defects (which may be less).

A defect usually constitutes a breach of contract, so the project company can bring a claim against the contractor for damages. One commonly used measure of damages for defective works is the reasonable cost to remedy the defects plus any other losses that arise directly from the breach, such as loss of profits. If it has been a number of years since takeover, the project company will also need to ascertain whether it would be time-barred from bringing a claim against the contractor, which may differ from country to country.

The operations and maintenance agreement should be carefully considered, as this will govern the way repairs and maintenance work is carried out and may impose greater obligations.

The owner should ensure that the works are insured from the start of the project. It could also consider insurance for defective design, but this may be limited and price may be prohibitive, especially if new technology has been used.

Communication is key

The use of new and evolving technology in the sector has inevitably led to defects on some projects. Given that the time and cost implications of any defects can be significant, parties should be alert to the risk of potential problems from the start of any project.

While owners can seek to protect themselves contractually as much as possible by allocating risk in detail at the procurement stage, commercially they may not be able to obtain a single point of responsibility and accept some risk. The key to minimising the effects of any defects is to communicate and work with the contractor from the start to try to ensure that any defects can be remedied as early as possible.

Steve Nichol, Theresa Mohammed and Helen Stuart are members of the energy disputes team at law firm Trowers & Hamlins


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