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EPC contracts in renewables projects

29th November 2013

By: Creamer Media Reporter

  

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By: Jurg van Dyk

The third round of the Department of Energy’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has closed and the bid winners announced. After having gone through three rounds of bid submissions, the construction market can determine fairly accurately the risk distribution that would be expected in any engineering, procurement and construction (EPC) contract.

An EPC contract is a construction contract in terms of which the EPC contractor takes responsibility for designing the works, procuring the necessary materials and equipment and constructing the works.

The EPC contractor is usually at liberty to subcontract certain parts of the works. It is typically expected of the EPC contractor to carry the risk in respect of time and cost. As such, an EPC contract would have a fixed price and a fixed completion date.

These are, however, not the main characteristics that distinguish an EPC contract from other types of construction contracts, as most construction contracts would have a fixed price and a fixed completion date. However, EPC contracts typically have fewer events which would entitle the EPC contractor to change the contract price or the completion date. In addition, it is common for EPC contractors to assume substantially more risk than contractors under non-EPC construction contracts, such as subsurface conditions, hence the premium associated with EPC contracts. In return, the owner has more certainty regarding the price and the completion date, and has a single point of contact with the EPC contractor.

For these reasons, EPC contracts are the preferred way of contracting under the REIPPPP.

Similar to most construction contracts, EPC contracts place a limitation on the contractor’s total liability. The value of the limitation is negotiated between the parties but, more importantly, owners and lenders will require that certain liabilities be excluded from the limitation on the EPC contractor’s total liability. The effect of such exclusions is that the EPC contractor’s liability for direct losses, in respect of those exclusions, is unlimited. These exclusions vary but, in general, one can expect the following to be excluded:
• liability covered by the proceeds of any insurance policy or for which insurance cover is required under the EPC contract;
• liability arising from death or personal injury;
• liability arising from third-party property damage;
• breach of intellectual property rights;
• liability arising from the EPC contractor’s fraud, wilful misconduct, gross negligence or unlawful acts;
• liability against which the owner is indemnified by the EPC contractor;
• liability arising from a breach (by the owner) of a project document under the REIPPPP caused by a breach by the EPC contractor of its obligations under the EPC contract; and
• certain flow-through liabilities that may arise under the project documents under the REIPPPP, such as penalties that may be imposed on the owner as a result of non- compliance with its economic development obligations.

These exclusions from the limitation of the EPC contractor’s overall liability can be divided into two broad groups – liability for which the EPC contractor is compensated and liability which arises solely as a result of the EPC contractor’s actions or inactions. The extent of these exclusions varies, but the above can be considered as the exclusions likely to be encountered in the REIPPPP. Owners and lenders may want more exclusions, whereas EPC contractors would argue in favour of having fewer exclusions.

The parties to EPC contracts, as is the case with other construction contracts, would normally waive the other party’s liability for consequential loss. The reason is that consequential loss is usually not easily quantifi- able, the quantum can be disproportionate, compared with the value of the EPC contract and the parties need a degree of certainty with respect to their possible exposure under the EPC contract. The waiver of consequential loss by the owner in favour of the EPC contractor may contain the following carve-outs:

• liquidated damages payable by the EPC contractor to the owner under the EPC contract (the most common liquidated damages are delay liquidated damages and performance liquidated damages);
• liability arising from the EPC con- tractor’s fraud, wilful misconduct, gross negligence or unlawful acts;
• liability covered by the proceeds of any insurance policy, or for which insurance cover is required under the EPC contract (to the extent that such proceeds include an element of consequential loss);

• liability arising from a breach by the EPC contractor of intellectual property rights;

• liability arising from the EPC con- tractor’s fraud, wilful misconduct, gross negligence or unlawful acts;
• liability arising from a breach (by the owner) of a project document under the REIPPPP caused by a breach by the EPC contractor of its obligations under the EPC contract; and
• liability against which the EPC con- tractor has indemnified the owner.

It is advisable that parties to an EPC contract perform an analysis of the risk regime to determine their possible exposure under the EPC contract. The risk regime under any construction contract can be overwhelmingly complex and requires detailed attention and an understanding of the relevant market before one puts pen to paper.

 

Van Dyk is a director in the projects and infrastructure practice at law firm Cliffe Dekker & Hofmeyr.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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