Asia Pacific Projects Update

EPC CONTRACTS IN THE

AUSTRALIAN RENEWABLE
ENERGY SECTOR –
WIND FARMS
However, because of their flexibility, the value and the
INTRODUCTION certainty sponsors and lenders derive from EPC contracts,
Engineering, Procurement and Construction (EPC) and the growing popularity of Public Private Partnership
contracts are the most common form of contract used to (PPP)2 projects, the authors believe EPC contracts will
undertake construction works by the private sector on continue to be the predominant form of construction
large-scale and complex infrastructure projects1. Under an contract used on large-scale infrastructure projects in most
EPC contract, a contractor is obliged to deliver a complete jurisdictions3.
facility to a developer who need only "turn a key" to start This paper will only focus on the use of EPC contracts in
operating the facility, hence EPC contracts are sometimes the wind power sector. However, the majority of the
called turnkey construction contracts. In addition to issues raised are applicable to EPC contracts used in all
delivering a complete facility, the contractor must deliver sectors.
that facility for a guaranteed price by a guaranteed date
Prior to examining renewable energy power project EPC
and it must perform to the specified level. Failure to
contracts in detail, it is useful explore the basic features of
comply with any requirements will usually result in the
a wind farm project.
contractor incurring monetary liabilities.
It is timely to examine EPC contracts and their use on OVERVIEW OF THE CURRENT STATE OF
infrastructure projects given the bad publicity they have RENEWABLE ENERGY IN AUSTRALIA
received, particularly in contracting circles. A number of Current uptake
contractors have suffered heavy losses and, as a result, a
number of contractors now refuse to enter into EPC Renewable energy projects range from solar, wind, hydro,
contracts in certain jurisdictions. This problem has been wave, tidal, geothermal and nuclear production. Wind
exacerbated by a substantial tightening in the insurance energy is currently one of the most economically feasible
market. Construction insurance has become more forms of renewable energy in many countries.
expensive due to significant losses suffered on many Renewable energy sources contributed 9.6% of the total
projects. electricity produced in Australia in the year to September
2011, up from 8.7% in 20104. Of this amount,
approximately two-thirds (67.2%) was generated by renewable energy projects including wind farms,
hydro-electricity. Wind energy was the next largest commercial solar and geothermal, whereas the SRES
source, contributing 21.9%, followed by bioenergy (8.5%) covers small-scale technologies such as solar panels and
and solar PV (2.3%). solar hot water systems.
Renewable energy policy and legislative framework It is intended that the majority of the RET will be
- federal delivered by large-scale renewable energy projects under
the LRET. The LRET includes legislative annual targets,
The federal regulatory framework governing the
starting at 10,000 GWh in 2011 and increasing to 41,000
renewable sector is set out in the Renewable Energy
GWh in 2020 and remaining at that level until 2030 9.
(Electricity) Act 2000 (Cth) (Act), which came into effect
There are no annual targets for the SRES.
in April 2001. This Act boosted the wind energy industry
in Australia by introducing the Mandatory Renewable Under the LRET, accredited renewable energy power
Energy Target (MRET), which set a target for renewable stations may be entitled to create one LGC for each MWh
energy generation from eligible renewable energy power of electricity generated10, which can then be sold and
stations in Australia of 9,500 GWh by 2010. The aim of transferred to liable entities using the REC Registry.
the MRET was both to encourage additional generation of Power stations using at least one of the more than 15 types
electricity from existing renewable energy power stations of "eligible renewable energy sources" (listed in s.17(1) of
and to encourage new renewable energy projects. the Act), which includes wind energy, can become
accredited. LGCs can only be created for renewable
In August 2009, the Federal Government implemented the
energy source that is new or additional to the "baseline"
Renewable Energy Target (RET) scheme. The expanded
amount of renewable source energy generated by that
RET increased the previous MRET by more than four
power station before the Act came into effect. Each
times, with a new renewable energy generation target of
accredited power station must submit an annual Electricity
45,000 GWh by 2020, representing a target of 20% of
Generation Return to the Office of the Renewable Energy
Australia's electricity being supplied by renewable sources
Regulator (ORER).
by 2020 and to be maintained at this level until 2030 5. At
the end of 2010, the generating capacity of renewable Under the SRES, owners of small-scale technology will
power stations was approximately 12,200 GWh of eligible receive one STC for each MWh generated by the small-
renewable energy per year6. scale system or displaced by the installation of a solar hot
water heater or heat pump.
The MRET and RET created a guaranteed market for
additional renewable energy deployment using a Under the amended RET, liable entities will be required to
mechanism of tradable Renewable Energy Certificates purchase and surrender an amount of both LGCs and
(RECs). RECs are market-based instruments that are STCs. The amount of LGCs and STCs to be purchased is
generated by accredited renewable energy power stations determined by the Renewable Power Percentage (RPP)
and can then be traded and sold. Demand for RECs is and Small-Scale Technology Percentage (STP),
created by a legal obligation that is placed on parties who respectively. Liable entities are required to purchase
buy wholesale electricity (retailers and large users of LGCs and STCs and surrender them to the ORER on an
electricity) to purchase and surrender a certain amount of annual basis (for LGCs) and a quarterly basis (for STCs).
RECs each year. Liable entitles may purchase LGCs directly from
renewable energy power stations or from agents dealing in
During the early years of the expanded RET scheme in
LGCs. The market price of LGCs is dependent on supply
2009 and 2010, strong demand for small-scale renewable
and demand and has varied between $10 and $60 in the
technologies including solar hot water panels and heat
past11. Liable entities may purchase their STCs through an
pumps meant that an increasingly large number of RECs
agent who deals with STCs or through the STC Clearing
were entering the market from small-scale technologies.
House. There is a government-guaranteed price of
This lead to some volatility in the market and depressing
$40/STC using the STC clearing house, although the price
of REC prices, which caused investment uncertainties and
may be less than $40 in the market. If a liable entity does
potential delays for large-scale renewable energy
not meet its requirements, it must pay a "shortfall charge",
projects7.
currently set at $65 per LGC or STC not surrendered.
In June 2010, Federal Parliament passed legislation8 to
The aim of the reforms is to allow the market to set a REC
split the RET into two parts - the Large-Scale Renewable
price for large-scale renewables that will provide
Energy Target (LRET) with Large-Scale Generation
incentives for those projects. As the increasing obligation
Certificates (LGCs) and the Small-Scale Renewable
of liable entities to purchase LRECs to 2020 increases
Energy Scheme (SRES) with Small-Scale Technology
demand, LREC prices are expected to increase, which is
Certificates (STCs). The LRET covers large scale

2  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
in turn expected to support the investment and expansion moderate carbon price scenarios, carbon pricing is
of large-scale renewable generation. unlikely to quickly force out many existing generators,
Other federal legislative and policy frameworks that although it may speed the planned retirements of marginal
impact on renewable energy development are units. However, the Australian Treasury has indicated that
environmental regulations under the Environment the impact of a carbon price would be more likely to
Protection and Biodiversity Conservation Act 1999 (Cth); influence the choice of new capacity and to transform the
and the carbon price mechanism under the Clean Energy Australian electricity sector as growth in energy demand
Act 2011 (Cth) (CE Act) and associated policies under the brings on new clean energy capacity14. The Federal
Clean Energy Plan 2011 (Clean Energy Plan)12, which are Government has also indicated that, in the future, it
discussed in further detail below. anticipates that the CPM will be the principal clean energy
deployment incentive mechanism, with the RET acting as
Renewable energy policy and legislative framework transitional support in the interim15.
- state
In addition to the CPM, other policy measures in the
State-based planning systems and associated guidelines Clean Energy Plan announced by the Federal Government
will also impact upon aspects of renewable energy in July 2011 to facilitate the development of renewable
development such as the siting of wind farms and their energy include:
design.
 The creation of the Clean Energy Finance
For example, in Victoria, the Policy and Planning
Corporation (CEFC), a new body to facilitate
Guidelines for Development of Wind Energy Facilities in
and coordinate up to $10 billion of investment
Victoria (August 2011)13 (guidelines) set out guidance
in the areas of renewable energy, enabling
relating to where a wind energy facility can be constructed
technologies, energy efficiency and low-
in accordance with the state planning framework and the
emissions technologies. The aim of the CEFC
matters that local governments must take into account in
is to unlock significant new private sector
assessing wind energy facility proposals. Under the
investment by providing equity investments,
guidelines, wind turbines are excluded from (among other
commercial loans and loan guarantees, with
places) listed geographical areas (including the Yarra
equity to be reinvested in the CEFC.
Valley, Dandenong Ranges, Bellarine and Mornington
Peninsulas) and will not be permitted to be built within  The creation of the Australian Renewable
two kilometres of an existing dwelling without the written Energy Agency, an independent statutory body
consent of the owner of the dwelling. responsible for managing $3.2 billion in funds
that have or will be allocated to existing
Carbon price mechanism and the Clean Energy
government grants programmes that support
Plan
the development of renewable energy
The CE Act and the 21 bills of the Clean Energy Future technologies.
Legislative Package were passed by the Federal
Government in 2011 and are scheduled to commence in BASIC FEATURES OF A WIND FARM PROJECT
April 2012. The key feature of the CE Act is the
Wind farm projects
introduction of a Carbon Price Mechanism (CPM) from
1 July 2012. Under the CPM, liable businesses will be A wind farm typically comprises a series of wind turbines,
required to purchase and surrender to the Federal a substation, cabling (to connect the wind turbines and
Government a permit for every tonne of covered substation to the electricity grid), wind monitoring
greenhouse gas emissions produced. The price of permits equipment and temporary and permanent access tracks.
will be fixed for the first three years and then, from 1 July The wind turbines used in commercial wind farms are
2015 onwards, the price of permits will be set by the generally large slowly rotating, three bladed machines that
market and the number of permits issued by the Federal typically produce between 1MW and 2MW of output.
Government will be capped. We have a paper that sets out Each wind turbine is comprised of a rotor, nacelle, tower
the details of the CPM in greater detail - please let us and footings. The height of a tower varies with the size of
know if you would like a copy. the generator but can be as high as 100m. The number of
turbines depends on the location and capacity of turbines.
Although the renewable energy industry will not be
directly impacted by the CPM, the effect of putting a price The amount of power a wind generator can produce is
on carbon will provide an economic driver to incentivise dependent on the availability and the speed of the wind.
investment in renewable energy technologies. Modelling The term “capacity factor” is used to describe the actual
undertaken by the Australian Treasury indicates that under output of a wind energy facility as the percentage of time
it would be operating at maximum power output. For
3  EPC contracts in the Australian Renewable Energy Sector –
Wind Farms
every megawatt hour (MWh) of renewable energy  Turbine works - 60-75%
generated, the emission of approximately 1.3 tonnes of
 Civil and electrical works to the point of
carbon dioxide through coal-fired electricity generation is
connection - 10-25%
displaced16.
 Grid connection - 5-15%
Wind farms need to be located on sites that have strong,
steady winds throughout the year, good road access and  Development and consulting work, including
proximity to the electricity grid. Australia has one of the wind speed monitoring - 5-15%.
world‟s best wind resources, especially along the
southeast coast of the continent and in Tasmania.
According to the Clean Energy Council, the average
prices of turbine supply contracts fell by up to 20% during
201117. The Clean Energy Council's18 estimated indicative
direct costs of the various components of a wind farm, in
terms of their percentage contribution to the overall
capital cost of the project, are:

THE CONTRACTUAL STRUCTURE

The diagram below illustrates the basic contractual structure of a project financed wind farm project using an EPC contract.

The detailed contractual structure will vary from project to WOM is the subject of a separate paper - please let us
project. However, for the purpose of this paper we have know if you would like a copy of this paper.
examined a project with the basic structure illustrated As can be seen from the diagram, the project company19
above. We do note that some wind farm projects split the will usually enter into agreements that cover the following
EPC into a Wind Turbine Generator (WTG) supply elements:
contract and a Balance of Plant (BOP) contract, where the
 An agreement that gives the project company the right
performance guarantee element is dealt with in a Warranty
to construct and operate the wind farm and sell
Operating and Maintenance Agreement (WOM). The
electricity generated by the wind farm. Traditionally
principles are essentially the same as set out below and we
this was a concession agreement (or project
will discuss specific components later in this paper. The

4  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
 agreement) with a relevant government entity granting  A connection agreement for connection of the wind
the project company a concession to build and operate farm generation equipment into the relevant electricity
the wind farm for a fixed period of time (usually distribution network (network) between the project
between 15 and 25 years), after which it was handed company and the owner of the network, which is either
back to the government. This is why these projects are a transmission company, a distribution company, an
sometimes referred to as Build Operate Transfer or electrical utility or a small grid owner/operator. The
Build Own Operate Transfer projects20. connection agreement will broadly cover the
However, following the deregulation of electricity construction and installation of connection facilities by
industries in many countries, merchant wind farms are the owner of the network and the terms and conditions
now being constructed. A merchant power project is a by which electricity is to be delivered to the generation
project that sells electricity into an electricity market equipment at the wind farm from the network (import
and takes the market price for that electricity. electricity) and delivered into the network once
Merchant power projects do not normally require an generated by the wind farm (export electricity).
agreement between the project company and a  A construction contract governing various elements of
government entity to be constructed. Instead, they the construction of the wind farm from manufacture of
need simply obtain the necessary planning, the blades and towers and assembly of the nacelles and
environmental and building approvals. The nature and hubs and construction of the balance of the plant
extent of these approvals will vary from place to place. comprising civil and electrical works. There are a
In addition, the project company will need to obtain number of contractual approaches that can be taken to
the necessary approvals and licences to sell electricity construct a wind farm. An EPC contract is one
into the market. approach. Another option is to have a supply contract
 In traditional project financed power projects (as for the wind turbines, a design agreement and
opposed to merchant power projects) there is a Power construction contract with or without a project
Purchase Agreement (PPA) between the project management agreement. The choice of contracting
company and the local government authority, where approach will depend on a number of factors including
the local government authority undertakes to pay for a the time available, the lender requirements and the
set amount of electricity every year of the concession, identity of the contractor(s). The major advantage of
subject to availability, regardless of whether it actually the EPC contract over the other possible approaches is
takes that amount of electricity (referred to as a “take that it provides for a single point of responsibility.
or pay” obligation). In turn, the project company will This is discussed in more detail below.
undertake to produce a minimum quantity of Interestingly, on large project financed projects the
electricity and LGCs. Sometimes a tolling agreement contractor is increasingly becoming one of the
is used instead of a PPA. A tolling agreement is an sponsors, ie an equity participant in the project
agreement under which the power purchaser directs company. Contractors will ordinarily sell down their
how the plant is to be operated and despatched. In interest after financial close because, generally
addition, the power purchaser is responsible for the speaking, contractors will not wish to tie up their
provision of fuel. This eliminates one risk variable (for capital in operating projects. In addition, once
the project company) but also limits its operational construction is complete the rationale for having the
flexibility. contractor included in the ownership consortium no
In the absence of a PPA, project companies developing longer exists. Similarly, once construction is complete
a merchant power plant, and lenders, do not have the a project will normally be reviewed as lower risk than
same certainty of cash flow as they would if there was a project in construction, therefore, all other things
a PPA. Therefore, merchant power projects are being equal, the contractor should achieve a good
generally considered higher risk than non-merchant return on its investments.
projects21. This risk can be mitigated by entering into In our experience most projects and almost all large
hedge agreements. Project companies developing private sector wind farms use an EPC contract.
merchant power projects often enter into synthetic  An agreement governing the operation and
PPAs or hedge agreements to provide some certainty maintenance of the wind farm. This is usually a long-
of revenue. These agreements are financial hedges as term Operating and Maintenance Agreement (O&M
opposed to physical sales contracts. Their impact on agreement) with an operator for the operation and
the EPC contract is discussed in more detail below. maintenance of the wind farm. The term of the O&M
agreement will vary from project to project. The

5  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
 operator will usually be a sponsor especially if one of Before examining the requirements for bankability, it is
the sponsors is an Independent Power Producer (IPP) worth briefly considering the appropriate financing
or utility company whose main business is operating structures and lending institutions. The most common
wind farms. Therefore, the term of the O&M form of financing for infrastructure projects is project
agreement will likely match the term of the concession financing. Project financing is a generic term that refers to
agreement or the PPA. In some financing structures financing secured only by the assets of the project itself.
the lenders will require the project company itself to Therefore, the revenue generated by the project must be
operate the facility. In those circumstances the O&M sufficient to support the financing. Project financing is
contract will be replaced with a technical services also often referred to as either “non-recourse” financing or
agreement, under which the project company is “limited recourse” financing.
supplied with the know-how necessary for its own The terms “non-recourse” and “limited recourse” are often
employees to operate the facility. In other used interchangeably, however they mean different things.
circumstances the project company will enter into a “Non-recourse” means there is no recourse to the project
fixed short-term O&M agreement with the sponsors at all and “limited recourse” means, as the name
manufacturer and supplier of the major equipment suggests, there is limited recourse to the sponsors. The
supplied, for example, in the case of a wind farm, the recourse is limited both in terms of when it can occur and
wind turbine generators, during which the appointed how much the sponsors are forced to contribute. In
operator will train the staff of the project company. practice, true non-recourse financing is rare. In most
The project company will take over operation of the projects the sponsors will be obliged to contribute
wind farm on expiry of the O&M agreement and will additional equity in certain defined situations.
perform all functions of the operator save for some
Traditionally project financing was provided by
support functions being retained by the manufacturer.
commercial lenders. However, as projects became more
 Financing and security agreements with the lenders to complex and financial markets more sophisticated, project
finance the development of the project. finance also developed. Whilst commercial lenders still
Accordingly, the construction contract is only one of a provide finance, governments now also provide financing
suite of documents on a wind farm project. Importantly, either through export credit agencies22 or trans or
the project company operates the project and earns multinational organisations like the World Bank, the
revenues under contracts other than the construction Asian Development Bank and European Bank for
contract. Therefore, the construction contract must, where Reconstruction and Development. In addition, as well as
practical, be tailored so as to be consistent with the bank borrowings sponsors are also using more
requirements of the other project documents. This is even sophisticated products like credit wrapped bonds,
more relevant when the EPC structure is split into WTG securitisation of future cash flows and political risk
supply, BOP and WOM elements. insurance to provide a portion of the necessary finance.
As a result, it is vital to properly manage the interfaces In assessing bankability, lenders will look at a range of
between the various types of agreements. These interface factors and assess a contract as a whole. Therefore, in
issues are discussed in more detail later. isolation it is difficult to state whether one approach is or
is not bankable. However, generally speaking the lenders
BANKABILITY will require the following:
A bankable contract is a contract with a risk allocation  A fixed completion date
between the contractor and the project company that
 A fixed completion price
satisfies the lenders. Lenders focus on the ability (or more
 No or limited technology risk
particularly the lack thereof) of the contractor to claim
additional costs and/or extensions of time as well as the  Output guarantees
security provided by the contractor for its performance.  Liquidated damages for both delay and performance
The less comfortable the lenders are with these provisions,
 Security from the contractor and/or its parent
the greater amount of equity support the sponsors will
have to provide. In addition, lenders will have to be  Large caps on liability (ideally, there would be no caps
satisfied as to the technical risk. Obviously price is also a on liability, however, given the nature of EPC
consideration, but that is usually considered separately to contracting and the risks to the contractors involved
the bankability of the contract because the contract price there are almost always caps on liability)
(or more accurately the capital cost of the wind farm) goes  Restrictions on the ability of the contractor to claim
more directly to the bankability of the project as a whole. extensions of time and additional costs.

6  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
An EPC contract delivers all of the requirements listed where the project company has delayed the contractor or
above in one integrated package. This is one of the major has ordered variations to the works.
reasons why they are the predominant form of A fixed completion date. EPC contracts include a
construction contract used on large-scale project financed guaranteed completion date that is either a fixed date or a
infrastructure projects. Again, lenders have become fixed period after the commencement of the EPC contract.
comfortable with the interface risk in a split EPC structure If this date is not met the contractor is liable for Delay
and will focus on the remedies for underperformance in Liquidated Damages (DLDs). DLDs are designed to
the WOM. compensate the project company for loss and damage
Sponsor support suffered as a result of late completion of the wind farm.
In certain cases, it may be necessary to provide sponsor To be enforceable in common law jurisdictions23, DLDs
support to strengthen the capacity of the project company must be a genuine pre-estimate of the loss or damage that
to satisfy its obligations to the banks and to have a the project company will suffer if the wind farm is not
"bankable" project. Forms of sponsor support may include completed by the target completion date. The genuine pre-
equity subscription agreements (base and standby equity), estimate is determined by reference to the time the
completion guarantees of whole or part of the debt until contract was entered into.
the project commences commercial operation, bank DLDs are usually expressed as a rate per day, which
guarantees to support completion guarantee and cost represents the estimated extra costs incurred (such as extra
overrun guarantees/facility. Completion guarantees, for insurance, supervision fees and financing charges) and
example, ensure that the lenders will be paid back a set losses suffered (revenue forgone) for each day of delay.
amount if the facility does not reach completion or the In addition, the EPC contract must provide for the
repayment of scheduled debt service, of principal plus contractor to be granted an extension of time when it is
interest, if completion is delayed. Other forms of support delayed by the acts or omissions of the project company.
may be incorporated where the sponsor is a party to a key The extension of time mechanism and reasons why it must
project contract (such as a construction contract, O&M be included are discussed later.
agreement or offtake agreement) by requiring the sponsor
Performance guarantees. The project company‟s revenue
to provide additional guarantee letters of credit or
will be earned by operating the wind farm. Therefore, it is
corporate support to underpin the project.
vital that the wind farm performs as required in terms of
BASIC FEATURES OF AN EPC CONTRACT output and reliability. Therefore, EPC contracts contain
performance guarantees backed by Performance
The key clauses in any construction contract are those that Liquidated Damages (PLDs), payable by the contractor if
impact on time, cost and quality. it fails to meet the performance guarantees. These
The same is true of EPC contracts. However, EPC performance guarantees usually comprise a guaranteed
contracts tend to deal with issues with greater power curve and an availability guarantee guaranteeing
sophistication than other types of construction contracts. the level of generation of electricity24.
This is because, as mentioned above, an EPC contract is PLDs must also be a genuine pre-estimate of the loss and
designed to satisfy the lenders‟ requirements for damage that the project company will suffer over the life
bankability. of the project if the wind farm does not achieve the
EPC contracts provide for: specified performance guarantees. As with DLDs, the
A single point of responsibility. The contractor is genuine pre-estimate is determined by reference to the
responsible for all design, engineering, procurement, time the contract was signed.
construction, commissioning and testing activities. PLDs are usually a Net Present Value (NPV) (less
Therefore, if any problems occur the project company expenses) calculation of the revenue forgone over the life
need only look to one party – the contractor – to both fix of the project.
the problem and provide compensation. As a result, if the For example, if the output of the plant is 5 MW less than
contractor is a consortium comprising several entities, the the specification, the PLDs are designed to compensate
EPC contract must state that those entities are jointly and the project company for the revenue forgone over the life
severally liable to the project company. of the project by being unable to sell that 5 MW.
A fixed contract price. Risk of cost overruns and the PLDs and the performance guarantee regime and its
benefit of any cost savings are to the contractor‟s account. interface with the DLDs and the delay regime is discussed
The contractor usually has a limited ability to claim in more detail below.
additional money, which is limited to circumstances

7  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
Caps on liability. As mentioned above, most EPC obligations, the price of the bank guarantee and the
contractors will not, as a matter of company policy, enter extent of the technology risk
into contracts with unlimited liability. Therefore, EPC  Retention, ie withholding a percentage (usually 5%–
contracts for power projects cap the contractor‟s liability 10%) of each payment. Provision is often made to
at a percentage of the contract price. This varies from replace retention monies with a bank guarantee
project to project, however, an overall liability cap of (sometimes referred to as a retention guarantee (bond))
100% of the contract price is common. In addition, there
 Advance payment guarantee, if an advance payment is
are normally sub-caps on the contractor‟s liquidated
made
damages liability. For example, DLDs and PLDs might
each be capped at 20% of the contract price, with an  A parent company guarantee - this is a guarantee from
overall cap on both types of liquidated damages of 30% of the ultimate parent (or other suitable related entity) of
the contract price. the contractor, which provides that it will perform the
contractor‟s obligations if, for whatever reason, the
There will also likely be a prohibition on the claiming of
contractor does not perform.
consequential damages. Put simply, consequential
damages are those damages that do not flow directly from Variations. The project company has the right to order
a breach of contract, but which were in the reasonable variations and agree to variations suggested by the
contemplation of the parties at the time the contract was contractor. If the project company wants the right to omit
entered into. This used to mean heads of damage like loss works either in their entirety or to be able to engage a
of profit. However, loss of profit is now usually different contractor, this must be stated specifically. In
recognised as a direct loss on project financed projects addition, a properly drafted variations clause should make
and, therefore, would be recoverable under a contract provision for how the price of a variation is to be
containing a standard exclusion of consequential loss determined. In the event the parties do not reach
clause. Nonetheless, care should be taken to state agreement on the price of a variation, the project company
explicitly that liquidated damages can include elements of or its representative should be able to determine the price.
consequential damages. Given the rate of liquidated This determination is subject to the dispute resolution
damages is pre-agreed, most contractors will not object to provisions. In addition, the variations clause should detail
this exception. how the impact, if any, on the performance guarantees is
to be treated. For some larger variations the project
In relation to both caps on liability and exclusion of
company may also wish to receive additional security. If
liability, it is common for there to be some exceptions.
so, this must also be dealt within the variations clause.
The exceptions may apply to either or both the cap on
liability and the prohibition on claiming consequential Defects liability. The contractor is usually obliged to
losses. The exceptions themselves are often project repair defects that occur in the 12 to 24 months following
specific, however, some common examples include in completion of the performance testing. Defects liability
cases of fraud or wilful misconduct, in situations where clauses can be tiered, ie the clause can provide for one
the minimum performance guarantees have not been met period for the entire wind farm and a second, extended
and the cap on delay liquidated damages has been reached period for more critical items.
and breaches of the intellectual property warranties. Intellectual property. The contractor warrants that it has
Security. It is standard for the contractor to provide rights to all the intellectual property used in the execution
performance security to protect the project company if the of the works and indemnifies the project company if any
contractor does not comply with its obligations under the third parties‟ intellectual property rights are infringed.
EPC contract. The security takes a number of forms Force majeure. The parties are excused from performing
including: their obligations if a force majeure event occurs. This is
 A bank guarantee for a percentage, normally in the discussed in more detail below
range of 5–15%, of the contract price. The actual Suspension. The project company usually has the right to
percentage will depend on a number of factors suspend the works.
including the other security available to the project
Termination. This sets out the contractual termination
company, the payment schedule (because the greater
rights of both parties. The contractor usually has very
the percentage of the contract price unpaid by the
limited contractual termination rights. These rights are
project company at the time it is most likely to draw
limited to the right to terminate for non-payment or for
on security, ie to satisfy DLD and PLD obligations the
prolonged suspension or prolonged force majeure and will
smaller the bank guarantee can be), the identity of the
be further limited by the tripartite or direct agreement
contractor and the risk of it not properly performing its
between the project company, the lenders and the

8  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
contractor. The project company will have more extensive analysis must be undertaken on all major risks prior to
contractual termination rights. They will usually include going out to tender.
the ability to terminate immediately for certain major Another consequence of the risk allocation is the fact that
breaches or if the contractor becomes insolvent and the there are relatively few construction companies that can
right to terminate after a cure period for other breaches. In and are willing to enter into EPC contracts. As mentioned
addition, the project company may have a right to in the introduction, some bad publicity and a tightening
terminate for convenience. It is likely the project insurance market have further reduced the pool of
company‟s ability to exercise its termination rights will potential EPC contractors. The scarcity of EPC
also be limited by the terms of the financing agreements. contractors can also result in relatively high contract
Performance specification. Unlike a traditional prices.
construction contract, an EPC contract usually contains a Another major disadvantage of an EPC contract becomes
performance specification. The performance specification evident when problems occur during construction. In
details the performance criteria that the contractor must return for receiving a guaranteed price and a guaranteed
meet. However, it does not dictate how they must be met. completion date, the project company cedes most of the
This is left to the contractor to determine. A delicate day-to-day control over the construction. Therefore,
balance must be maintained. The specification must be project companies have limited ability to intervene when
detailed enough to ensure the project company knows problems occur during construction. The more a project
what it is contracting to receive but not so detailed that if company interferes, the greater the likelihood of the
problems arise the contractor can argue they are not its contractor claiming additional time and costs. In addition,
responsibility. interference by the project company will make it
Whilst there are, as described above, numerous substantially easier for contractors to defeat claims for
advantages to using an EPC contract, there are some liquidated damages and defective works.
disadvantages. These include the fact that it can result in a Obviously, ensuring the project is completed satisfactorily
higher contract price than alternative contractual is usually more important than protecting the integrity of
structures. This higher price is a result of a number of the contractual structure. However, if a project company
factors not least of which is the allocation of almost all the interferes with the execution of the works, in most
construction risk to the contractor. This has a number of circumstances it will have the worst of both worlds. It will
consequences, one of which is that the contractor will have a contract that exposesit to liability for time and
have to factor into its price the cost of absorbing those costs incurred as a result of its interference without any
risks. This will result in the contractor building corresponding ability to hold the contractor liable for
contingencies into the contract price for events that are delays in completion or defective performance. The same
unforeseeable and/or unlikely to occur. If those problems occur even where the EPC contract is drafted to
contingencies were not included, the contract price would give the project company the ability to intervene. In many
be lower. However, the project company would bear more circumstances, regardless of the actual drafting, if the
of the risk of those unlikely or unforeseeable events. project company becomes involved in determining how
Sponsors have to determine, in the context of their the contractor executes the works, then the contractor
particular project, whether the increased price is worth executes the works then the contractor will be able to
paying. argue that it is not liable for either delayed or defective
As a result, sponsors and their advisors must critically performance.
examine the risk allocation on every project. Risk As a result, it is vitally important that great care is taken in
allocation should not be an automatic process. Instead, the selecting the contractor and in ensuring the contractor has
project company should allocate risk in a sophisticated sufficient knowledge and expertise to execute the works.
way that delivers the most efficient result. For example, if Given the significant monetary value of EPC contracts,
a project is being undertaken in an area with unknown and the potential adverse consequences if problems occur
geology and without the time to undertake a proper during construction, the lowest price should not be the
geotechnical survey, the project company may be best only factor used when selecting contractors.
served by bearing the site condition risk itself as it will
mean the contractor does not have to price a contingency SPLIT EPC CONTRACTS
it has no way of quantifying. This approach can lower the
One common variation, particularly in Asia, on the basic
risk premium paid by the project company. Alternatively,
EPC structure illustrated above is a split EPC contract.
the opposite may be true. The project company may wish
Under a split EPC contract, the EPC contract is, as the
to pay for the contingency in return for passing off the risk
name implies, split into two or more separate contracts.
which quantifies and caps its exposure. This type of

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The basic split structure involves splitting the EPC KEY RENEWABLE ENERGY SPECIFIC
contract into an onshore construction contract and an CLAUSES IN WIND FARM EPC CONTRACTS
offshore supply contract25. General interface issues
There are two main reasons for using a split contract. The As noted in the earlier section above, an EPC contract is
first is because it can result in a lower contract price as it one of a suite of agreements necessary to develop a wind
allows the contractor to make savings in relation to farm project. Therefore, it is vital that the EPC contract
onshore taxes; in particular on indirect and corporate taxes properly interfaces with those other agreements. In
in the onshore jurisdiction. The second is because it may particular, care should be taken to ensure the following
reduce the cost of complying with local licensing issues interface properly:
regulations by having more of the works, particularly the
 Commencement and completion dates
design works, undertaken offshore. In addition, in some
countries which impose restrictions on who can carry out  Liquidated damages amounts and trigger points
certain activities like engineering and design services,  Caps on liability
splitting the EPC contract can also be advantageous
 Indemnities
because it can make it easier to repatriate profits.
 Entitlements to extensions of time
As mentioned above, the benefits in splitting an EPC
contract for tax and licensing reasons primarily arise in  Insurance
certain countries in Asia; there has not, nor is there likely  Force majeure
to be given the climatic and geographical conditions, been
 Intellectual property.
a project financed wind farm project in Asia. However, a
split EPC contractual structure arises in another context in Obviously, not all these issues will be relevant for all
wind farm projects. The manufacturers of the turbines agreements. In addition to these general interface issues
have successfully avoided taking the turnkey that apply to most types of projects, there are also power
responsibility by entering into a supply contract and a project issues that must be considered. These issues are
balance of plant contract (ie the foundation works, civils mainly concerned with the need to burn fuel and export
and erection etc.) instead of an EPC contract. power. They are discussed in more detail below27.

There are risks to the project company in this structure. Those major renewable energy specific interface issues
This mainly arises because of the derogation from the are:
principle of single point of responsibility.  Access for the contractor to the transmission grid to
Unlike a standard EPC contract, the project company allow timely completion of construction,
cannot look only to a single contractor to satisfy all the commissioning and testing (grid access)
contractual obligations (in particular, design, construction  Consistency of commissioning and testing regimes
and performance). Under a split structure, there are at
 Interface issues between the relevant government
least two entities with those obligations. Therefore, a third
agencies and system operator and the contractor. In
agreement, a wrap-around guarantee26, is often used to
particular, whilst the project company must maintain a
deliver a single point of responsibility despite the split.
long term/comfortable relationship with either the
Under a wrap-around guarantee, an entity, usually either government or the system operator, the contractor does
the offshore supplier or the parent company of the not.
contracting entities, guarantees the obligations of both
Grid access
contractors. This delivers a single point of responsibility
to the project company and the lenders. However, that Clearly, EPC contracts will not provide for the handover
agreement is not relevant where the manufacturer of the of the wind farm to the project company and the PPA will
turbines and the balance of plant contractor are separate not become effective until all commissioning and
entities and neither company will take the single point of reliability trialling has been successfully completed. This
responsibility under the wrap-around guarantee. raises the important issue of the contractor‟s grid access
Accordingly, the lenders will want to be satisfied that the and the need for the EPC contract to clearly define the
interface issues are dealt with in the absence of a single obligations of the project company in providing grid
point of responsibility. access.
Lenders need to be able to avoid the situation where the
project company‟s obligation to ensure grid access is
uncertain. This will result in protracted disputes with the
contractor concerning the contractor‟s ability to place load

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onto the grid system and to obtain extensions of time in Many EPC contracts are silent on these matters or raise far
situations where delay has been caused as a result of the more questions than they actually answer. Given that the
failure or otherwise of the project company to provide project company‟s failure will stem from restrictions
grid access. imposed on it under either or both the PPA or the
Grid access issues arise at two differing levels, namely: concession agreement, the best answer is to back to back
the project company‟s obligations under the EPC contract
 The obligation to ensure that the infrastructure is in
(usually to provide an extension of time and / or costs)
place
with the PPA. This approach will not eliminate the risk
 The obligation to ensure that the contractor is associated with grid access issues but will make it more
permitted to export power. manageable.
With respect to the obligation to ensure that the A variety of projects we have worked on in Asia,
infrastructure is in place, the project company is the most particularly in China and the Philippines, have incurred
appropriate party to bear this risk vis-à-vis the contractor, significant amounts of time and costs in determining the
since the project company usually either builds the grid access obligations under the EPC contract. This
infrastructure itself or has it provided through the relevant suggests that it is a matter which must be resolved at the
concession agreement. Issues that must be considered contract formation stage. Therefore, we recommend
include: inserting the clauses in Part III of Appendix 128.
 What are the facilities that are to be constructed and Interfacing of commissioning and testing regimes
how will these facilities interface with the contractor‟s
It is also important to ensure the commissioning and
works? Is the construction of these facilities covered
testing regimes in the EPC contract mirror the
by the PPA, connection agreement, concession
requirements for commercial operation under the PPA.
agreement or any other construction agreement? If so,
Mismatches only result in delays, lost revenue and
are the rights and obligations of the project company
liability for damages under the PPA or concession
dealt with in a consistent manner?
agreement, all of which have the potential to cause
 What is the timing for completion of the infrastructure disputes.
– will it fit in with the timing under the EPC contract?
Testing/trialling requirements under both contracts must
With respect to the contractor‟s ability to export power, provide the necessary project company satisfaction under
the EPC contract must adequately deal with this risk and the EPC contract and system operator/offtaker satisfaction
satisfactorily answer the following questions to ensure the under the PPA or connection agreement. Relevant testing
smooth testing, commissioning and entering of issues which must be considered include:
commercial operation:
 Are differing tests/trialling required under the EPC
 What is the extent of the grid access obligation? Is it contract and the PPA/connection agreement? If so, are
merely an obligation to ensure that the infrastructure the differences manageable for the project company or
necessary for the export of power is in place or does it likely to cause significant disruption?
involve a guarantee that the grid will take all power
 Is there consistency between obtaining handover from
which the contractor wishes to produce?
the contractor under the EPC contract and commercial
 What is the timing for the commencement of this operation? It is imperative to prescribe back-to-back
obligation? Does the obligation cease at the relevant testing under the relevant PPA and the EPC contract,
target date of completion? If not, does its nature which will result in a smoother progress of the testing
change after the date has passed? and commissioning and better facilitate all necessary
 What is the obligation of the project company to supervision and certification. It must not be forgotten
provide grid access in cases where the contractor‟s that various certifications will be required at the lender
commissioning/plant is unreliable – is it merely a level. The last thing the lenders will want is the
reasonableness obligation? process to be held up by their own requirements for
certification. To avoid delays and disruption it is
 Is the relevant grid robust enough to allow for full
important that the lenders‟ engineer is acquainted with
testing by the contractor - for example, the
the details of the project and, in particular, any
performance of full load rejection testing?
potential difficulties with the testing regime.
 What is the impact of relevant national grid codes or Therefore, any potential problems can be identified
legislation and their interaction with both the EPC early and resolved without impacting on the
contract and the PPA? commercial operation of the wind farm.

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 Is the basis of the testing to be undertaken mirrored Interface issues between the offtaker and the EPC
under both the EPC contract and the PPA? For contractor
example, what basis are various noise tests to be
At a fundamental level, it is imperative that the
undertaken?
appropriate party corresponds with the relevant offtaker/
 What measurement methodology is being used? Are system operator during construction on issues such as the
there references to international standards or provision of transmission facilities/testing requirements
guidelines to a particular edition or version? and timing.
 Are all tests necessary for the contractor to complete The project company must ensure the EPC contract states
under the EPC contract able to be performed as a clearly that it is the appropriate party to correspond with
matter of practice? the offtaker and the system operator. Any uncertainty in
Significantly, if the relevant specifications are linked to the EPC contract may unfortunately see the EPC
guidelines such as the relevant International contractor dealing with the offtaker and/or the system
Electrotechnical Commission (IEC) standard, operator thus possibly risking the relationship of the
consideration must be given to changes which may occur project company with its customer. Significantly, it is the
in these guidelines. The EPC contract reflects a snapshot project company which must develop and nurture an
of the standards existing at a time when that contract was ongoing and long term relationship with the offtaker. On
signed. It may be a number of years post that date in the other hand, it is the contractor‟s prime objective to
which the actual construction of the project is undertaken complete the project on time or earlier at a cost which
thus allowing for possible mismatches should the relevant provides it with significant profit. The clash of these
standards guidelines have changed. It is important that conflicting objectives in many cases does not allow for
there is certainty as to which standard applies for both the such a smooth process. Again, the resolution of these
PPA and the EPC contract. Is it the standard at the time of issues at the EPC contract formation stage is imperative.
entering the EPC contract or is it the standard which Interface issues on site access
applies at the time of testing?
Access to land for the siting of wind turbines involves
Consideration must therefore be given to the appropriate negotiations with the landowner or the appropriate state-
mechanism to deal with potential mismatches between the based land authority. More often than not, the co-
ongoing obligation of complying with laws, and the existence of wind turbines with rural holdings will result
contractor‟s obligation to build to a specification agreed at in the project company entering into access agreements
a previous time. Consideration must be given to requiring with the landowners. The more common arrangements
satisfaction of guidelines “as amended from time to time”. will be land leases providing possession and site access
The breadth of any change of law provision will be at the for the duration of the construction and operation of the
forefront of any review. wind farm. While the leasing of land to wind energy
The above issues raise the importance of the testing companies provides long-term income that complements
schedules to the EPC contract and the PPA. The size and farming income, the substance of the land lease
importance of the various projects to be undertaken must agreements with landowners is the subject of much
mean that the days where schedules are attached at the last discussion and negotiation, principally to ensure that the
minute without being subject to review are gone. environmental and development impact of the wind farm
development is considered and managed properly.
Discrepancies between the relevant testing and
Securing land rights for good development sites may be
commissioning requirements will only serve to delay and
difficult if there is community opposition to these
distract all parties from the successful completion of
developments, particularly given controversy in recent
testing and reliability trials.
years relating to aspects of wind farm development such
In addition, there is a need to ensure that the interface as noise and "flicker" issues from wind turbines.
arrangements in relation to testing and commissioning are However, there is also a large body of community support
appropriately and clearly spelled out between the EPC for wind farms demonstrated by pro-wind rallies.
contractor and the operator under the EPC contract, the
Principal responsibility for obtaining access to the site and
O&M contract and any other relevant interface
negotiating the terms of the lease agreements will lie with
agreements to avoid any subsequent interface disputes.
the project company. However, in order for the project
These are all areas where lawyers can add value to the company to comply with the terms of the land lease or
successful completion of projects by being alert to and other access agreements, the project company will have to
dealing with such issues at the contract formation stage. ensure that the contractor under the EPC contract
complies with all the terms and conditions of the land

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lease agreements. The contractor must also accept some  The effect of shadow flicker and blade glint which
degree of responsibility for the ongoing liaison and must be avoided or mitigated by design and siting
coordination with landowners during the construction and  Noise from the swishing of the blades and mechanical
operation of the wind farm29. Given that considerations noise associated with noise from the generator and
and concerns will often differ between landowners, the compliance with prescribed noise standards and
specific requirements of the landowners should be taken guidelines
into account at an early stage in the negotiation of the
 The impact on listed threatened species that inhabit the
terms of the EPC contract. Such concerns will vary from
nearby area, whose habitat or surrounding ecological
prohibitions on the depth of excavation to allow farming
community may be impacted by the development
activity, to controlling the spread of horehound30.
 The impact on migratory species that may fly or move
The project company should only be required to provide
through the wind farm area, even if they do not inhabit
possession and access as permitted under the negotiated
the area
land lease or site agreements, and the obligations of the
project company under the land lease or site agreements  Potential electromagnetic interference with
should be flowed down into the EPC contract. The microwave, television and radio signals
contractor should be appraised of the specific conditions  Effects caused by the clearance of native vegetation
and requirements of the landowners to ensure that the and revegetation during construction
contractor is aware of the limits on access to the site on
 Effects on areas of high conservation and landscape
which the wind farm is to be constructed and operated.
values, such as national and state parks, Ramsar
The contractor must formally acknowledge the project
Wetlands, World Heritage properties and National
company‟s obligation to comply with the terms of the land
Heritage Places, which may limit or prevent
lease or site agreements and must accept responsibility for
development
compliance with the terms of the land lease or site
agreements which are affected by the contractor‟s design  Effects on particular locations of high amenity or
and construction obligations under the EPC contract. tourist value, which may limit or prevent development

Development and environmental considerations  Construction issues such as the impact of construction
traffic and the construction of access road
The responsibility for the environmental issues
surrounding the construction and operation of a wind farm  Archaeological and heritage issues including the
must be set out clearly in the EPC contract. Wind farms impact on cultural heritage values and sites of
have a range of environmental impacts which need to be significance to indigenous peoples.
considered and managed properly and the sponsor or Many of these issues will be most relevant at the stage of
project company will have to investigate if any aspects of seeking approval for the development of a wind farm and
the project are likely to be subject to scrutiny under the will be the responsibility of the sponsor or project
Environmental Protection and Biodiversity Conservation company. The list of development permits, approvals and
Act 1999 (Cth) (EPBC Act)31 or other environment or licences that must be obtained by the project company
planning legislation such as the relevant state planning should be clearly identified in the EPC contract, with the
scheme provisions. balance of construction permits and approvals being the
Certain factors relating to the location of the wind farm or responsibility of the contractor. However, responsibility
its effect on particular environmental features may limit for adherence to the conditions attached to the
development or trigger the need for reports or assessments development approvals, permits and the risks identified in
to be conducted and approvals obtained before the environmental impact assessment, must be passed on
construction can proceed. For example, as outlined above, to the contractor. For instance, planning approvals for
if turbines are located close to dwellings, written consent wind farms are generally subject to permit conditions
may be required from the owners before development is about noise limits. The contractor must adhere to the
allowed. Depending on the relevant state legislative required noise specifications and provide warranties that
framework, if the facility will require the clearance of the wind farm will comply with the noise curves required
native vegetation, a native vegetation offset management by the specifications.
plan may need to be prepared, and if flora and fauna will If the environmental assessment has identified areas of
be affected, surveys and assessments may be required. ecological or archaeological importance, then these pre-
Environmental and development impacts include: construction site conditions must be documented in the
EPC contract and accepted by the contractor.
 Concern for the visual impact of wind energy
development

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The contractor must also develop an environmental conditions prevalent at the site as compared with standard
management plan to identify risks, mitigation and wind conditions and the calculation of loads for the site
monitoring processes during construction of the wind conditions compared with the design basis.
farm. This should take into account factors such as Staged completion of wind turbine generators
erosion, dust and sediment control, storage of hazardous
materials, weed control and waste management. As each wind turbine generator on a wind farm is usually
constructed sequentially, each wind turbine generator may
Wind turbine certification be taken over by the project company as it passes the
The provision of design certificates or a statement of required tests on completion. While the taking over of
compliance from an independent certifying body is each wind turbine generator and associated equipment as
essential for the project company to ensure that the wind and when it is installed and commissioned is not unusual,
turbines provided by the contractor have been designed in it is important to ensure that the issue of a taking over
accordance with industry standards and will fulfil the certificate for each individual wind turbine does not affect
required design parameters. Certification of wind turbines the contractor‟s obligations under the EPC contract. Issues
has a history of almost 25 years and different standards such as the management of staggered defects liability
apply in Denmark, Germany and the Netherlands (which periods, the method of calculation of the availability
pioneered the development and application of certification guarantees and the point at which performance security
rules). In recent years, other countries, as well as held by the project company should be released are among
financiers, have realised the necessity of a thorough the important issues that must be considered carefully by
evaluation and certification of wind turbines and their the project company when contemplating staged taking
proposed installation. The certifications are commonly over of wind turbine generators.
divided into type certification and wind turbine Despite taking over individual wind turbine generators,
certification. The certification is usually required to be the performance security held by the project company
carried out by an independent certifying body such as should only be reduced or released when the wind farm
Germanischer Lloyd Industrial Services GmbH (GL has passed all tests required for commercial operation of
Renewables) (an international operating certification body the entire wind farm. Factors such as the time period
for renewable energy equipment, including wind between taking over of each wind turbine generator and
turbines), and is performed in accordance with that body‟s the generation of electricity by wind turbine generators
rules, and in the case of GL Renewables in accordance taken over by the project company, will influence the
with the Regulations for the Certification of Wind Energy point at which it is reasonable to reduce the performance
Conversion Systems, 1999 edition and the Guideline for security held by the project company. If the operation and
the Certification of Wind Turbines, 2010 edition 32. Under maintenance obligations of an operator of the wind farm
these regulations, type certification comprises design commences on the taking over each wind turbine
assessment, evaluation of quality management and generator, the performance security to be provided by the
prototype testing and is preferably obtained by the project operator can be increased in accordance with the number
company prior to shipment of components to site. Where of wind turbine generators taken over.
possible, the certification should encompass confirmation
The issue of a taking over certificate for individual wind
on the design life of the wind turbines.
turbine generators will also trigger commencement of the
Wind turbine certification involves a complete third party defects liability period for that wind turbine generator. If a
assessment and certification of specific wind turbines wind farm has between 20 and 25 wind turbines, this
from design assessment to commissioning, witnessing, could mean that the project company will have to
site assessment and periodic monitoring. Wind turbine administer defects liability periods equivalent to the
certification can only be carried out for type certified wind number of wind turbines on the wind farm. If there is a
turbines and on locations for which the necessary data is substantial gap between taking over of the first wind
available. turbine and the last wind turbine, this could also result in
The project company may also require a site certification the defects liability period for the first wind turbine
to be provided by an independent certifying body expiring substantially earlier than the last wind turbine
confirming that real site conditions of the wind farm as a taken over and could affect the contractor‟s defects
whole (including factors such a wind, climate, topography rectification or warranty obligations for defects affecting
and WTG layout) complies with the design parameters of the entire wind farm. The ideal position would be to
the relevant international standard. The real climatic require the defects liability period to commence on taking
conditions of the relevant site will be provided to the over of each wind turbine but to expire only from a set
certifying body for assessment of factors such as the wind time from taking over of the entire wind farm. If this

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proves too onerous for the contractor, the wind turbine they will be a penalty and unenforceable. There is no legal
generators could be divided into circuits of wind turbines, sanction for setting a liquidated damages rate below that
for instance, two or three circuits of wind turbines each of a genuine pre-estimate, however, there are the obvious
comprising a separable portion. A taking over certificate financial consequences.
will therefore only be issued in relation to each circuit, In addition to being unenforceable as a penalty, liquidated
making it easier to administer the defects liability periods damages can also be void for uncertainty or unenforceable
or to manage other issues such as the reduction of because they breach the prevention principle. Void for
security. uncertainty means, as the term suggests, that it is not
The availability guarantee provided by the contractor in possible to determine how the liquidated damages
each operating year of the wind farm should ideally provisions work. In those circumstances, a court will void
commence from commercial operation of the entire wind the liquidated damages provisions.
farm and not from the time revenue is generated from The prevention principle was developed by the courts to
commercial operation of each wind turbine generator. prevent employers, ie project companies, from delaying
However, as with the defects liability period, whether or contractors and then claiming DLDs. It is discussed in
not this is acceptable to the contractor will depend on the more detail below in the context of extensions of time.
length of time during which the project company has
Prior to discussing the correct drafting of liquidated
commenced generation of electricity from individual wind
damages clauses to ensure they are not void or
turbine generators taken over prior to commercial
unenforceable it is worth considering the consequences of
operation of the entire wind farm. In some contracts, the
an invalid liquidated damages regime. If the EPC contract
availability guarantee in the first operating year has been
contains an exclusive remedies clause the result is simple
calculated from the average date of completion of the
– the contractor will have escaped liability unless the
individual wind turbines.
contract contains an explicit right to claim damages at law
Another important consideration is to ensure that the delay if the liquidated damages regime fails. This is discussed in
liquidated damages imposed for failure to complete the more detail below.
entire wind farm by the required date for practical
If, however, the EPC contract does not contain an
completion takes into account any revenue that may be
exclusive remedies clause the non-challenging party
generated by the project company from individual wind
should be able to claim at law for damages they have
turbine generators that are taken over and operated prior
suffered as a result of the challenging party‟s non or
to commercial operation of the entire wind farm. This is to
defective performance. What then is the impact of the
ensure that the delay liquidated damages represent a
caps in the now invalidated liquidated damages clauses?
genuine pre-estimate of the project company‟s loss.
Unfortunately, the position is unclear in common law
KEY PERFORMANCE CLAUSES IN WIND jurisdictions, and a definitive answer cannot be provided
FARM EPC CONTRACTS based upon the current state of authority. It appears the
Rationale for imposing liquidated damages answer varies depending upon whether the clause is
invalidated due to its character as a penalty, or because of
Almost every construction contract will impose liquidated uncertainty or unenforceability. Our view of the current
damages for delay and impose standards in relation to the position is set out below. We note that whilst the legal
quality of construction. Most, however, do not impose position is not settled the position presented below does
PLDs. EPC contracts impose PLDs because the appear logical.
achievement of the performance guarantees has a
 Clause invalidated as a penalty
significant impact on the ultimate success of a project.
Similarly, it is important that the wind farm commences When liquidated damages are invalidated because they
operation on time because of the impact on the success of are a penalty (ie they do not represent a genuine pre-
the project and because of the liability the project estimate of loss), the liquidated damages or its cap will
company will have under other agreements. This is why not act as a cap on damages claims at general law.
DLDs are imposed. DLDs and PLDs are both "sticks" We note that it is rare for a court to find liquidated
used to motivate the contractor to fulfil its contractual damages are penalties in contracts between two
obligations. sophisticated, well-advised parties.
The law of liquidated damages  Clause invalidated due to acts of prevention by the
As discussed above, liquidated damages must be a principal
genuine pre-estimate of the project company‟s loss. If A liquidated damages clause will cap the contractor‟s
liquidated damages are more than a genuine pre-estimate liability where a liquidated damages regime breaches
15  EPC contracts in the Australian Renewable Energy Sector –
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 the prevention principle because this gives effect to the uncertainties will arise if the availability guarantee is met
commercial bargain struck by the parties. but one or more of the efficiency guarantees are not. In
 Clause void for uncertainty these circumstances, the contractor will argue that the
PLDs constitute a penalty because the loss the project
A liquidated damages clause that is uncertain is
company suffers if the efficiency guarantees are not met
severed from the EPC contract in its entirety, and will
are usually smaller than if the availability guarantees are
not act as a cap on the damages recoverable by the
not met.
principal from the contractor. Upon severance, the
clause is, for the purposes of contractual interpretation, Drafting of the performance guarantee regime
ignored. Now that it is clear that DLDs and PLDs must be dealt
However, it should be noted that the threshold test for with separately, it is worth considering, in more detail,
rendering a clause void for uncertainty is high, and how the performance guarantee regime should operate. A
courts are reluctant to hold that the terms of a contract, properly drafted performance testing and guarantee
in particular a commercial contract where performance regime is important because the success or failure of the
is well advanced, are uncertain. project depends, all other things being equal, on the
performance of the wind farm.
Drafting of liquidated damages clauses
The major elements of the performance regime are:
Given the role liquidated damages play in ensuring EPC
contracts are bankable, and the consequences detailed  Testing
above of the regime not being effective, it is vital to  Guarantees
ensure they are properly drafted to ensure contractors  Liquidated damages.
cannot avoid their liquidated damages liability on a legal
Liquidated damages were discussed above. Testing and
technicality.
guarantees are discussed below.
Therefore, it is important, from a legal perspective, to
Testing
ensure DLDs and PLDs are dealt with separately. If a
combined liquidated damages amount is levied for late Performance tests may cover a range of areas. Three of
completion of the works, it risks being struck out as a the most common are:
penalty because it will overcompensate the project Functional tests – these test the functionality of certain
company. However, a combined liquidated damages parts of the wind turbine generators. For example, Scada
amount levied for underperformance may under systems, power collection systems and meteorological
compensate the project company. masts, etc. They are usually discrete tests which do not
Our experience shows that there is a greater likelihood of test the wind farm as a whole. Liquidated damages do not
delayed completion than there is of permanent normally attach to these tests. Instead, they are absolute
underperformance. One of the reasons why projects are obligations that must be complied with. If not, the wind
not completed on time is contractors are often faced with farm will not reach the next stage of completion (for
remedying performance problems. This means, from a example, mechanical completion or provisional
legal perspective, if there is a combination of DLDs and acceptance).
PLDs, the liquidated damages rate should include more of Guarantee tests – these test the ability of the wind farm
the characteristics of DLDs to protect against the risk of to meet the performance criteria specified in the contract.
the liquidated damages being found to be a penalty. For instance, a requirement to meet a specified power
If a combined liquidated damages amount includes a NPV curve or an availability guarantee to meet the minimum
or performance element, the contractor will be able to quantity of electricity required under the PPA. The
argue that the liquidated damages are not a genuine pre- consequence of failure to meet these performance
estimate of loss when liquidated damages are levied for guarantees is normally the payment of PLDs. Satisfaction
late completion only. However, if the combined liquidated of the minimum performance guarantees is normally an
damages calculation takes on more of the characteristics absolute obligation. The performance guarantees should
of DLDs the project company will not be properly be set at a level of performance at which it is economic to
compensated if there is permanent underperformance. accept the wind farm. Lender‟s input will be vital in
determining what this level is. However, it must be
It is also important to differentiate between the different
remembered that lenders have different interests to the
types of PLDs to protect the project company against
sponsors. Lenders will, generally speaking, be prepared to
arguments by the contractor that the PLDs constitute a
accept a wind farm that provides sufficient income to
penalty. For example, if a single PLDs rate is only focused
service the debt. However, in addition to covering the debt
on availability and not efficiency, problems and

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service obligations, sponsors will also want to receive a wind farm that achieves the required performance
return on their equity investment. If that will not be guarantees. The right to modify and retest is another
provided via the sale of electricity because the contractor reason why DLDs should be payable up to the time the
has not met the performance guarantees, the sponsors will performance guarantees are satisfied.
have to rely on the PLDs to earn their return. In some If the contractor is to be given an opportunity to modify
projects, the guarantee tests occur after hand over of the and retest, the EPC contract must deal with who bears the
wind farm to the project company. This means the costs required to undertake the retesting. The cost of the
contractor no longer has any liability for DLDs during performance of a power curve test in particular can be
performance testing. significant and should, in normal circumstances, be to the
In our view, it is preferable, especially in project financed contractor‟s account because the retesting only occurs if
projects, for handover to occur after completion of the performance guarantees are not met at the first
performance testing. This means the contractor continues attempt.
to be liable for DLDs until either the wind farm achieves Technical issues
the guaranteed level or the contractor pays PLDs where
Ideally, the technical testing procedures should be set out
the wind farm does not operate at the guaranteed level.
in the EPC contract. However, for a number of reasons,
Obviously, DLDs will be capped (usually at 20% of the
including the fact that it is often not possible to fully
contract price), therefore the EPC contract should give the
scope the testing program until the detailed design is
project company the right to call for the payment of the
complete, the testing procedures are usually left to be
PLDs and accept the wind farm. If the project company
agreed during construction by the contractor, the project
does not have this right the problem mentioned above will
company‟s representative or engineer and, if relevant, the
arise, namely, the project company will not have received
lenders‟ engineer. However, a properly drafted EPC
its wind farm and will not be receiving any DLDs as
contract should include the guidelines for testing.
compensation.
The complete testing procedures must, as a minimum, set
It is often the case in wind farm projects that the
out details of:
contractor or operator of a wind farm will not accept
liability for availability PLDs beyond a limited period. In  Testing methodology – reference is often made to
a power plant, the PLDs are calculated to enable the standard methodologies, for example, the IEC 61-400
owner to recover the amount it will lose over the life of methodology33.
the power plant in the event the heat rate, rated output or  Testing equipment – who is to provide it, where it is
availability guarantees are not satisfied. The PLDs on a to be located, how sensitive must it be.
power plant are usually calculated using the net present
 Tolerances – what is the margin of error. For instance
value of the owner‟s loss based on the life of the plant. On
excluding wind conditions in excess of specified
wind farm projects, the contractor will pay power curve
speeds.
PLDs but will often not accept responsibility for
availability PLDs beyond the warranty period or in the  Ambient conditions – what atmospheric conditions
case of the operator, the term of the operating and are assumed to be the base case (testing results will
maintenance agreement. The contractor or operator, as the need to be adjusted to take into account any variance
case may be, will simply pay the yearly availability PLDs from these ambient conditions).
for failing to meet the stipulated availability guarantee In addition, for wind farms with multiple wind turbine
over the warranty period specified in the contract or for generators, the testing procedures must state those tests to
the period during which the operator has control over the be carried out on a per turbine basis and those on an
operation and maintenance of the wind farm. average basis.
It is common for the contractor to be given an opportunity An example of the way a performance testing and
to modify the wind farm if it does not meet the liquidated damages regime can operate is best illustrated
performance guarantees on the first attempt. This is diagrammatically. Refer to the flowchart in Appendix 2 to
because the PLD amounts are normally very large and see how the various parts of the performance testing
most contractors would prefer to spend the time and the regime should interface.
money necessary to remedy performance instead of
paying PLDs. Not giving contractors this opportunity will
likely lead to an increased contract price both because
contractors will build a contingency for paying PLDs into
the contract price. The second reason is because in most
circumstances the project company will prefer to receive a

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KEY GENERAL CLAUSES IN EPC CONTRACTS conditions precedent to the contractor‟s entitlement to
Delay and Extensions of Time receive an EOT. In addition, it is usually good practice to
include a general right for the project company to grant an
(a) The Prevention Principle EOT at any time. However, this type of provision must be
As noted previously, one of the advantages of an EPC carefully drafted because some judges have held
contract is that it provides the project company with a (especially when the project company‟s representative is
fixed completion date. If the contractor fails to complete an independent third party) the inclusion of this clause
the works by the required date they are liable for DLDs. imposes a mandatory obligation on the project company to
However, in some circumstances the contractor is entitled grant an extension of time whenever it is fair and
to an extension of the date for completion. Failure to grant reasonable to do so, regardless of the strict contractual
an extension for a project company caused delay can void requirements. Accordingly, from the project company‟s
the liquidated damages regime and "set time at large". perspective it must be made clear that the project
This means the contractor is only obliged to complete the company has complete and absolute discretion to grant an
works within a reasonable time. EOT, and that it is not required to exercise its discretion
This is the situation under common law governed for the benefit of the contractor.
contracts due to the prevention principle. The prevention Similarly, following some recent common law decisions,
principle was developed by the courts to prevent the contractor should warrant that it will comply with the
employers ie project companies from delaying contractors notice provisions that are conditions precedent to its right
and then claiming DLDs. to be granted an EOT.
The legal basis of the prevention principle is unclear and it We recommend using the clause in Part II of Appendix 1.
is uncertain whether you can contract out of the (b) Concurrent Delay
prevention principle. Logically, given most commentators
believe the prevention principle is an equitable principle, You will note that in the suggested EOT clause, one of the
explicit words in a contract should be able to override the subclauses refers to concurrent delays. This is relatively
principle. However, the courts have tended to apply the unusual because most EPC contracts are silent on this
prevention principle even in circumstances where it would issue. For the reasons explained below we do not agree
not, on the face of it, appear to apply. Therefore, there is a with that approach.
certain amount of risk involved in trying to contract out of A concurrent delay occurs when two or more causes of
the prevention principle. The more prudent and common delay overlap. It is important to note that it is the
approach is to accept the existence of the prevention overlapping of the causes of the delays not the
principle and provide for it the EPC contract. overlapping of the delays themselves. In our experience,
The contractor‟s entitlement to an extension of time is not this distinction is often not made. This leads to confusion
absolute. It is possible to limit the contractor‟s rights and and sometimes disputes. More problematic is when the
impose pre-conditions on the ability of the contractor to contract is silent on the issue of concurrent delay and the
claim an extension of time. A relatively standard parties assume the silence operates to their benefit. As a
Extension of Time (EOT) clause would entitle the result of conflicting case law it is difficult to determine
contractor to an EOT for: who, in a particular fact scenario, is correct. This can also
lead to protracted disputes and outcomes contrary to the
 An act, omission, breach or default of the project intention of the parties.
company
There are a number of different causes of delay which
 Suspension of the works by the project company may overlap with delay caused by the contractor. The
(except where the suspension is due to an act or most obvious causes are the acts or omissions of a project
omission of the contractor) company.
 A variation (except where the variation is due to an act A project company often has obligations to provide
or omission of the contractor) certain materials or infrastructure to enable the contractor
 Force majeure to complete the works. The timing for the provision of
Which cause a delay on the critical path34 and about which that material or infrastructure (and the consequences for
the contractor has given notice within the period specified failing to provide it) can be affected by a concurrent
in the contract. It is permissible (and advisable) from the delay.
project company‟s perspective to make both the necessity For example, the project company is usually obliged, as
for the delay to impact the critical path and the obligation between the project company and the contractor, to
to give notice of a claim for an extension of time provide a transmission line to connect to the wind farm by

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the time the contractor is ready to commission the wind For example, if the contractor‟s personnel were on
farm. Given the construction of the transmission line can strike and during that strike the project company failed
be expensive, the project company is likely to want to to approve drawings, in accordance with the
incur that expense as close as possible to the date contractual procedures, the contractor would not be
commissioning is due to commence. For this reason, if the entitled to an extension of time for the delay caused by
contractor is in delay the project company is likely to the project company‟s failure to approve the drawings.
further delay incurring the expense of building the The operation of this clause is best illustrated
transmission line. In the absence of a concurrent delay diagrammatically.
clause, this action by the project company, in response to
the contractor‟s delay, could entitle the contractor to an Example 1: Contractor not entitled to an extension of
extension of time. time for project company caused delay

Concurrent delay is dealt with differently in the various

international standard forms of contract. Accordingly, it is
not possible to argue that one approach is definitely right
and one is definitely wrong. In fact, the „right‟ approach
will depend on which side of the table you are sitting.
In general, there are three main approaches for dealing In this example, the contractor would not be entitled to
with the issue of concurrent delay. These are: any extension of time because the Contractor Delay 2
 Option One – the contractor has no entitlement to an overlap entirely the Project Company Delay.
extension of time if a concurrent delay occurs. Therefore, using the example clause above, the
contractor is not entitled to an extension of time to the
 Option Two – the contractor has an entitlement to an
extent of the concurrency. As a result, at the end of the
extension of time if a concurrent delay occurs.
Contractor Delay 2 the contractor would be in eight-
 Option Three – the causes of delay are apportioned week delay (assuming the contractor has not, at its
between the parties and the contractor receives an own cost and expense accelerated the works).
extension of time equal to the apportionment. For
Example 2: Contractor entitled to an extension of time
example, if the causes of a 10-day-delay are
for project company-caused delay
apportioned 60:40 project company : contractor, the
contractor would receive a six-day extension of time.
Each of these approaches is discussed in more detail
below.
(i) Option One: Contractor not entitled to an extension of
time for concurrent delays.
In this example, there is no overlap between the
A common, project company friendly, concurrent
contractor and project company delay events and the
delay clause for this option one is:
contractor would be entitled to a two-week extension
“If more than one event causes concurrent delays and of time for the project company delay. Therefore, at
the cause of at least one of those events, but not all of the end of the project company delay the contractor
them, is a cause of delay which would not entitle the will remain in six weeks delay, assuming no
Contractor to an extension of time under [EOT acceleration.
Clause], then to the extent of the concurrency, the
Example 3: Contractor entitled to an extension of time
Contractor will not be entitled to an extension of
for a portion of the project company caused delay
time.”
The most relevant words are bolded.
Nothing in the clause prevents the contractor from
claiming an extension of time under the general
extension of time clause. What the clause does do is to
remove the contractor‟s entitlement to an extension of
time when there are two or more causes of delay and at
least one of those causes would not entitle the In this example, the contractor would be entitled to a
contractor to an extension of time under the general one week extension of time because the delays overlap
extension of time clause. for one week. Therefore, the contractor is entitled to an

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 extension of time for the period when they do not a) WUC can nevertheless reach practical completion
overlap, ie when the extent of the concurrency is zero. without an EOT; or
As a result, after receiving the one-week extension of b) the Contractor can accelerate, but shall have
time, the contractor would be in seven weeks delay, regard to what prevention and mitigation of the delay
assuming no acceleration. has not been effected by the Contractor.”
From a project company‟s perspective, we believe, this We appreciate the intention behind the clause and the
option is both logical and fair. For example, if, in desire for both parties to share responsibility for the
example 2 the project company delay was a delay in delays they cause. However, we have some concerns
the approval of drawings and the contractor delay was about this clause and the practicality of the apportionment
the entire workforce being on strike, what logic is approach in general. It is easiest to demonstrate our
there in the contractor receiving an extension of time? concerns with an extreme example. For example, what if
The delay in approving drawings does not actually the qualifying cause of delay was the project company‟s
delay the works because the contractor could not have inability to provide access to the site and the non-
used the drawings given its workforce was on strike. qualifying cause of delay was the contractor‟s inability to
In this example, the contractor would suffer no commence the works because it had been black banned by
detriment from not receiving an extension of time. the unions. How should the causes be apportioned? In this
However, if the contractor did receive an extension of example, the two causes are both 100% responsible for the
time it would effectively receive a windfall gain. delay.
The greater number of obligations the project company In our view, an example like the above where both parties
has the more reluctant the contractor will likely be to are at fault has two possible outcomes. Either:
accept option one. Therefore, it may not be appropriate
 The delay is split down the middle and the contractor
for all projects.
receives 50% of the delay as an extension of time; or
(ii) Option Two: Contractor entitled to an extension of
 The delay is apportioned 100% to the project company
time for concurrent delays
and therefore the contractor receives 100% of the time
Option two is the opposite of option one and is the claimed. The delay is unlikely to be apportioned 100%
position in many of the contractor friendly standard to the contractor because a judge or arbitrator will
forms of contract. These contracts also commonly likely feel that that is "unfair", especially if there is a
include extension of time provisions to the effect that potential for significant liquidated damages liability.
the contractor is entitled to an extension of time for We appreciate the above is not particularly rigorous
any cause beyond its reasonable control which, in legal reasoning, however, the clause does not lend
effect, means there is no need for a concurrent delay itself to rigorous analysis.
clause.
In addition, option three is only likely to be suitable if the
The suitability of this option will obviously depend on party undertaking the apportionment is independent from
which side of the table you are sitting. This option is both the project company and the contractor.
less common than option one but is nonetheless
sometimes adopted. It is especially common when the Exclusive remedies and fail safe clauses
contractor has a superior bargaining position. It is common for contractors to request the inclusion of an
(iii) Option Three: Responsibility for concurrent delays is exclusive remedies clause in an EPC contract. However,
apportioned between the parties from the perspective of a project company, the danger of
an exclusive remedies clause is that it prevents the project
Option three is a middle ground position that has been company from recovering any type of damages not
adopted in some of the standard form contracts. For specifically provided for in the EPC contract.
example, the Australian Standards construction
contract AS4000 adopts the apportionment approach. An EPC contract is conclusive evidence of the agreement
The AS4000 clause states: between the parties to that contract. If a party clearly and
unambiguously agrees that their only remedies are those
“34.4 Assessment within the EPC contract, they will be bound by those
When both non qualifying and qualifying causes of terms. However, the courts have been reluctant to come to
delay overlap, the Superintendent shall apportion the this conclusion without clear evidence of an intention of
resulting delay to WUC according to the respective the parties to the EPC contract to contract out of their
causes’ contribution. legal rights. This means if the common law right to sue for
In assessing each EOT the Superintendent shall breach of EPC contract is to be contractually removed, it
disregard questions of whether: must be done by very clear words.

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(c) Contractor’s perspective it would be prevented from recovering general damages at
The main reason for a contractor insisting on a project law, and the contractor would escape liability for late
company being subject to an exclusive remedies clause is delivery and underperformance of the wind farm.
to have certainty about its potential liabilities. The (e) Fail safe clauses
preferred position for a contractor will be to confine its In contracts containing an exclusive remedies clause, the
liabilities to what is specified in the EPC contract. For project company must ensure all necessary exceptions are
example, an agreed rate of liquidated damages for delay expressly included in the EPC contract. In addition,
and, where relevant, underperformance of the wind farm. drafting must be included to allow the project company to
A contractor will also generally require the amount of recover general damages at law for delay and
liquidated damages to be subject to a cap and for the EPC underperformance if the liquidated damages regimes in
contract to include an overall cap on its liability. the EPC contract are held to be invalid. To protect the
(d) Project company’s perspective position of a project company (if liquidated damages are
The preferred position for a project company is for it not found for any reason to be unenforceable and there is an
to be subject to an exclusive remedies clause. An exclusive remedies clause), we recommend the following
exclusive remedies clause limits the project company‟s clauses be included in the EPC contract:
right to recover for any failure of the contractor to fulfil its “[ ].1 If clause [delay liquidated damages] is found
contractual obligations to those remedies specified in the for any reason to be void, invalid or otherwise
EPC contract. For this reason, an exclusive remedies inoperative so as to disentitle the Project company
clause is an illogical clause to include in an EPC contract from claiming Delay Liquidated Damages, the Project
from the perspective of a project company because it company is entitled to claim against the Contractor
means that the project company has to draft a remedy or damages at law for the Contractor’s failure to
exception for each obligation - this represents an absurd complete the Works by the Date for Practical
drafting position. For example, take the situation where Completion.
the EPC contract does not have any provision for the [ ].2 If [ ].1 applies, the damages claimed by the
recovery of damages other than liquidated damages. In Project company must not exceed the amount specified
this case, if the contractor has either paid the maximum in Item [ ] of Appendix [ ] for any one day of delay
amount of liquidated damages or delivered the wind farm and in aggregate must not exceed the percentage of
in a manner that does not require the payment of the EPC contract Price specified in Item [ ] of
liquidated damages (ie it is delivered on time and Appendix [ ].”
performs to specification) but subsequent to that delivery
These clauses (which would also apply to PLDs) mean
the project company is found to have a claim, say for
that if liquidated damages are held to be unenforceable for
defective design which manifests itself after completion,
any reason the project company will not be prevented
the project company will have no entitlement to recover
from recovering general damages at law. However, the
any form of damages as any remedy for latent defects has
amount of damages recoverable at law may be limited to
been excluded.
the amount of liquidated damages that would have been
The problem is exacerbated because most claims made by recoverable by the project company under the EPC
a project company will in some way relate to performance contract if the liquidated damages regime had not been
of the wind farm and PLDs were expressed to be the held to be invalid (see discussion above). For this reason,
exclusive remedy for any failure of the wind farm to the suggested drafting should be commercially acceptable
perform in the required manner. For example, any to a contractor as its liability for delay and
determination as to whether the wind farm is fit for underperformance will be the same as originally
purpose will necessarily depend on the level and standard contemplated by the parties at the time of entering into the
of the performance of the wind farm. In addition to claims EPC contract.
relating to fitness for purpose, a project company may also
In addition, if the EPC contract excludes the parties rights
wish to make claims for, amongst other things, breach of
to claim their consequential or indirect losses, these
contract, breach of warranty or negligence. The most
clauses should be an exception to that exclusion. The
significant risk for a project company in an EPC contract
rationale being that the rates of liquidated damages are
is where there is an exclusive remedies clause and the
likely to include an element of consequential or indirect
only remedies for delay and underperformance are
losses.
liquidated damages. If, for whatever reason, the liquidated
damages regimes are held to be invalid, the project
company would have no recourse against the contractor as

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Force Majeure  It can occur with or without human intervention
(f) What is force majeure?  It cannot have reasonably been foreseen by the parties
Force majeure clauses are almost always included in EPC  It was completely beyond the parties‟ control and they
contracts. However, they are rarely given much thought could not have prevented its consequences.
unless and until one or more parties seek to rely on them. Given the relative uncertainty surrounding the meaning of
Generally, the assumption appears to be that “the risk will force majeure we favour explicitly defining what the
not affect us” or “the force majeure clause is a legal parties mean. This takes the matter out of the hands of the
necessity and does not impact on our risk allocation under courts and gives control back to the parties. Therefore, it
the contract”. Both of these assumptions are inherently is appropriate to consider how force majeure risk should
dangerous, and, particularly in the second case, incorrect. be allocated.
Therefore, especially in the current global environment, it
(g) Drafting force majeure clauses
is appropriate to examine their application.
The appropriate allocation of risk in project agreements is
Force majeure is a civil law concept that has no real
fundamental to negotiations between the project company
meaning under the common law. However, force majeure
and its contractors. Risks generally fall into the following
clauses are used in contracts because the only similar
categories:
common law concept – the doctrine of frustration – is of
limited application. For that doctrine to apply the  Risks within the control of the project company
performance of a contract must be radically different from  Risks within the control of the contractor
what was intended by the parties. In addition, even if the
 Risks outside the control of both parties.
doctrine does apply, the consequences are unlikely to be
those contemplated by the parties. An example of how The negotiation of the allocation of many of the risks
difficult it is to show frustration is that many of the beyond the control of the parties, for example, latent site
leading cases relate to the abdication of King Edward VIII conditions and change of law, is usually very detailed so
before his coronation and the impact that had on contracts that it is clear which risks are borne by the contractor. The
entered into in anticipation of the coronation ceremony. same approach should be adopted in relation to the risks
arising from events of force majeure.
Given force majeure clauses are creatures of contract their
interpretation will be governed by the normal rules of There are two aspects to the operation of force majeure
contractual construction. Force majeure provisions will be clauses:
construed strictly and in the event of any ambiguity the  The definition of force majeure events
contra proferentem rule will apply. Contra proferentem  The operative clause that sets out the effect on the
literally means “against the party putting forward”. In this parties‟ rights and obligations if a force majeure event
context, it means that the clause will be interpreted against occurs.
the interests of the party that drafted and is seeking to rely
on it. The parties may contract out of this rule. The events which trigger the operative clause must be
clearly defined. As noted above, it is in the interests of
The rule of ejusdem generis, which literally means “of the both parties to ensure that the term force majeure is
same class”, may also be relevant. In other words, when clearly defined.
general wording follows a specific list of events, the
general wording will be interpreted in light of the specific The preferred approach for a project company is to define
list of events. In this context it means that when a broad force majeure events as being any of the events in an
"catch-all" phrase, such as "anything beyond the exhaustive list set out in the contract. In this manner, both
reasonable control of the parties", follows a list of more parties are aware of which events are force majeure events
specific force majeure events the catch all phrase will be and which are not. Clearly, defining force majeure events
limited to events analogous to the listed events. makes the administration of the contract and, in particular,
Importantly, parties cannot invoke a force majeure clause the mechanism within the contract for dealing with force
if they are relying on their own acts or omissions. majeure events simpler and more effective.

The underlying test in relation to most force majeure An example exhaustive definition is:
provisions is whether a particular event was within the “An Event of Force Majeure is an event or
contemplation of the parties when they made the contract. circumstance which is beyond the control and without
The event must also have been outside the control of the the fault or negligence of the party affected and which
contracting party. There are generally three essential by the exercise of reasonable diligence the party
elements to force majeure: affected was unable to prevent provided that event or
circumstance is limited to the following:

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 a. riot, war, invasion, act of foreign enemies, the Contract and to fulfil its or their obligations
hostilities (whether war be declared or not) acts of under the Contract.
terrorism, civil war, rebellion, revolution, [ ].3 Upon completion of the Event of Force Majeure
insurrection of military or usurped power, the party affected must as soon as reasonably
requisition or compulsory acquisition by any practicable recommence the performance of its
governmental or competent authority; obligations under this Contract. Where the
b. ionising radiation or contamination, radio activity party affected is the Contractor, the Contractor
from any nuclear fuel or from any nuclear waste must provide a revised Program rescheduling
from the combustion of nuclear fuel, radio active the Works to minimise the effects of the
toxic explosive or other hazardous properties of prevention or delay caused by the Event of
any explosive assembly or nuclear component; Force Majeure
c. pressure waves caused by aircraft or other aerial [ ].4 An Event of Force Majeure does not relieve a
devices travelling at sonic or supersonic speeds; party from liability for an obligation which
d. earthquakes, flood, fire or other physical natural arose before the occurrence of that event, nor
disaster, but excluding weather conditions does that event affect the obligation to pay
regardless of severity; and money in a timely manner which matured prior
to the occurrence of that event.
e. strikes at national level or industrial disputes at a
national level, or strike or industrial disputes by [ ].5 The Contractor has no entitlement and the
labour not employed by the affected party, its Project Company has no liability for:
subcontractors or its suppliers and which affect an (a) any costs, losses, expenses, damages or
essential portion of the Works but excluding any the payment of any part of the Contract
industrial dispute which is specific to the Price during an Event of Force
performance of the Works or this Contract.” Majeure; and
An operative clause will act as a shield for the party (b) any delay costs in any way incurred by
affected by the event of force majeure so that a party can the Contractor due to an Event of Force
rely on that clause as a defence to a claim that it has failed Majeure.”
to fulfil its obligations under the contract. In addition to the above clause, it is important to
An operative clause should also specifically deal with the appropriately deal with other issues that will arise if a
rights and obligations of the parties if a force majeure force majeure event occurs. For example, as noted above,
event occurs and affects the project. This means the it is common practice for a contractor to be entitled to an
parties must consider each of the events it intends to extension of time if a force majeure event impacts on its
include in the definition of force majeure events and then ability to perform the works. Contractors also often
deal with what the parties will do if one of those events request costs if a force majeure event occurs. In our view,
occurs. this should be resisted. Force majeure is a neutral risk in
An example of an operative clause is: that it cannot be controlled by either party. Therefore, the
parties should bear their own costs.
“[ ].1 Neither party is responsible for any failure to
perform its obligations under this Contract, if it Another key clause that relates to force majeure type
is prevented or delayed in performimg those events is the contractor‟s responsibility for care of the
obligations by an Event of Force Majeure. works and the obligation to reinstate any damage to the
works prior to completion. A common example clause is:
[ ].2 Where there is an Event of Force Majeure, the
party prevented from or delayed in performing “[ ].1 The Contractor is responsible for the care of
its obligations under this Contract must the Site and the Works from when the Project
immediately notify the other party giving full Company makes the Site available to the
particulars of the Event of Force Majeure and Contractor until 5.00 pm on the Date of
the reasons for the Event of Force Majeure Commercial Operation.
preventing that party from, or delaying that [ ].2 The Contractor must promptly make good loss
party in performing its obligations under this from, or damage to, any part of the Site and the
Contract and that party must use its reasonable Works while it is responsible for their care.
efforts to mitigate the effect of the Event of [ ].3 If the loss or damage is caused by an Event of
Force Majeure upon its or their performance of Force Majeure, the Project Company may
direct the Contractor to reinstate the Works or
23  EPC contracts in the Australian Renewable Energy Sector –
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 change the Works. The cost of the reinstatement “[ ].1 The Project Company must provide a sufficient
work or any change to the Works arising from a number of competent and qualified operating
direction by the Project Company under this and maintenance personnel to assist the
clause will be dealt with as a Variation except Contractor to properly carry out
to the extent that the loss or damage has been Commissioning and the Commercial Operation
caused or exacerbated by the failure of the Performance Tests.
Contractor to fulfil its obligations under this [ ].2 Prior to the Date of Commercial Operation,
Contract. any act or omission of any personnel provided
[ ].4 Except as contemplated in clause [ ].3, the cost by the Project Company pursuant to GC [ ].1
of all reinstatement Works will be borne by the is, provided those personnel are acting in
Contractor.” accordance with the Contractor’s instructions,
This clause is useful because it enables the project directions, procedures or manuals, deemed to
company to, at its option, have the damaged section of the be an act or omission of the Contractor and the
project rebuilt as a variation to the existing EPC contract. Contractor is not relieved of its obligations
This will usually be cheaper than recontracting for under this Contract or have any claim against
construction of the damaged sections of the works. the Project Company by reason of any act or
omission.”
Operation and maintenance
Spare parts
(h) Operating and maintenance manuals
The contractor is usually required to provide, as part of its
The contractor is usually required to prepare a detailed
scope of works, a full complement of spare parts (usually
Operating and Maintenance Manual (O&M manual). The
specified in the appendices (the scope of work or the
EPC contract should require the contractor to prepare a
specification) to be available as at the commencement of
draft of the O&M Manual within a reasonable time to
commercial operation.
enable the project company, the operator and possibly the
lenders to provide comments, which can be incorporated Further, the contractor should be required to replace any
into a final draft at least six months before the start of spare parts used in rectifying defects during the defects
commissioning. liability period, at its sole cost. There should also be a
time limit imposed on when these spare parts must be
The draft should include all information that may be
back in the store. It is normally unreasonable to require
required for start-up, all modes of operation during normal
the spare parts to have been replaced by the expiry of the
and emergency conditions and maintenance of all systems
defects liability period because that may, for some long
of the facility.
lead time items, lead to an extension of the defects
(i) Operating and maintenance personnel liability period.
It is standard for the contractor to be obliged to train the The project company also may wish to have the option to
operations and maintenance staff supplied by the project purchase spares parts from the contractor on favourable
company. The cost of this training will be built into the terms and conditions (including price) during the
contract price. It is important to ensure the training is remainder of the concession period. In that case it would
sufficient to enable such staff to be able to efficiently, be prudent to include a term which deals with the situation
prudently, safely and professionally operate the wind farm where the contractor is unable to continue to manufacture
upon commercial operation. Therefore, the framework for or procure the necessary spare parts. This provision
the training should be described in the appendix dealing should cover the following points:
with the scope of work (in as much detail as possible).
 Written notification from the contractor to the project
This should include the standards of training and the
company of the relevant facts, with sufficient time to
timing for training.
enable the project company to order a final batch of
The project company‟s personnel trained by the contractor spare parts from the contractor
will also usually assist in the commissioning and testing
 The contractor should deliver to, or procure for the
of the wind farm. They will do this under the direction and
project company (at no charge to the project
supervision of the contractor. Therefore, absent specific
company), all drawings, patterns and other technical
drafting to the contrary, if problems arise during
information relating to the spare parts
commissioning and/ or testing the contractor can argue
 The contractor must sell to the project company (at the
they are entitled to an extension of time etc. We
recommend inserting the following clause: project company‟s request) at cost price (less a
reasonable allowance for depreciation) all tools,

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 equipment and moulds used in manufacturing the liability, obligation or duty arising out of or in
spare parts, to extent they are available to the connection with the contracts including (without
contractor provided it has used its reasonable limitation):
endeavours to procure them. [ ].1 any extension of time;
The contractor should warrant that the spare parts are fit [ ].2 any relief from liability for liquidated
for their intended purpose, and that they are of damages;
merchantable quality. At worst, this warranty should
[ ].3 any relief from liability for any other
expire on the later of:
damages;
 The manufacturer‟s warranty period on the applicable
[ ].4 any relief for deductions from payments;
spare part
[ ].5 any relief from liability to rectify defects;
 The expiry of the defects liability period.
[ ].6 any increase in the contract sum under the
The project company should be aware that the contractor
contracts; or
may be purchasing the spare parts from the Original
Equipment Manufacturer (OEM). The OEM will have [ ].7 payment of any costs incurred,
typically imposed non-negotiable warranties on the spare which arises out of or in connection with any act or
parts that the contractor will try to pass-through to the omission of the other, whether pursuant to or in
project company. This should be resisted on the part of the connection with any of the contracts or otherwise.
project company. However, the project company should
Horizontal defences
be prepared to pay higher prices for those spare parts to
reflect the greater risk the contractor will be accepting in [ ] Contractor 1 and contractor 2 each waive any and
place of the pass-through of the OEM warranties. all rights, under contract, delict or otherwise at
law, to assert any and all defences which either
Interface issues
of contractor 1 or contractor 2 may have to a claim
In some circumstances, a split contract structure may be by the project company for the non-performance,
used to achieve a lower overall contract price than would inadequate performance or delay in performance
be achieved under an EPC contract. For example, a under their respective Contract due to any non-
structure with a BOP contract and an equipment supply performance or inadequate performance or delay
contract may be used. However, if a split structure is used, in performance by the other party under its
it is critical that a single point of responsibility is Contract."
provided. If not, the project company will be left with
interface risk which will impact on bankability. DISPUTE RESOLUTION
Matters that are critical to providing a single point of Dispute resolution provisions for EPC contracts could fill
responsibility are: another entire paper. There are numerous approaches that
 Providing that no claim is available by the contractor can be adopted depending on the nature and location of
against the project company arising out of an act or the project and the particular preferences of the parties
omission of any other contractor involved.

 Preventing split contractors from having the ability to However, there are some general principles which should
make a claim on the project company due to the be adopted. They include:
default of one of the other contracting entities (e.g.  Ensuring that the dispute resolution process is aligned
equipment supply contractor claiming against the with that under the PPA
project company for a default caused by the balance of  Having a staged dispute resolution process that
plant contractor).
provides for internal discussions and meetings aimed
If a split contract structure is used, we recommend at resolving the dispute prior to commencing action
inserting the following clauses: (either litigation or arbitration)
 Obliging the contractor to continue to execute the
"No relief works pending resolution of the dispute

[ ] Neither contractor 1 nor contractor 2 will be  Not permitting commencement of litigation or

entitled to payment of any sum from the project arbitration, as the case may be, until after commercial
company or to relief from any obligation to make operation of the wind farm. This provision must make
payment of any sum to the project company or be exception for the parties to seek urgent interlocutory
entitled to relief from or reduction of any other relief i.e. injunctions and to commence proceedings

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 prior to the expiry of any limitations period. If the 1.6 If the Owner or the Lenders‟ Representative fails to
provision does not include these exceptions it risks attend the test and/or inspection, or if it is agreed
being unenforceable between the parties that the Owner or the Lenders‟
 Providing for consolidation of any dispute with other Representative will not attend, then the Contractor
disputes which arise out of or in relation to the may proceed with the test and/or inspection in the
construction of the wind farm. The power to absence of the Owner‟s inspector and provide the
consolidate should be at the project company‟s Owner and the Lenders‟ Representative with a
discretion. certified report of the results.

We have prepared a paper which details the preferred 1.7 The Owner may require the Contractor to carry out
approach to be taken in respect of dispute resolution any test and/or inspection not described in this
regimes in various Asian jurisdictions including the PRC, Contract. The Contractor‟s extra costs necessarily
Philippines, Thailand, Vietnam and Taiwan. You should incurred, which do not include head office or
consult this paper, or ask us for a copy, if you want more corporate overheads, profit or loss of profit, in the
information on this topic. carrying out of the test and/or inspection will be
added to the Contract Price only if the test shows
APPENDIX 1 EXAMPLE CLAUSES that the relevant Works conform with the
requirements of the Contract, but otherwise all costs
will be borne by the Contractor.
Part I - Performance Testing and Guarantee Regime 1.8 If any Equipment or any part of the Works fails to
pass any test and/or inspection, the Contractor must
1 TESTING
either rectify to the Owner‟s satisfaction or replace
Tests and Inspections such Equipment or part of the Works and must
1.1 The Contractor must, at its own expense, carry out at repeat the test and/or inspection upon giving a notice
the place of manufacture and/or on the Site all tests under GC 1.4.
and/or inspections of the Equipment and any part of 1.9 The Contractor must afford the Owner and the
the Works as specified in this Contract or as Lenders‟ Representative access at any time to any
required by any applicable Laws, and as necessary place where the Equipment is being manufactured or
to ensure the Facility operates safely and reliably the Works are being performed in order to inspect
under the conditions specified in the Schedule of the progress and the manner of manufacture or
Scope of Work and the Schedule of Tests. construction, provided that the Owner gives the
[Appendix 1 should specify all the categories of tests Contractor reasonable prior notice.
other than the Tests (example: test at manufacturers
1.10 The Contractor agrees that neither the execution of a
plant, test on site, functional test etc.)]
test and/or inspection of Equipment or any part of
1.2 The Contractor must also comply with any other the Works, nor the attendance by either or both the
requirements of the Owner in relation to testing and Owner and the Lenders‟ Representative nor the issue
inspection. of any test report pursuant to GC 1.5 releases the
1.3 The Owner and the Lenders‟ Representative are Contractor from any other responsibilities under this
entitled to attend any test and/or inspection by its Contract.
appointed duly authorised and designated inspector. 1.11 No part of the Works are to be covered up on the
1.4 Whenever the Contractor is ready to carry out any Site without carrying out any test and/or inspection
test and/or inspection, the Contractor must give a required under this Contract and the Contractor must
reasonable advance notice to the Owner of the test give reasonable notice to the Owner whenever any
and/or inspection and of the place and time. The part of the Works are ready or about to be ready for
Contractor must obtain from any relevant third party test and/or inspection.
or manufacturer any necessary permission or 1.12 The Contractor must uncover any part of the Works
consent to enable the Owner‟s inspector and the or make openings in or through the same as the
Lenders‟ Representative to attend the test and/or Owner may from time to time require at the Site and
inspection. must reinstate and make good that part.
1.5 The Contractor must provide the Owner‟s 1.13 If any part of the Works have been covered up at the
Representative with a certified report of the results Site after compliance with the requirement of GC
of any test and/or inspection within 5 days of the 1.12 and are found to be performed in accordance
completion of that test or inspection. with the Contract, the Contractor‟s extra costs,
26  EPC contracts in the Australian Renewable Energy Sector –
Wind Farms
 which do not include head office or corporate 1.21 If the Contractor fails to pass a Performance Test (or
overheads, profit or loss of profit, necessarily any repetition in the event of prior failure) or if a
incurred in uncovering, making openings in or Performance Test is stopped before its completion,
through, reinstating and making good the same will that Performance Test must, subject to 24 hours
be added to the Contract Price. prior notice having been given by the Contractor to
Performance Tests Procedures and Guidelines the Owner and the Lenders‟ Representative, be
repeated as soon as practicable. All appropriate
1.14 The relevant Performance Tests must be conducted adjustments and modifications are to be made by the
by the Contractor after Commissioning to ascertain Contractor with all reasonable speed and at its own
whether the Facility can achieve Completion and expense before the repetition of any Performance
after Completion to ascertain whether the Facility Test.
can meet the Performance Guarantees.
1.22 The results of the Performance Tests must be
1.15 All Performance Tests must be conducted in a presented in a written report, produced by the
professional, timely, safe and environmentally Contractor and delivered to the Owner and the
responsible manner and in accordance with the Lenders‟ Representative within 5 days of the
Schedule of Scope of Work and the Schedule of completion of the Tests. Those results will be
Tests, all other terms and conditions of this Contract, evaluated by the Owner and the Lenders‟
applicable standards, Laws, Government Approvals Representative. In evaluation of the results, no
and must be accomplished at no additional cost or additional allowance will be made for measurement
expense to the Owner. tolerances over and above those specified in the
1.16 The Facility must not be operated during any applicable ISO test standard.
Performance Test in excess of:
Sale of electricity during the Performance Tests
(a) the limits allowed by any manufacturer to
1.23 The Contractor acknowledges and agrees that:
maintain its warranty;
(a) the Owner is entitled to all energy, revenues
(b) the limits imposed by the Law and
and other benefits, including all Renewable
Government Approvals applicable standards;
Energy Certificates under the REC Act, carbon
and
credits and all other “green” renewable energy
(c) the limits stated in the Schedule of Tests. credits, that may be generated or derived from
1.17 The Contractor agrees that the Owner and the the Facility during the Performance Tests or
Lenders‟ Representative will monitor the conduct of otherwise; and
the Performance Testing to ensure compliance with (b) nothing in this Contract imposes any
the terms and conditions of this Contract. restrictions on the Owner from selling any
1.18 The Contractor agrees that an inspection pursuant to electricity generated during the Performance
GC 1.17 by the Owner and/or the Lenders‟ Tests.
Representative does not release the Contractor from
any other responsibilities under this Contract, 2 MECHANICAL COMPLETION,
including meeting the Performance Guarantees. PRECOMMISSIONING, COMMISSIONING
AND TESTS ON COMPLETION
1.19 If a Performance Test is interrupted or terminated,
for any reason, that Performance Test must be re- 2.1 Mechanical completion
started from the beginning, unless otherwise (a) As soon as the Facility, in the opinion of the
approved by the Owner or the Lenders‟ Contractor, reaches the stage of Mechanical
Representative. Completion the Contractor must give a notice
1.20 The Owner or the Contractor is entitled to order the to the Owner.
cessation of any Performance Test if: (b) The Owner‟s Representative must, promptly,
(a) damage to the Works, the Facility or other and no later than 5 days after receipt of the
property or personal injury; or Contractor‟s notice under GC 22.1(a), either
issue a Certificate of Mechanical Completion
(b) breach of the conditions specified in the
stating that the Facility has reached
relevant environmental Laws or Government
Mechanical Completion or notify the
Approvals, is likely to result from
Contractor of any defects and/or deficiencies.
continuation.

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 (c) If the Owner‟s Representative notifies the issue a Certificate of completion stating that
Contractor of any defects and/or deficiencies, the Facility has reached Completion or notify
the Contractor must then correct those defects the Contractor of any defects and/or
and/or deficiencies and the procedures deficiencies.
described in GCs 2.1(a) and (b) must be (c) If the Owner‟s Representative notifies the
repeated until the Owner issues a Certificate of Contractor of any defects and/or deficiencies,
Mechanical Completion. the Contractor must then correct those defects
Precommissioning and/ or deficiencies and the procedures
2.2 The Contractor must comply with the Owner‟s described in GCs 3.1(a) and (b) must be
requirements and procedures in relation to repeated until the Owner issues a Certificate of
Precommissioning as set out in the Schedule of Completion.
Scope of Work. (d) Despite any other provision of this Contract,
2.3 As soon as all works in respect of Precommissioning no partial or entire use or occupancy of the
are completed and, in the opinion of the Contractor, Site, the Works or the Facility by the Owner,
the Facility is ready for Commissioning, the whether during the Tests on Completion or
Contractor must give notice to the Owner. otherwise, in any way constitutes an
acknowledgment by the Owner that
Commissioning Completion has occurred, nor does it operate
2.4 Commissioning of the Facility or any part must be to release the Contractor from any of its
commenced by the Contractor at a time agreed warranties, obligations or liabilities under this
between the Contractor‟s Representative and the Contract.
Owner after achieving Mechanical Completion and (e) Upon the issue of the Certificate of
completing Precommissioning. Completion, the Contractor must handover
Tests on Completion care, custody and control of the Facility to the
2.5 Owner.

(a) After Commissioning when the Contractor is Tests after Completion

satisfied that all the requirements for 3.2
Completion (other than the passing of the Tests a) Upon the issue of the Certificate of
on Completion) have been satisfied the Completion the Contractor must carry out the
Contractor must give notice to the Owner that Tests after Completion in accordance with
the Facility or that part is ready for the Tests GCs 3.3 to 3.5 and the Schedule of Tests to
on Completion. meet the Performance Guarantees;
(b) The Owner must, as soon as reasonably Guaranteed Power Curve Test
practicable, after receipt of a notice under GC
2.5(a), issue a notice to the Contractor 3.3 The Contractor must carry out a Guaranteed Power
specifying the date for commencement of Curve Test:
those Tests on Completion not already (a) immediately after the issue of the Certificate of
identified in the Program and the Schedule of Completion in accordance with Clause 3.4(a);
Tests. (b) subsequently up to the expiry of the term of the
O&M deed, at any time as instructed by the
3 COMPLETION, TESTS AFTER
Owner in accordance with Clause 3.4(b); and
COMPLETION AND FINAL COMPLETION
(c) 12 months prior to the end of the term of the
Completion O&M Deed in accordance with Clause 3.4(c),
3.1 on all the WTGs in order to verify the
(a) As soon as the Facility, in the opinion of the Guaranteed Power Curve.
Contractor, reaches the stage of Completion Methodology
the Contractor must give a notice to the 3.3
Owner.
(a)
(b) The Owner‟s Representative must, promptly,
and no later than 5 days after receipt of the (i) The Contractor must perform the Power
Contractor‟s notice under GC 3.1(a), either Curve Test immediately after the issue of

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 the Certificate of Completion in established, from the date when the last
accordance with the methodology set out VMP Scada Test or IEC Power Curve
in the Schedule of Tests. Test, as the case may be, was performed
(ii) If the measurement resulting from which proved the Guaranteed Power
performance of the Guarantee Power Curve was equal to or greater than
Curve Test under GC 3.4(a)(i) determines [95]%.
that the average Guaranteed Power Curve (c)
is equal to or greater than [95%], the (i) The Contractor must carry out a
security provided under GC [#] will be Guaranteed Power Curve Test 12 months
reduced to 5% of the Contract Price. prior to the expiry of the term of the
(iii) If the measurement resulting from O&M Deed.
performance of the Guaranteed Power (ii) If the measurement resulting from
Curve Test under GC 3.4(a)(i) determines performance of the Guaranteed Power
that the average Guaranteed Power Curve Curve Test under Clause 3.4(c)
is less than [95]%, GC 27.2(b) will apply determines that the average Guaranteed
and the security provided under GC 8.2 Power Curve is less than [95]%, GC
will only be reduced to 5% of the 27.3(b) will apply.
Contract Price when the Guaranteed
(iii) The Performance Liquidated Damages
Power Curve is equal to or greater than
payable pursuant to GC 27.2(a) shall be
[95]%.
calculated retrospectively from the time at
(iv) The Performance Liquidated Damages which the Guaranteed Power Curve,
payable pursuant to GC 27.2(b) must be according to Scada data, was less than
calculated from the date of issue of the [95]% and where this point cannot be
Certificate of Completion until the established, from the date when the last
Contractor establishes by a subsequent Guaranteed Power Curve Test or IEC
Guaranteed Power Curve or IEC Power Power Curve Test, as the case may be,
Curve Test, as the case may be, that the was performed which proved the
Guaranteed Power Curve is more than Guaranteed Power Curve was equal to or
[95]%. greater than 95%.
(b) (iv) If the Contractor performs an IEC Power
(i) The Owner has the right to perform Curve Test in the 12 months prior to the
further measurements using the expiry of the term of the O&M Deed, that
Guaranteed Power Curve Test at any sample test will be deemed to be
time after the completion of the first representative of the entire Facility. The
Guaranteed Power Curve Test under GC parties agree that the results of the IEC
3.4(a) up to the expiry of the term of the Power Curve Test will be final and
O&M Deed if the Scada data evidences a binding, GC 27.2 shall apply and no
deficiency in the Guaranteed Power further IEC Power Curve Test or VMP
Curve of less than 95% occurring over 20 Power Curve will be carried out.
consecutive days. (v) Subject to Clause 3.4(c)(iv), if the
(ii) If the measurement resulting from Contractor is unable to increase the Power
performance of the Guaranteed Power Curve so that the Guaranteed Power
Curve Test under GC 3.4(b)(i) Curve is equal to or greater than 95%
determines that the average Guaranteed prior to the expiry of the term of the
Power Curve is less than 95%, GC O&M Deed, GC 27.2(c) will apply.
27.2(b) will apply. IEC Power Curve Test
(iii) The Performance Liquidated Damages 3.5
payable pursuant to GC 27.2(a) must be
calculated retrospectively from the time (a) An IEC Power Curve Test will be performed if
at which the Guaranteed Power Curve, the Contractor elects to perform an IEC Power
according to Scada data, was less than Curve Test pursuant to GC 27.3(b)(iii) or if
[95]% and where this point cannot be either party disputes the results of the

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 Guaranteed Power Curve Test carried out warranties, obligations or liabilities under this
under Clauses 3.4(a), (b) or (c). Contract including the satisfactory
The IEC Power Curve Test may be performed performance of its obligations during the
at up to 3 WTG locations on the Site. The Defects Liability Period, the carrying out of
locations must be selected from WTGs which the Tests after Completion and meeting the
represent an average of the performance of all Performance Guarantees.
WTGs as assessed from the scada data Part II – Extension of Time Regime
collected from the issue of the Certificate of
[ ].1 The Contractor must immediately give notice to the
Completion to the time of the IEC Power Curve
Project Company of all incidents and/or events of
Test or as otherwise agreed by the Owner.
whatsoever nature affecting or likely to affect the
(b) While performing the first IEC Power Curve progress of the Works.
Test, the Contractor must perform an
[ ].2 Within 15 days after an event has first arisen the
additional VMP Scada Test concurrently with
Contractor must give a further notice to the Project
the IEC Power Curve Test and the Correlation
Company which must include:
Factor will be used for the performance of all
subsequent VMP Scada Tests. (a) the material circumstances of the event
including the cause or causes;
(c) The costs of the IEC Power Curve Test must
be borne by the Contractor if the Contractor (b) the nature and extent of any delay;
elects to perform an IEC Power Curve Test (c) the corrective action already undertaken or to
pursuant to Clause 27.3(b)(iii) or by the party be undertaken;
electing to perform the test, together with all
(d) the affect on the critical path noted on the
indirect costs incurred as a result of the test
Program;
including any loss of production of electricity.
(e) the period, if any, by which in its opinion the
Final Completion
Date for Commercial Operation should be
3.6 extended; and
(a) As soon as the Facility, in the opinion of the (f) a statement that it is a notice pursuant to this
Contractor, reaches the stage of Final GC [ ].2.
Completion the Contractor must give a notice
[ ].3 Where an event has a continuing effect or where the
to the Owner.
Contractor is unable to determine whether the effect
(b) The Owner‟s Representative must, promptly, of an event will actually cause delay to the progress
and no later than 5 days after receipt of the of the Works so that it is not practicable for the
Contractor‟s notice under GC 3.6(a), either Contractor to give notice in accordance with GC [
issue a Certificate of Final Completion stating ].2, a statement to that effect with reasons together
that the Facility has reached Final Completion with interim written particulars (including details of
or notify the Contractor of any defects and/or the likely consequences of the event on progress of
deficiencies. the Works and an estimate of the likelihood or likely
(c) If the Owner‟s Representative notifies the extent of the delay) must be submitted in place of
Contractor of any defects and/or deficiencies, the notice required under GC [ ].2. The Contractor
the Contractor must then correct those defects must then submit to the Project Company, at
and/ or deficiencies and the procedures intervals of 30 days, further interim written
described in GCs 3.6(a) and (b) must be particulars until the actual delay caused (if any) is
repeated until the Owner issues a Certificate of ascertainable, whereupon the Contractor must as
Final Completion. soon as practicable but in any event within 30 days
give a final notice to the Project Company including
(d) Despite any other provision of this Contract,
the particulars set out in GC [ ].2.
no partial or entire use or occupancy of the
Site, the Works or the Facility by the Owner, [ ].4 The Project Company must, within 30 days of
whether during the Tests after Completion or receipt of the notice in GC [ ].2 or the final notice in
otherwise, in any way constitutes an GC [ ].3 (as the case may be), issue a notice
acknowledgment by the Owner that Final notifying the Contractor‟s Representative of its
Completion has occurred, nor does it operate determination as to the period, if any, by which the
to release the Contractor from any of its Date for Commercial Operation is to be extended.

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[ ].5 Subject to the provisions of this GC [ ], the [ ].10 If there are two or more concurrent causes of delay
Contractor is entitled to an extension of time to the and at least one of those delays would not entitle the
Date for Commercial Operation as the Project Contractor to an extension of time under this GC [ ]
Company assesses, where a delay to the progress of then, to the extent of that concurrency, the
the Works is caused by any of the following events, Contractor is not entitled to an extension of time.
whether occurring before, on or after the Date for [ ].11 The Project Company may direct the Contractor‟s
Commercial Operation: Representative to accelerate the Works for any
(a) any act, omission, breach or default by the reason including as an alternative to granting an
Project Company, the Project Company‟s extension of time to the Date for Commercial
Representative and their agents, employees Operation.
and contractors; [ ].12 The Contractor will be entitled to all extra costs
(b) a Variation, except where that Variation is necessarily incurred, by the Contractor in complying
caused by an act, omission or default of the with an acceleration direction under GC [ ].11,
Contractor or its Subcontractors, agents or except where the direction was issued as a
employees; consequence of the failure of the Contractor to fulfil
(c) a suspension of the Works pursuant to GC [ ], its obligations under this Contract. The Project
except where that suspension is caused by an Company must assess and decide as soon as
act, omission or default of the Contractor or its reasonably practical, the extra costs necessarily
Subcontractors, agents or employees; incurred by the Contractor.

(d) an Event of Force Majeure; or Part III - Grid Access Regime

(e) a Change of Law. [ ].1 The Contractor must co-ordinate the connection of
[ ].6 Despite any other provisions of this GC [ ], the the Facility to the Transmission Line and provide, in
Project Company may at any time make a fair and a timely manner, suitable termination facilities in
reasonable extension of the Date for Commercial accordance with Appendix 1. The Contractor must
Operation. liaise with the Network Service Provider,
Government Authorities and other parties to avoid
[ ].7 The Contractor must constantly use its best delays in connecting the Facility to the Transmission
endeavours to avoid delay in the progress of the Line.
works.
[ ].2 On the Date for First Synchronisation the Project
[ ].8 If the Contractor fails to submit the notices required Company must ensure that there is in place a
under GCs [ ].1, [ ].2 and [ ].3 within the times Transmission Network which is capable of receiving
required then: the generated output the Facility is physically
(a) the Contractor has no entitlement to an capable of producing at any given time.
extension of time; [ ].3 The Project Company‟s obligation to ensure that the
(b) the Contractor must comply with the Transmission Network is in place is subject to the
requirements to perform the Works by the Date Contractor being able (physically and legally) to
for Commercial Operation; and connect the Facility to the Transmission Line and
(c) any principle of law or equity (including those import and/or export power to the Transmission
which might otherwise entitle the Contractor to Network.
relief and the “prevention principle”) which [ ].4 If the Contractor notifies the Project Company that
might otherwise render the Date for First Synchronisation is likely to take place before
Commercial Operation immeasurable and the Date for First Synchronisation, the Project
liquidated damages unenforceable, will not Company must endeavour, but is under no
apply. obligation to ensure that the Transmission Network
[ ].9 It is a further condition precedent of the Contractor‟s is in place, to enable First Synchronisation to take
entitlement to an extension of time that the critical place in accordance with the Contractor‟s revised
path noted on the Program is affected in a manner estimate of First Synchronisation.
which might reasonably be expected to result in a [ ].5 At the time of and following First Synchronisation
delay to the Works reaching Commercial Operation the Project Company will ensure that the Contractor
by the Date for Commercial Operation. is permitted to export to the Transmission Network

31  EPC contracts in the Australian Renewable Energy Sector –

Wind Farms
 power which the Facility is physically capable of (b) promptly notify the Project Company‟s
exporting, provided that: Representative if there is any change in the
(a) it is necessary for the Contractor to export that information contained in such notice; and
amount of power if the Contractor is to obtain (c) do all things necessary to assist the Project
Commercial Operation; Company (including but not limited to
(b) the Contractor has complied in all respects cooperating with the Network Service Provider
with its obligations under GC [ ].7; and and complying with its obligations under GC
20.15), so that the Project Company can
(c) in the reasonable opinion of the Project
comply with its obligations under the National
Company and/or the Network Service Provider
Electricity Code.
the export of power by the Facility will not
pose a threat to the safety of persons and/or
property (including the Transmission
Network).
[ ].6 For the avoidance of doubt, the Project Company
will not be in breach of any obligation under this
Contract by reason only of the Contractor being
denied permission to export power to the
Transmission Network in accordance with the Grid
Code.
[ ].7 The Contractor must carry out the testing of the
Works, in particular in relation to the connection of
the Facility to the Transmission Network so as to
ensure that the Project Company and the Contractor
as a Participant (as defined in the Electricity Code)
comply with their obligations under the Electricity
Code in respect of the Testing of the Works,
[ ].8 The Contractor must carry out the Testing of the
Works, in particular in relation to the connection of
the Facility to the Transmission Network, so as to
ensure that:
(a) any interference to the Transmission Network
is minimised; and
(b) damage to the Transmission Network is
avoided.
[ ].9 The Contractor must promptly report to the Project
Company‟s Representative any interference with
and damage to the Transmission Network which
connects with the Facility.
[ ].10 Without derogating from the Contractor‟s
obligations under this Contract, in carrying out any
test which requires the Contractor to supply
electricity to the Transmission Network, the
Contractor must:
(a) issue a notice to the Project Company‟s
Representative at least 24 hours prior to the
time at which it wishes to so supply, detailing
the testing or commissioning and including the
Contractor‟s best estimate of the total period
and quantity (in MWh per half-hour) of that
supply;

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APPENDIX 2

33  EPC contracts in the Australian Renewable Energy Sector –

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34  EPC contracts in the Australian Renewable Energy Sector –
Wind Farms
 http://www.ret.gov.au/energy/facts/white_paper/draft-ewp-
FOOTNOTES 2011/Pages/Draft-Energy-White-Paper-2011.aspx p.41
1. By this we mean industry sectors including power, oil and gas, 15. Department of Energy, Resources and Tourism, Draft Australian
transport, water and telecommunications. Energy White Paper 2011,
http://www.ret.gov.au/energy/facts/white_paper/draft-ewp-
2. The terms Private Finance Initiatives (PFI) and Public Private
2011/Pages/Draft-Energy-White-Paper-2011.aspx, pp215-216)
Partnerships (PPP) are used interchangeably. Sectors which undertake
PFI projects include prisons, schools, hospitals, universities and defence. 16. McLennan Magasanik Associates Pty Ltd , Report to sustainability
Victoria - Assessment of greenhouse gas abatement from wind farms in
3. Some jurisdictions, such as the USA, use alternative structures which
Victoria (June 2006)
separate the work into various components. Governments in Asia have
http://www.sustainability.vic.gov.au/resources/documents/Greenhouse_a
traditionally used other forms of contracts to undertake large scale
batement_from_wind_report.pdf
infrastructure projects. For example, the Hong Kong Government
routinely uses Bills of Quantities as opposed to D&C or EPC contracts. 17. (Clean Energy Australia Report 2011, p.54)
4. Clean Energy Council, Clean Energy Australia Report 2011 18. (Clean Energy Australia Report 2011, p.54)
http://www.cleanenergycouncil.org.au/cec/resourcecentre/reports/cleane 19. Given this paper focuses on project financed infrastructure projects
nergyaustralia ; Department of Energy, Resources and Tourism, Draft we refer to the employer as the project company. Whilst project
Australian Energy White Paper 2011 companies are usually limited liability companies incorporated in the
http://www.ret.gov.au/energy/facts/white_paper/draft-ewp- same jurisdiction as the project is being developed in the actual structure
2011/Pages/Draft-Energy-White-Paper-2011.aspx . of the project company will vary from project to project and jurisdiction
5. Explanatory Memorandum to the Renewable Energy (Electricity) to jurisdiction.
Amendment Bill 2010 (Cth), p4. 20. Power projects undertaken by the private sector, and more
6. Office of the Renewable Energy Regulator, Increasing Australia's particularly, by non-utility companies are also referred to as IPPs,
renewable electricity generation, www.orer.gov.au Independent Power Projects. They are undertaken by IPPs - Independent
Power Producers.
7. Media Release by Senator Penny Wong, Enhanced Renewable Energy
Target Scheme, 26 February 2010 21. However, because merchant power projects are generally undertaken
http://www.climatechange.gov.au/minister/previous/wong/2010/media- in more sophisticated and mature markets there is usually a lower level
releases/February/mr20100226.aspx. of country or political risk. Conversely, given the move towards
privatisation of electricity markets in various Asian countries, this may
8. Legislative package including the Renewable Energy (Electricity)
no longer be the case.
Amendment Bill 2010 (Cth).
22. Export credit agencies are bodies that provide finance on the
9. Under section 40(1) of the Act.
condition that the funds are used to purchase equipment manufactured in
10. Under s. 18 of the Act, a LGC may be created by a nominated person the country of the export credit agency.
in respect of an accredited power station for each whole MWh of
23. For the purposes of this paper, we have assumed the EPC contract
electricity generated by the power station during a year that is in excess
will be governed by the law of a common law jurisdiction. Where there
of the power station's 1997 eligible renewable power baseline. A
are differences between jurisdictions we have adopted the English law
nominated person for an accredited power station is the person who
approach. Therefore, if an EPC contract is governed by a law other than
made the application for accreditation or a person who has been granted
English law you will need to seek advice from local counsel to ensure
an approval under section 30B of the Act in relation to the power station.
the contract is enforceable in the relevant jurisdiction. For example, in
Under section 30B a registered person who is a stakeholder in relation to
both the PRC and Malaysia liquidated damages amounts specified in a
an accredited power station may apply to the Regulator for approval to
contract may be subsequently altered by a court. If a party can show that
become the nominated person for the power station. A stakeholder is
the liquidated damages amounts will either under or in some cases over
defined under the Act as a person who operates the power station or who
compensate a party the court can adjust the damages payable so they
owns all or a part of the power station (whether alone or together with
more accurately reflect the actual damage suffered by a party.
one or more other persons). An application for changing the nominated
person in accordance with section 30B must (among other things) be 24. On projects where the supplier or manufacturer of the wind turbine
accompanied by a statement in writing from each other stakeholder in generator is appointed as an operator of the wind farm for a fixed
relation to the power station indicating that the other stakeholder agrees duration, it is not unusual for the availability guarantees to be provided
to the making of the application (section 30B(2)(e)). by the operator under the O&M Agreement. This is sometimes referred
to as a warranty, operations and maintenance agreement (“WOM”).
In addition to the legislative framework, it is prudent to set out in any
Refer to the following section for a discussion on Split EPC contracts.
operating and maintenance agreement a provision that clearly states that
owner is entitled to all energy, revenues and other entitlements including 25. For a more detailed discussion on split EPC contracts refer to the
LGCs under the Act that is generated by the wind farm during the term DLA Piper International Best Practice in Project and Construction
of the agreement. Agreements paper entitled “EPC contracts in the Power Sector” dated
April 2004. We have also prepared a paper that deals with the variations
11. Office of the Renewable Energy Regulator, Increasing Australia's
and complications in split EPC contracts. You should consult that paper,
renewable electricity generation, www.orer.gov.au
or ask us for a copy, if you want more information on this topic.
12. The Clean Energy Future Package is available at:
26. This is also called a Co-ordination Agreement, an Administration
(http://www.cleanenergyfuture.gov.au/clean-energy-future/our-plan/
Agreement or an Umbrella Deed.
13. Available online at:
27. This discussion assumes the project company will be entering into
http://www.dpcd.vic.gov.au/__data/assets/pdf_file/0010/77851/Policy-
either a PPA or a Tolling Agreement. However, some of these issues will
and-planning-guidelines-for-development-of-wind-energy-facilities-in-
also be relevant if the project company is entering into hedging
Victoria.pdf
agreements for a merchant project. For example, those hedge agreements
14. Department of Energy, Resources and Tourism, Draft Australian will likely mandate a date by which the power station must be capable of
Energy White Paper 2011, commercial operation. Failure to comply with this requirement will incur

35  EPC contracts in the Australian Renewable Energy Sector –

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monetary liability. Similarly there may be availability requirements and
certain performance guarantees imposed by the hedge. These
requirements must be flowed through to the EPC contract.
28. These clauses will have to be modified to ensure compliance with the
relevant regulatory regime.
29. These same issues will need to be reflected in any operating and
maintenance agreement entered into by the project company.
30. A type of weed that is widespread in South Australia and horehound
burrs are considered a vegetable fault contamination of wool. It has been
conservatively estimated at costing the wool producers in Australia
$AUD680,000 per annum.
31. The EPBC Act prescribes the Commonwealth‟s involvement in
environmental matters where an action has or will have a significant
impact on “matters of national environmental significance”. Detailed
administrative guidelines are found at www.environment.gov.au/epbc .
32. Other certifications include certification according to the Dutch
prestandard NVN 11400-0, Wind Turbines - Part 0: Criteria for type
certification-technical criteria”, Issue April 1999 and certification
according to the Danish Technical Criteria.
33. The IEC (http://www.iec.ch/home-e.htm) is a global organisation that
prepares and publishes international standards for all electrical,
electronic and related technologies. The main technical committee for
wind turbine systems is TC88 which publishes standards for the wind
turbine industry.
34. The critical path is the path on the construction program that shows
the dates when certain activities must be completed by in order to
achieve completion by the specified date.

KEY CONTACTS

Damian McNair
Partner, Head of Finance & Projects Australia
T +61 3 9274 5379
damian.mcnair@dlapiper.com

www.dlapiper.com

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36  EPC contracts in the Australian Renewable Energy Sector –

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