Fitter for Purpose – Your Next Renewable Energy EPC Contract | Thailand

Engineering, procurement and construction (EPC) contracts typically define a DNP, during which the contractor is obliged to remedy at its expense any defects identified by the employer. DNPs usually start when the project has been accepted by the employer save for minor defects that do not affect safety and performance (eg, Taking Over) and continue for a specified number of months.

Contractors will typically deny all responsibility for defects that arise after the expiry of the DNP and refuse to remedy the defects unless the employer pays the cost of the repairs. From the employer’s perspective, this can result in unbudgeted repair costs which, for example, reduce the profitability of a wind farm (and in the case of serial defects, the impact on wind farm profitability can be disastrous).

The critical drafting point for DNP wording to prevent the EPC contractor from walking away after the expiry of the DNP is to make sure that the EPC contract does not include “exclusive remedy” wording that extinguishes the employer’s rights to rely on defect limitation periods arising under the law governing the EPC contract.

For example, if an EPC contract with a two-year DNP is governed by the laws of a country which impose a six-year statutory liability period on contractors for defective work, the employer would potentially have an additional four years after the expiry of the DNP to claim for defective work, provided the wording of the EPC contract does not have the effect of extinguishing those statutory rights.

Many civil law jurisdictions prevent contracting out of statutory defects liability periods, but contracting out is effective in several common law jurisdictions, so this is one area in which jurisdiction-specific advice is crucial.

From an operational perspective, it is important for the employer to conduct an inspection before the expiry of the statutory defects liability period in order to identify defects and make a claim against the contractor. As the expiry of the statutory defects liability period can be fatal to the employer’s ability to commence litigation or arbitration, the timing of the inspection should factor in the time required for mandatory negotiations or mediation which the employer must observe under the dispute resolution provisions of the EPC contract before being entitled to commence arbitration or litigation.

The well-trodden path taken by EPC contracts to ensure quality of the works is to focus on the contractor’s obligation to exercise skill, care and diligence and adhere to “Good Industry Practice” when constructing the works. The problem with this approach for employers is that it can leave the employer with no remedy if the contractor has built the project using due skill and care but the project nevertheless underperforms on Taking Over, or fails after the applicable statutory liability period.   

For example, if a wind farm with a 100MW nameplate capacity produces only 80MW after Taking Over, the underlying cause could be an inappropriate selection of wind turbines for the wind speeds at the site. However if the EPC contract specifically identifies the model of turbine and provides no warranties as to the suitability of the turbine, the employer could be left with no contractual recourse against the contractor. Turbine suppliers do offer power curve warranties as a remedy, but the expense, time and complexity of the testing procedure often discourages employers from accessing the warranty.

A stronger position for the employer would be to state in the EPC contract that the intended purpose of the wind farm was to generate 100MW at the wind speeds present at the site and to require the contractor to complete the works to be fit for that intended purpose. The delivery of a wind farm producing only 80MW would be a breach of this requirement, regardless of whether the contractor had exercised due skill, care and diligence.

Fitness for purpose is easily implemented in FIDIC contracts. The 1999 Silver (EPC/Turnkey) and Yellow (Plant and Design Build) books required the works when completed to be fit for the purpose for which the works were intended as defined in the contract, enabling the employer to simply include a definition of the intended purpose in the contract. The 2017 Silver book and Yellow book versions have been revised to require the works when completed to be fit for the purpose defined or described in the Employer’s Requirements, or fit for their ordinary purpose if no purpose has been defined or described in the Employer’s Requirements. 

Bear in mind that with FIDIC contracts, the fitness for purpose obligation applies “when completed” and as a result, additional wording needs to be inserted if the anticipated operating life of the project is to form part of the intended purpose.

As renewable energy projects are typically built with a view to 20 or more years of operation, a significant part of the project’s operation takes place after the expiry of statutory liability periods, and including operating life in the definition of intended purpose can substantially increase the employer’s contractual recourse for performance issues after the expiry of the DNP and statutory liability periods.