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Hello, and welcome to the Power Play podcast, the podcast that talks tactics for renewable investments and assets. My name is Dan Cashmore, and today, I'm joined by Danielle Griffiths. How are doing, Danielle?
Speaker 2:Yeah. I'm good. Thank you. How are you?
Speaker 1:Yeah. Very well. Thank you. And so in this current series, we're going to be talking about effective management of risks on assets throughout their life cycle. And we're very much concerned here with the physical aspect of a renewable asset, I.
Speaker 1:E. The kit itself. And in each episode, we're gonna be introducing an issue and talking tactics on how to deal with that in order to maximize value or minimize the detriment to the asset or portfolio. And we're obviously going to be coming at this from a contractual and legal perspective, but as we do, we'll be weaving in practical and commercial points we've seen from our experience of advising on these assets. And in this episode, we're talking about the issue of defects and performance issues in renewable assets.
Speaker 1:Now it's fair to say, Danielle, you've dealt with a few cases involving defects in your time.
Speaker 2:Yeah. Quite a few. So a lot of the issues we tend to advise on in relation to renewable assets are actually related to issues with the plant that either arise during the development phase or the operational phase of the project that affect the performance of the asset over its lifetime. And therefore, we're quite often involved in advising on how those risks and issues can be mitigated. So hopefully useful experience for for today's discussion.
Speaker 1:Yeah. Perfect. Good to know. I'm in good hands here with you. And so let's start off probably in quite a lawyerly way by defining the issue.
Speaker 1:So, Danielle, when we're talking about defects in the context of an energy asset, what are we really talking about here?
Speaker 2:I'll start with a lawyer's answer, which is definite the definition of defects is often found in the relevant contract. But usually, and taking kind of a general example, a defect is any part of the works. So that includes design, manufacturer workmanship that doesn't meet the requirements of that particular contract. Now the term defects is probably used quite loosely in that often it's used to refer to any issues with the works that arise at any point in time during construction or after completion, but often works the particular plant that you're talking about is not actually defective until it's completed and taken over. Because until that point, the contractor has the opportunity to fix any non compliant work.
Speaker 2:So strictly speaking, they aren't defective until the point at which they handed over. So when we talk about defects, we are usually talking about the period post completion or takeover of the works. And in terms of energy assets, just to give some examples, this might include physical defects with the plant or the assets. So components that don't work at all or don't work as they should do or performance issues with the plant. So despite operating the plant doesn't meet specific performance requirements that are set out in the contract or there are issues with infrastructure around the plant.
Speaker 1:Perfect. Very helpful to understand what we mean from the outset in terms of defects. So why should asset owners and operators care about defects?
Speaker 2:I think there are a few reasons now, primarily obviously in relation to renewable assets, they are developed or required based on a projected revenue stream or analysis. And therefore anything that affects the performance of the asset or its ability to produce energy over time will impact the generation capacity of the asset. And therefore the revenues that will be seen from that. So dealing with defects and performance issues is often critical to the financial viability of these projects. Secondly, in relation to energy infrastructure, it's a highly regulated area and the impact of defects might affect certain regulatory obligations and liabilities that a party may have.
Speaker 2:And then thirdly, depending upon the nature of the defect, they can give rise to health and safety concerns or issues, particularly when we're talking about, you know, energy assets with high voltage equipment. So it's important to address those issues promptly.
Speaker 1:Thanks, Danielle. Yeah. So clearly asset owners and operators should, and from our experience are always interested in in resolving defects on their assets. And and defects or performance issues, as you've touched on there, they can arise at different stages of the construction or operation of an asset. So I just wanted to explore that a bit more with you and and perhaps ask if you could break that down because tactics can differ depending on what stage you're at.
Speaker 1:So turning first to defects identified during the construction stage, what are the things that owners or operators should be considering there?
Speaker 2:So following completion of the physical works, there's often a period during which the contractor is obliged to return and fix any defects that are identified during that set period. And this is known by various terms, but often the defects liability period, rectification period, warranty period, etcetera. And this is often a period that runs for twelve or twenty four months from completion of the physical works. So if there is a non compliance during construction or a defect that is identified during this defects liability period, then there's an obligation on the contractor to come back and fix that defect. And I guess at this stage, there are a few things that should be considered.
Speaker 2:I think firstly, do any notices need to be issued, notifying the contractor of a particular defect? And if so, is there any timeframe within which you need to get that notice out because those can be very important. What's the particular nature of the defect? Is it design issue, workmanship issue, manufacturing issue? Because this might affect how that defect in any claim is then addressed and your potential routes to recovery if that defect is not actually fixed by the contractor.
Speaker 2:So for example, is that defective part covered by a warranty that's still valid or has the contractor notified its insurers if there is a defect that rises out of a design issue for which it's responsible. The next issue is you need to identify as quickly as possible. If and to the extent the defect is a defect that's construction defect or a defect that has arisen due to operation and maintenance issues. And identifying this early can avoid later issues with the main contractor or EPC contractor, depending on how the works have been procured and O and M contractor blaming each other for the defect, which you often see at this crucial stage. Often the EPC contractor and the O and M contractor may be same or related parties, particularly immediately after completion or takeover.
Speaker 2:But this can get more complicated the further away you are from completion or where there is a difference in the parties that are responsible for each phase of the works. And then the other benefit of defects being identified during that defects liability period or equivalent is that often as the owner or employer of an asset, you might still be holding security or retention. And therefore there's an incentive for the contractor to rectify defects, to obtain release of that retention or to obtain release of any particular bond. And equally if the contractor fails to do so, the employer owner has a pot of money to utilize to rectify that defect itself. So it's kind of useful, but I'd say critical to ensure that a full review of any potential defects is carried out before the end of that defects liability period to ensure there's enough time to notify everything that that needs to be fixed.
Speaker 1:And what about then if defects are identified a little later on, perhaps after any file acceptance and where the owner doesn't have the benefit of the contractual warranty, the defect liability that you've been talking about from the contractor.
Speaker 2:Yeah. So outside of those kinds of set defect liability or rectification periods, the contractor might not have a strict obligation to come back and fix that defect, but it might still be liable for any defects as latent defects. So any such defects might have arisen due to a breach of contract by the contractor for which an employer or owner can claim damages. Now, often in this situation, the contractor is still usually invited back to fix the defect in the first instance, as it has the relevant expertise having been the kind of contractor on the project, it minimizes the loss to the employer or owner if the contractor fixes the issue itself. And the incentive for the contractor is often it can fix that defect for less than the employer or owner would, and therefore it'll minimize its exposure to any losses that that might arise.
Speaker 2:However, if a contractor doesn't come back and fix defect that's identified outside of a a defect liability period, the employer or owner's recourse is to have that defect rectified by a third party and then to seek to recover the costs of doing so as damages from the contractor, which is obviously a bit more of a timely and costly exercise. And then the final thing, I think just to note, particularly in relation to defects outside of any contractual rectification period is to be aware of any relevant limitation periods for a claim, whether that's a statutory limitation period. So six years or twelve years, depending on how that contract has been executed or a contractual limitation period, which might act as a bar to the bringing of any claims. And sometimes you can see those contractual limitation periods acting as a bar sooner than the statutory limitation period might have expired.
Speaker 1:Okay. So I wanted to turn to performance testing now. So with generation assets, obviously really common to have testing and commissioning phases after the completion of the physical works. And these can vary depending on the contract and the technology. But, typically, you're gonna have tests on completion of works and prior to taking over operation.
Speaker 1:And then subsequently, you may have further testing that takes place up until the end of the warranty period or final acceptance. So, Daniel, could you just explain the significance of this testing and what happens if any of that testing is failed?
Speaker 2:Yeah, of course. So with an energy asset, the testing regime is obviously critical because you want to ensure that what has been built will perform and generate as you intended it to. So the usual position is that the employer or the owner is entitled to liquidated damages to compensate for performance issues if the tests are failed or if the relevant performance criteria is not met at any of the particular stages. However, any liquidated damages, which are a fixed sum are usually an employer's sole and exclusive remedy for any such performance issues. So it's important that those damages are adequate to address any potential losses that may occur because you'll have limited other ability to pursue any losses that are over and above that liquidated damages amount.
Speaker 2:And we are aware that there's often a desire to get takeover or provisional acceptance or final acceptance as soon as possible to get that asset generating for all the reasons kind of we went over earlier. But just a word of caution about accepting kind of takeover or final acceptance without kind of suitable protection. Because if an owner or an employer knows about existing issues or defects and nevertheless issues a final acceptance certificate, for example, there is a risk that it may lose its right to claim in respect of those defects depending on the particular wording of the contract. And I guess another tool that could be utilized or at least considered at this stage is expert determination. This is a dispute resolution mechanism that's either set out in the contract or can be kind of agreed on an ad hoc basis between the parties when an issue arises.
Speaker 2:And this usually involves a technical expert engaged to give an opinion on a particular issue to try and break a deadlock on key issues. So for example, when we're talking about defects and performance issues that might include giving an opinion on the root cause of a particular defect or whether, you know, particular testing for provisional acceptance or final acceptance has actually passed.
Speaker 1:Yeah. And I think I think there's some really important points there and particular one around getting to take over or pack. Think, you know, we've we've seen that so many times. And and as you rightly say, thinking very carefully and and making sure that, you know, you can do that, but you gotta acknowledge the risks and do that in a very careful way to make sure that you mitigate those risks as much as possible. And it's that balance between the the practical and the and the contractual aspects that you've just gotta try and get right.
Speaker 1:And so finally, if any one of our listeners knows or suspects that they have a defect or nonconformity in their asset? What are the top steps, top tips that you think they should take?
Speaker 2:Yeah. I think the first one is, and it's my favorite for a lot of different construction related issues is check your notice provisions. When do you need to notify? Who do you need to notify? And how do you need to notify?
Speaker 2:It's key to kind of preserving the majority of claims that any party might have under a contract and particularly in relation to defects. So make sure you comply strictly with notice requirements. I think the second point I would say is get technical advice and get technical advice early, identify the root cause of any particular defect. And that will assist you in identifying responsibility, but also what recourse you might have for that defect in the particular asset. And then finally ensure all of your rights are protected whilst your investigations are ongoing.
Speaker 2:If you think particular parties are in the frame, put them on notice, make sure their insurers are on notice, etcetera. And make sure you've got specific reservations in place. So you can keep all of your options open until you can kind of definitively pin down what's happened and who's responsible for it.
Speaker 1:Yeah, absolutely. And I might just add one more, which is to reach out to you or I or anyone else at Osborne Clark who who can help you with taking all of those steps. Think, actually, I would say this, but early legal involvement can really be the difference between making good a defects claim or not. So I'm gonna wrap up there. Unfortunately, we've got not much more time.
Speaker 1:We've talked about quite a few issues today. We've talked about the importance of addressing defects, how the approach might change depending on where you are in that asset life cycle, and, of course, your top tips on what to do when a defect crops up. A big thank you to you, Danielle, for joining me today. It's been a real pleasure talking to you.
Speaker 2:No problem. Thanks for having me. It's it's been a pleasure to to talk about this issue that we see come up quite often, so, it's useful for for everybody listening.
Speaker 1:And a big thank you to everyone for listening, and see you next time.