Construction contracts on power projects contain a host of operational requirements, but the testing of the plant’s performance can cause sparks to fly

lindy patterson

This article looks at the operational and performance risks that a contractor typically takes in construction of a power project. This may involve a third party operator’s requirements or simply those of the employer who is also the operator.

Either way, a set of operational requirements will be included as part of the construction contract. This will be accompanied by an express obligation on the contractor that it should design and construct the plant to meet such requirements - a fitness for purpose obligation by any other name.

These requirements typically include some that are relative to outputs - availability (when plant is in operation and not having downtime for breakdowns), fuel efficiency, and so on. These obligations are likely to be backed up by certain guarantees and may well have liquidated damages attached for failures to meet these.

Take a typical availability guarantee with availability damages. This is likely to apply during a defects correction period.

  • Between completion and the defects date, the employer assesses the availability of the power plant and notifies the contractor.
  • The contractor pays the amount of low availability damages at the end of each of the first four half-year periods.

There would then be provisions around:

  • expected percentage availability - for example, 92% in year one increasing through the next two years to 98%, and
  • a formula to calculate availability.

Similar provisions may well be included relative to plant efficiency and performance generally - such as amount of waste to be processed or fuel to be used.
In many major projects such obligations will take the form of warranties — regardless of the cause of low performance, damages are due. Very often such performance damages are not supported by relief provisions, which give the contractor relief from the effect of poor performance in particular circumstances. This raises issues as to whether acts of prevention by the employer could stop enforcement of such damages. To avoid such uncertainty, a “carve out” of an absolute warranty that relates to fault by the employer may be sought by the contractor at contract drafting stage.

Other issues that affect operation will arise at completion. This will be at least a two-stage process under such contracts. It will involve a construction completion and a passing of tests on completion. For example, under the IChemE Red Book, a construction completion certificate is issued when the plant is substantially complete; takeover tests are then carried out and once successfully completed a takeover certificate is issued. Following takeover, performance tests will then be carried out. Once the performance tests are complete, an acceptance certificate is issued.

Many of the disputes on these projects relate to whether or not tests have been passed. Typical disputes are around interpretation of results, the suitability of the testing environment and the legal implications of the employer or operator starting to operate the plant before any tests have been passed.

At the point of testing, those employed in the operation of the plant will inevitably be involved. They may only be allowed to witness the tests. They may have input as to whether they consider these tests have been passed. How the contract regulates this is critical. What can’t happen is for there to be separate disputes and potentially separate findings under each of the contracts as to whether a takeover certificate should be issued.

Take a situation where the employer is advised by a third party operator that it does not accept the tests on completion and will not be taking it over. The employer thinks that these tests have been passed and so does the contractor. What are the dispute resolution mechanisms that allow that dispute to be dealt with? A dispute under the operator’s agreement will only assist the employer if it can apply any decision reached under this to the construction contract. It is therefore essential the provisions in the construction agreement and the operation and maintenance agreement and any other “up the line” contract are “back to back” on this.

Also, is the dispute to be chased up the line to be dealt with under the head contract? If not, one will be faced with a situation where one of the parties disputes the findings under another contract. This is why terms that provide that the takeover decision be made by the engineer or owner’s representative have been common. Such provisions do however require redrafting to be enforceable, following the amended Construction Act coming into force.

Lindy Patterson QC is a partner at Dundas & Wilson