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Solar EPC guarantor liable for delay damages

The High Court enforced payment of liquidated damages for delay in the construction of five solar plants, deciding that they were not a penalty.

It also permitted the recovery of general damages (in addition to delay damages) in respect of two of the five solar plants arising from the lower level of government subsidy obtained.

It also considered the difference between a guarantee and an indemnity, looking to the substance of the arrangement rather than the words used.

GPP Big Field LLP v Solar EPC Solutions SL: the facts

GPP entered into five solar EPC contracts with Prosolia UK Ltd (Prosolia) for the construction of solar power generation plants in the UK. Three of the projects were to be accredited for the Feed-in Tariffs scheme and two of them for the Renewables Obligation (RO) scheme. Under the RO scheme, accredited energy generators receive Renewables Obligation Certificates (ROCs) for the renewable electricity they generate. In respect of four of the five EPC contracts, Solar EPC Solutions (Solar), Prosolia's parent company, provided "guarantees" for Prosolia's obligations.

The contracts contained substantially similar liquidated damages provisions covering delays in commissioning. Prosolia failed to commission each plant by the completion date specified in the relevant contract and subsequently became insolvent. As a result, GPP brought a claim before the High Court against Solar for liquidated damages for delay under four of the five contracts.  In addition, GPP's claim in respect of the two RO projects was for general damages as well as liquidated damages because the delay resulted in a lower level of ROC entitlement for the projects.

Issues before the High Court

The main issues for the High Court to decide included the following:

  • Was the liquidated damages provision in each contract an unenforceable penalty?
  • Should GPP be permitted to recover general damages for the two RO projects in addition to liquidated damages for delay?
  • Did Solar's obligations apply to it as a guarantor or as an indemnifier?

Liquidated damages or unenforceable penalties?

Solar argued that the liquidated damages provisions should be construed as unenforceable penalties because:

  • Each of the contracts provided for the same daily rate of liquidated damages (i.e. £500 per day per MWp) though each of the plants had a different energy output with varying expected electricity prices. The extent of the loss likely to be suffered by GPP would therefore depend on the output and the prevailing electricity price of each of the plants. As a result, the daily rate of liquidated damages exceeded a genuine attempt to estimate loss in advance.
  • The contracts expressly described the daily rate of liquidated damages as "the penalty" which served as "a powerful indicator of the parties' intentions".

In deciding on the issues raised by Solar, the High Court applied the Supreme Court decision in Makdessi v Cavendish. That decision reformulated the legal test for deciding whether a clause is a penalty by placing a focus on whether the clause is "exorbitant" or "unconscionable" in the context of the legitimate interest it seeks to protect (rather than on whether it was a genuine pre-estimate of loss as it was previously the case). According to the Supreme Court, the question of whether a clause provides for a genuine pre-estimate of damages remains of importance in considering what that legitimate interest is.

The High Court held that the provisions did not constitute unenforceable penalties because:

  • Liquidated damages provisions of this kind are common in construction contracts and both parties were capable of assessing their commercial implications due to their experience and equal bargaining power.
  • While the rate stipulated was not a precise calculation of the likely loss that GPP would suffer in the event of a breach, it did not exceed a genuine attempt to estimate that loss in advance. 
  • While the rate was a round sum, it is in the nature of liquidated damages clauses that precise prediction of the likely loss is difficult and so they are often expressed in round figures.
  • Any discrepancy that might arise between actual loss and the liquidated damages sum agreed did not mean that the sum was a penalty as long as it was not "extravagant and unconscionable in amount in comparison with the greatest loss that might have been expected when the contract was made to be likely to follow from the breach". 
  • The use of the word "penalty" in the liquidated damages provisions was immaterial; it was the substance of the provisions that mattered.

Separate claim for loss of ROCs

Two of the projects were to be accredited for the RO scheme. Delays to commissioning led to the projects being eligible for a lower RO banding (and therefore fewer ROCs) than that stipulated in the contracts. This would reduce the income which could be generated from the relevant projects. GPP raised a claim for general damages arising from the contractor's failure to achieve accreditation for the levels of ROCs stipulated in those two contracts (in addition to the liquidated damages for delay it had claimed).

The High Court held that the failure to achieve accreditation for the contractually stipulated level of ROCs was a consequence of the failure to achieve commissioning on time and did not constitute a separate breach. Ordinarily, this would have meant that GPP's losses stemming from the failure to achieve ROCs of the required value were already compensated by the liquidated damages.

However, and "not without some misgivings", the High Court found that the contracts treated the losses as falling outside the ambit of the liquidated damages provisions. Central to the High Court's finding on this point was the fact that the contracts provided an express right of termination for failing to achieve the required level of ROCs. On termination, the parties were obliged to attempt to agree a revised price, with guidance being given as to the level of price reduction which might be agreed. This suggested that the parties had intended that, in addition to liquidated damages, GPP would be entitled to separate compensation "in the form of a reduction in the price" in respect of a reduced level of ROCs.

Another reason for the High Court's finding is that the liquidated damages did not cover all the consequences of delay in commissioning. Therefore, the failure to achieve the required level of ROCs (which was a consequence of the delay) extended beyond the liquidated damages (in reaching this conclusion the High Court referred to the case of Aktieselskabet Reidar v Arcos Ltd).

Indemnity or guarantee?

Solar also argued that it should be discharged from any liability as its obligations applied to it as a guarantor (and not as an indemnifier). Accordingly, Solar, as a guarantor, should be relieved from any liability in view of the protection afforded to guarantors because GPP failed to:

  • disclose unusual features regarding the works before Solar had entered into the guarantee; and
  • consult Solar on a significant change to the logistics of the works which varied Solar's contractual obligations.

The High Court decided that Solar was liable for liquidated damages because Solar's guarantees for Prosolia's obligations were expressed as a promise to indemnify and were "written in language characteristic of indemnities". The protections claimed by Solar did not apply to indemnities.

Comment

Although the case doesn't create any new law, it is a useful reminder of the legal issues that may arise in the context of renewables construction project. In particular, it will be of some comfort to project owners that damages for delay were not treated as an unenforceable penalty.  However, it will be important to ensure that liquidated damages provisions are proportionate to the legitimate interest they seek to protect and are not extravagant or unconscionable.

The award of general damages in addition to liquidated damages highlights the importance of ensuring that contracts are drafted in a clear manner in order for them to properly capture the parties' intentions.  The usual position in EPC contracts is that liquidated damages are the only remedy for the specified breach, in this case, delay.  This avoids "double dipping" by claiming different types of damages for the same loss. It remains to be seen whether this aspect of the judgment will require resolution by the Court of Appeal in the future. 

However, the clear take away is that where there are different heads of loss that require different types of remedies, this should be clearly set out in the contract.  While the Feed-in Tariffs and RO schemes have closed to future projects, this will still be relevant to projects where a delay will give rise to further consequences, such as a diminution of the ultimate value or revenue of the project over its lifetime (rather than losses for the period of the delay only). This is likely to be the case for:

  • projects that have obtained Contracts for Difference, where the contract may be terminated if the project is not commissioned within a specified window;
  • international projects which risk losing a benefit or a concession if longstop dates are missed.

The case also highlights the distinction between guarantees and indemnities and the complexity of the law in this area. It will be important for parties seeking to rely on the benefit of a third party guarantee to limit the protections afforded to guarantors and ideally include a supporting indemnity (as a primary obligation).  

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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