Avoiding Disputes in the Middle East’s Evolving Renewable Energy Sector

In our previous article, we considered the increase in the use of renewable energy sources in the Middle East and the strategic considerations behind the increase – The Middle East’s Evolving Renewable Energy Landscape – MantleLaw.

Horizon Scanning: types of renewable energy sector disputes in overview

Inevitably, large scale renewables projects will run the risk of significant disputes arising. Taking time at the outset of a project to identify and understand ‘hotspots’ that have the potential to lead to conflict is a crucial element of an effective dispute recognition and mitigation strategy. There are a plethora of issues which lead to disputes, particularly in more ‘nascent’ sectors such as the renewables industry. A non-exhaustive list of potential future conflict areas may include:

Contractual Disputes: As with all large-scale projects, disputes can arise across the whole gamut of contractual issues. For renewables projects, broadly those might be:

• Construction disputes: Disputes concerning the design and construction phase of renewables projects are, as with all large-scale projects, not uncommon. The installations involved can be novel and complex. Common areas of contention can include delay, cost overrun and quality issues. Disputes can arise from design defects, procurement challenges or contractual misunderstandings around performance specifications, complicated by the rapid pace of innovation in renewable technology.
• Performance and Delivery: Disputes can arise over the timely delivery and performance of services or equipment. We often see disputes relating to change in project scope, particularly for long-lead renewables projects where governmental policy change or development of technology can lead to significant changes in scope.
• Payment Terms: Conflicts can arise regarding delayed payments or non-compliance with financial obligations or contractual payment mechanisms. These can be particularly complex where renewables projects are concerned, as payment mechanisms linked to plant or equipment performance often fail to operate successfully in the precise way envisaged under the contract. This can be exacerbated by the pace of technological advancement in the sector, with contractually agreed performance sometimes outstripped by newer technology (this is a point that we have seen not infrequently raised against a party causing delay to operations). There is also significant scope for disputes regarding compliance with contractual performance metrics, which are often complex given the variable nature of renewable energy generation.
• Force Majeure: Projects of all natures are prone to running into disputes over whether certain events, like political instability or natural disasters, excuse non-performance.

Regulatory and Compliance Issues: Renewables projects may also face challenges relating to:

• Permits and Licenses: Disputes over obtaining and maintaining necessary governmental approvals can arise. This is all the more so given the inherently political nature of these projects.
• Grid connection: Renewable electricity generation projects are, by and large, dependent on connection to electricity grids, which requires the involvement of third parties (typically government agencies or enterprises) to construct and enable grid connection. This interface can be a significant cause of disputes.
• Tariff changes: Again, due to the nature of renewables projects, significant issues can arise when tariffs are changed, leading to severe impacts to the economics of the project. One only has to look at the huge number of investment treaty arbitrations arising out of changes to tariff regimes in European countries to see the potential impact of this issue.
• Environmental Regulations: Environmental regulation is an evolving body of rules. Conflicts may arise from non-compliance with local environmental laws and standards (whether existing or new).
• Change in law: Policy changes are not unusual in the renewables sector, and parties may find that changes in law or policy give rise to disputes across a range of issues.

Land and Property Disputes: Renewable projects, particularly large-scale solar and wind farms, require significant land use, leading to potential disputes over:

• Land Acquisition: Issues related to land ownership, compensation, and expropriation.
• Land Use Rights: Conflicts over zoning laws and land use restrictions.
• Decommissioning: This is an area where we have traditionally seen disputes, along with positive industry initiative and mitigation, in the oil and gas sector. Whilst the environmental impact of land use for renewables projects is different, issues around decommissioning will nevertheless arise, and future disputes are foreseeable in this regard.

Technical and Operational Disputes: The technology deployed in the execution of renewables projects is both new and fast-evolving. Undoubtedly, this makes it an inherently exciting sector to work in. However, as with all innovation, this can lead to challenges and complications that the parties have not (and possibly could not have) foreseen. Issues that can arise include the following:

• Technology: Renewables technology is often new, and may be relatively untested. Errors or unexpected issues are not uncommon, and disputes can follow. Sometimes, given the pace of change, disputes arise in relation to technology that is underperforming compared to newer technology.
• Defects and Warranties: Disagreements over the quality and performance of installed equipment can arise (in some instances surprisingly quickly post-contract).
• Maintenance and Repairs: Conflicts regarding the responsibilities for ongoing maintenance and repairs, particularly if these are unexpected or significantly greater than anticipated.
• Weather: Weather in the region can at times be unpredictable. In particular for the solar energy industry, sandstorms can cause significant operational issues.
• Specialist contractors: Often, an Employer or Main Contractor has to work with specialist subcontractors when utilising ‘new tech’. The lack of sophistication or financial standing can cause challenges on a project.

Civil law rights and obligations: Various civil law legal provisions, and a party’s entitlement to rely on them, may give rise to disputes where contracts are governed by (or on occasion performed in) civil law jurisdictions. The issues that we have seen include the following:

• Good Faith: The obligation to perform contacts in good faith (regardless of whether or not such a duty is imposed by the contract).
• Delay Damages: The Court or Tribunal’s entitlement to adjust any contractually stipulated liquidated damages in accordance with the law (note that the law differs on this point in different civil law jurisdictions).
• Price Adjustment: Adjustment of contract price if performance of the contractual obligation, while not impossible, is so onerous as to threaten the performer with a substantial loss.

Strategies to Avoid Disputes

To minimise the risks of disputes in renewable energy projects, with the goal of avoiding them altogether, there are various mitigation strategies that can be deployed by parties.

1. Before the Contract: Pre-contract conduct should be carefully considered.

• Parties should undertake investigations and background checks on the parties they will be contracting with as well as due diligence on the jurisdiction of the project, particularly if unfamiliar.
• Negotiating correspondence should be marked as non-binding, or ‘subject to contract’, and any oral agreements made by which the parties wish to be bound should be carefully documented.
• An entire agreement mechanism should be included in contract documentation to ensure that pre-contractual statements are not included inadvertently as part of the parties’ agreement; the corollary is that parties must ensure that all terms on which they are relying to enter into the contract are expressly included within the contract itself.

2. Robust Due Diligence: Conduct thorough due diligence to understand the regulatory landscape, land use policies, and potential risks associated with the project.

• This includes verifying the legal status of the land, assessing environmental impact, and ensuring compliance with local laws.
• Ensure that all stipulations of local law are understood and considered, particularly mandatory provisions of local law conferring rights and obligations.

3. Comprehensive Contract Drafting: Ensure that contracts are meticulously drafted to cover all potential areas of dispute.

• Drafting should be clear, simple and precise.
• Key provisions should include detailed performance metrics, clear payment terms, dispute resolution mechanisms, and force majeure clauses.
• If standard terms and conditions are used, ensure that their content and effect is well understood and appropriate for the project.
• Do not simply take boilerplate provisions for granted or ‘as read’ – these provisions can often be the cause of disputes, so care should be taken as regards boilerplate drafting.
• Given that renewables projects often include many project documents, it is sensible to include a clause setting out which agreement should take precedence in case of ambiguity.
• If for whatever reason a contractual variation or change becomes necessary, ensure that that variation or change is executed in a manner that is in accordance with any requirements of the underlying contract (for example, that any changes be executed in writing/signed by all parties). Ensure that all agreements and provisions work in harmony, and that there are no obvious irreconcilable inconsistencies.
• Consider carefully the choice of law in the contract as this will dictate how it should be drafted and ultimately how it will be interpreted.

4. Clear Communication and Documentation: During the life of the project, clear communication and record keeping is key.

• Maintain transparent communication with all parties involved and ensure that all agreements, changes and decisions are well-documented. This can prevent misunderstandings and provide evidence in case of a dispute.
• Ensure an effective document retention is in place and is implemented.
• Be aware of the contract terms, how to comply and when compliance is required.
• In particular, be mindful of notice obligations, notice periods and deadlines. Make sure that teams are advised of procedures in place under the contract and any relevant timeframes or obligations.

5. Dispute Resolution Provisions: If a dispute does arise, having (and complying with) clear and effective dispute resolution provisions will assist the parties to minimise cost and disruption, and may even help with arrival at a resolution.

• Consider whether an escalation provision providing for negotiation or a ‘cooling off’ period is appropriate. If so, take care with drafting (is it optional? Mandatory? A condition precedent to entering into a formal disputes process?) and set out the steps clearly.
• Consider alternative dispute resolution options such as dispute adjudication boards or a stage for formal mediation.
• Ensure clear dispute resolution, governing law and jurisdiction provisions. This will assist in the event that a dispute does arise, and will help to avoid the risk of costly and time-consuming satellite disputes regarding the dispute provision implementation.

6. Effective management of disputes: Notwithstanding all efforts to avoid them, disputes do happen regularly on complex renewables projects. As set out above, the nature of the dispute can vary widely. Whatever the nature of the dispute, however, it is crucial to consider the most efficient and effective means of navigating the issues to achieve the best possible outcome. Most often, the best outcome is an early, negotiated, resolution that enables business to continue. Too often, however, issues are not addressed early enough and so, when they are finally addressed, it is too late to achieve what might have been possible at an earlier stage and the parties can become entrenched and a formal dispute inevitable.

Conclusion

The renewable energy arena is an exciting one in which to operate, and as a result of the combination of factors that make it so dynamic, disputes will inevitably arise. The combination of large-scale/complex projects, new technology, and significant (often cross-border) investment means that at certain points, the interests of the various stakeholders will not be aligned. However, by adopting proactive, and pre-emptive, strategies, those operating in the renewables sector in the Middle East will put themselves in the best position to minimise risks whilst also contributing to and profiting from a sustainable energy future for the region.

Posted by: Emma Nierinck