By Guy C. Smith, partner and co-head of the Renewable Energy and Energy Transactions Practice Group at Stinson LLP
Today’s unique market conditions are causing unprecedented disruptions in the equipment supply chain for many developers, owners and contractors with solar projects that are under development or construction. Some of these disruptions could have significant and adverse impacts on the successful and timely completion of such projects.
Supply chain concerns have arisen due to the COVID-19 pandemic and associated government restrictions, scarcity of commodities, raw materials and inputs (steel, semiconductors, polysilicon, etc.), limited shipping capacity and backlogs, container shortages and port congestion. Add to this a proliferation of unfair trade remedy actions and other government-driven import restrictions and a perfect storm of disruption to supply chains has been the result.
So, what can be done?
Understand your contracts and related risks, especially force majeure provisions
Developers and Owners. If a supply chain issue develops or exists in connection with a particular project, developers and owners are likely to first learn about the problem from the contractor whose performance has been affected. Often, the affected contractor will notify the developer or owner of circumstances affecting the contractor’s performance under the applicable contract, citing the contract’s force majeure provisions to excuse the contractor’s delay in performance to the extent caused by the supply chain event.
Developers and owners should familiarize themselves with the force majeure provisions in their project contracts. In some cases, these provisions can be quite broad so that almost any event outside the contractor’s reasonable control that affects or delays performance can serve as a basis for excusing delay in performance. In other cases, the force majeure provisions may be quite limited and confined to certain specifically-enumerated events. Such provisions often contain a list of specific examples of what may constitute force majeure events subject to meeting certain criteria (e.g., the event is [i] outside the reasonable control of the affected party, [ii] could not have been avoided through reasonable due diligence and [iii] is not the result of the failure to act or negligence of the affected party) and include certain specifically-enumerated exclusions from the definition of force majeure event.
If a contractor has invoked force majeure, the developer or owner should confirm that the development or event affecting supply falls within the contractual definition of a force majeure event. In addition, the developer or owner should confirm that the notice provisions and other requirements that allow for a valid assertion of force majeure have been complied with by the contractor. In many contracts, failing to adhere to such requirements can result in waiving the right to assert force majeure.
Similarly, force majeure provisions often require that the affected contractor takes steps to mitigate the effect of the force majeure event on its performance and that the suspension of performance is of no greater scope or longer duration than is required by the force majeure event. If force majeure is invoked, developers and owners also should confirm that these additional requirements are met.
In addition, developers and owners should become familiar with the remedies available to them if development or event affecting supply does not qualify as a force majeure event or the force majeure event and its effects on supply become prolonged.
The risk analysis is simpler if there is only a single construction contract for the solar project (an engineering, procurement and construction contract) that governs all or substantially all engineering, equipment procurement, supply, installation, commissioning and construction associated with the project. However, if a developer or owner has separate contracts with a key equipment supplier, like the solar module supplier, and the construction/balance of plant contractor or if the project is subject to a power purchase agreement, the risk analysis is more complex. In such cases, a developer or owner may have to invoke force majeure under one contract for protective reasons to excuse the delay, while also contesting invocation of force majeure in its other contract.
Contractors. Contractors generally have concerns similar to those of developers and owners. They should ensure that the procedures for the valid invocation of force majeure are followed and that the supply chain-related developments or events fall within the definition of a force majeure event. A contractor’s right to validly excuse the delay in performance due to a supply chain development or event is especially important if the contractor would otherwise owe liquidated damages for its delay in meeting certain contractual milestones affected by supply chain issues.
Contractors also should familiarize themselves with the scope of the force majeure provisions in their contracts with subcontractors and suppliers and the framework under such contracts, as well as other remedies that may be available in the event of contractual non-compliance. Depending on the force majeure terms, a disconnect could result with the subcontractor or supplier having the right to excuse performance due to a supply chain issue under its contract, without the contractor possessing the same ability to excuse the performance delay under its contract with the developer or owner.
Even if a solar project is not currently experiencing supply chain issues, given the potential for experiencing such problems, developers, owners and contractors should become familiar with the items described above to assist with contingency planning.
Address specifically in new contracts
In new contracts, developers, owners and contractors should each consider directly addressing supply chain issues that could arise, including concepts designed to anticipate some of the issues described above. Contractors may ultimately be required to bear more of the supply chain risk, especially if they assume responsibility for sourcing and subcontracting, including managing shipment and logistics.
Developers and Owners. In anticipation of supply chain disruptions (or if supply chain disruptions are already being experienced), developers and owners should try to identify and preserve additional sources of supply. While this may be somewhat challenging and could result in additional costs, it is possible that backup supplies could be arranged through using reservation agreements or the equivalent with alternative equipment suppliers as a contingency. At a minimum, consideration should be given to making less formal inquiries to ascertain the availability of alternative sources of supply as needed.
Similarly, if a developer or owner has a fleet of projects under development, it should consider preserving the ability to allocate items among projects depending on priorities and address supply chain issues if needed.
Contractors. Contractors also should consider having or arranging alternative supply sources if they are available. This may be difficult if there is a cost associated with “locking in” alternative supply sources that cannot be passed on to the developer or owner. Furthermore, contractors may have more challenges re-allocating items across projects due to additional costs and resource constraints.con
Familiarity and monitoring developments
Solar project stakeholders should monitor policy and other developments affecting the industry and, more specifically, the solar projects in which they have an interest. By being informed and proactive, timely steps can be taken to address specific supply chain disruptions.
Examples include monitoring governmental actions affecting imports of solar equipment, consulting with key freight forwarders and logistics providers regarding shipping delays and port congestion and monitoring developments and governmental measures concerning the COVID-19 pandemic. By staying on top of such developments, stakeholders can react and mitigate the project-related impacts.
While leveraging contractual strengths or weaknesses may strengthen a party’s negotiating position in the short term, parties involved in projects that are under construction and that have been affected by supply chain disruptions will generally need to cooperate and work together if they want the solar project to be built and completed notwithstanding the delay. Given the scale and proliferation of the current supply chain issues, many solar projects are likely to experience disruptions. As such, solar project stakeholders should develop an awareness of steps to address or minimize the supply chain risk that may arise.
Guy C. Smith is a partner in the law firm, Stinson LLP, and co-head of the firm’s Renewable Energy and Energy Transactions Practice Group.