Handling potential risks of design and performance issues in renewables projects

The number of renewable energy projects has skyrocketed in recent years, with wind and solar the largest source of new energy in 2023, representing a 40% of overall increase in new capacity of renewable power. In the next 10 years, there is expected to be over $3 trillion of investments into power generation in the Asia-Pacific region, with around half in renewables.

One of the most significant risks associated with the transition to clean energy generation is the adoption of new technology and design, resulting in performance issues becoming the main driver of disputes. This is because the rising demand for clean energy is driving an unprecedented and rapid upscaling of technology and products, in some cases before these have been tested at commercial scale. Deployment of such new and largely untested technology makes it difficult for contracting parties to accurately assess the long-term feasibility and potential risks from the outset, in circumstances where failures in these technologies could lead to major financial and operational setbacks.

Complex infrastructure projects typically incorporate design input from a number of parties, but responsibility for design input will depend on the party’s role and any express modification of implied warranties. Express design liability is often based on a multiplicity of terms and technical requirements, where reasonable skill and care warranties tends to sit alongside conflicting fitness for purpose obligations. Making sense of which party bears the risk and to what extent in the event of design failure requires a clear understanding of the fundamentals of what design liability entails.

Standards of design liability

Design and build contractors are typically bound by the more rigorous obligation to ensure fitness for purpose, whereas a professional design consultant would only be bound by a 'reasonable skill and care' obligation. 

Obligations are implied at common law and under statute on professional service providers to design to a standard of reasonable skill and care. This standard applies to design consultants and contractors taking on any design obligations. Reasonable skill and care is fault-based. This means that service providers are not required to guarantee specific results but instead to act in accordance with the standards of a reasonably competent member of the profession at the time. The consequence is that a designer will not necessarily be liable if the design fails to achieve a specified output, provided that they have acted in accordance with the applicable standard.

An owner seeking to establish a breach of this duty would therefore need to prove that the design process adopted by the designer was negligent. The test is whether the designer met the standard of "the ordinary skilled [person] exercising and professing to have that special skill". The standard is not judged with the benefit of hindsight, but at the date the service was provided. Given the rapid pace of technological advancement on renewables projects, this is important, as it means that the designer will be assessed based on the accepted practices and technology at the relevant time, rather than when the issue is disputed typically several years later. Noted that a higher threshold applies to professionals holding themselves out to have special knowledge.

Establishing breach requires not only proof of negligence, but also proof of loss and that the negligence complained of caused the loss suffered, which can be problematic on construction projects where there may be many intervening causes of loss. 
Express contractual obligations can augment the reasonable skill and care obligation, and designers should beware of accepting absolute obligations, for example, to "meet the requirements described in the specifications", which will impose strict liability. 

Fitness for purpose

The standard of fitness for purpose is the most common design liability standard in international design and build contracting. It is implied at common law and statute, although frequently appears as an express obligation in construction contracts. In particular, in energy projects the fitness for performance standard is imposed to mandate the achievement of specified performance outputs or to impose a specific design life for the project. 

Fitness for purpose is known as an ‘absolute’ standard. This means that establishing breach requires only proof that the design was not fit for the intended purpose, irrespective of whether the contractor exercised reasonable skill and care in undertaking the design. Moreover, where more than one standard is incorporated into the contract, remember that the more onerous standard of fitness for purpose will apply.

For this reason, the design and build contractor’s primary consideration will be to ascertain its design obligations at tender based on the suite of contract and technical documents. These are often prepared by different individuals and different organisations and may be potentially inconsistent or unclear. 

Drafters should ensure the purpose is clearly identified in the contract and avoid aspirational or subjective definitions such as "world-class", "cutting-edge" or "satisfactory". Contractors should take care to thoroughly review contracts for words like purpose, design life, lifetime, ensure and guarantee, and beware of ‘fitness for purpose by stealth’. For example, where design obligations are qualified to be "without prejudice to any warranties implied by law or statute", the applicable standard is fitness for purpose.

A contractor will seek to narrow the scope of fitness for purpose to the scope that it can control, or to the extent that the site data and other information provided by the owner is accurate. Care should also be taken when drafting carve-outs from liability. For instance, if a contractor has carved out an obligation of reasonable skill and care in relation to design from a general fitness for purpose obligation, and defects are proven to have arisen from the workmanship but not the design, the contractor will still be liable to rectify those defects under the more onerous fitness for purpose standard in respect of that workmanship.

In many cases, professional indemnity insurance will not cover fit for purpose obligations and should be clarified in advance with insurers, meaning that fit for purpose liability will in most cases be an out of pocket expense for contractors and suppliers.

Suppliers

Often in renewable energy projects, technology is driving the project and many of the design choices will be made by the key pieces of equipment. 

This can result in owners seeking to impose warranty obligations directly upon suppliers through performance guarantees to cover risk of failure and well as liability for defects. For example, wind turbines are produced to a particular class and receive independent certification of reliability and design life. Significant design is carried out and independently certified, well before an order is placed. So rather than designing the turbine to meet the owner’s specification, the supplier will be providing the owner or the contractor with the specification of the turbines, in a manner akin to an ‘off the shelf purchase’.

For this reason, suppliers may often refuse to provide fitness for purpose warranties in a turbine supply agreement. Sub-sea cable suppliers may also be reluctant to provide such performance warranties, in circumstances where performance is so highly dependent on the accuracy of geological and geotechnical information and the due performance of interfacing contractors out of their control.  

Owners on solar projects will typically seek to obtain direct collateral warranties to remedy defects from their suppliers of PV modules, transformers and inverters down the supply chain, and for periods much greater than the EPC main contractor’s two-year defect liability period. This is because the EPC contractor’s design scope on a solar project is typically significantly narrower than design scope on a traditional energy project. 

Key takeaways

At law, unanticipated difficulties or impossibility caused by onerous or inaccurate project specifications typically does not excuse a contractor’s performance once agreed. Contractors cannot rely on the excuse that the fault is with the client or the client’s design or that the client has approved the drawings, in the absence of express exclusions of liability. Contractors may also be held liable for the owner’s design inputs if the contractor agrees to ‘complete’ the design.

Multiple design obligations at different standards can co-exist, in which case the more rigorous fitness for purpose and functional requirements will trump the reasonable skill and care obligation.

Undertake a thorough review of agreed to terms to avoid inadvertently taking on more onerous design requirements.

If fitness for purpose cannot be avoided, contractors should seek to narrow the scope or make it subject to the accuracy of the site data or the employer’s requirements, or that liability is excluded in the case of fault of the employer or errors in the site data.

Contractors should also pass design liability down the supply chain and insure to the extent that is possible.