Disputes on implementation of biogas projects: contractor's liability
Read about the details of disputes on implementation of biogas projects that arise between an employer and a contractor and minimization of risks in the new article of EVERLEGAL Senior Associate Maryna Ryashchenko for GetMarket, a platform for renewable energy investments.
- Delays related disputes
- Quality related disputes
- How to Minimize Your Risks
Read the article below or on the GetMarket website.
Information about the author:
Marina Ryashchenko - Senior Associate at EVERLEGAL, focuses on International Arbitration and Cross-border litigation. To find out more about Marina follow by the link.
During implementation of biogas projects quite often disputes arise between an employer and a contractor on their contractual obligations. While the contractor's claims relate mainly to due and full payment for their services under respective agreements, the employer's claims are far more extensive.
When a company decided to build a biogas plant, the ideal scenario for its execution looks like:
The employer expects to receive state-of-the-art plant which will meet their needs and potential of specific quality and cost within the specific period of time. However, in practice, during the implementation of biogas projects the employer quite often faces a number of complications and, at first sight, unforeseeable problems, that may further result in a dispute. Some disputes, of course, may be settled by way of amicable negotiations, though most of them are submitted for resolution to a court or arbitration.
The employer, who is not happy with the quality of services and the outcome provided by the contractor can reasonably claim for protection of their interests. As a rule, the employer's claims to the contractor regarding the implementation of a biogas plant project concern delays of execution and quality of services rendered by the contractor (design and performance of the plant).
Delays related disputes
Every contract on design and implementation of a biogas plant shall include concrete deadlines for execution: the end date of the contract and intermediate dates for each stage (design, construction, personnel training, biological start-up and commissioning). Any delays in design, construction and commissioning may cause significant damages to the employer.
In case of delay of performance or the executor's failure to perform their contractual obligations, the employer has right to claim the recovery of incurred damages from the contractor. However, the question arises, what damages caused by the contractor's delay of performance can be reimbursed and how to quantify them.
As a rule, at the early stages, like designing, developing supporting documents, construction, the employer's losses may be either insignificant or it may be difficult to assess them. In this case, the employer may be entitled for liquidation damages in the amount specified by the contract or by applicable law. Such liquidation damages shall be calculated for each day of delay from the day of the planned completion until the actual performance. However, it should be noted, that the contractor quite rarely agrees to compensate any delays during the implementation of the project. Thus, most construction contracts contain provision on limitation of liability of the contractor if such delay was outside their control. In this case, if the employer files a claim the contractor may lodge a counterclaim to the employer requesting prolongation of the contract for the period of the induced delay and claim exclusion of their liability for consequences of such delay.
Quality related disputes
The main task of the contractor under the construction contract on design and construction of a biogas complex is a duly functioning biogas plant that meets needs and capacity of the contractor. However, it is possibly to adequately asses the quality of the contractor's services in full upon the commissioning of the biogas plant only. It is highly unlikely that the employer possesses sufficient technical knowledge to allocate any design defects of the plant on the stage of its projecting.
Design Defects of the Biogas Plant
If the contractor made a mistake in the design of the biogas plant the employer, as a rule, may face a number of problems. For instance, during the construction or commissioning of the plant some mistakes or omissions of the contractor made in the design of the plant may be found: engineering mistakes that make impossible functioning of the biogas plant as a whole or a part of it; improper equipment that does not fit the technology or is not suitable for operation in certain climate conditions or with certain types of substrata, etc. If such defects are found the employer would need to substitute of modify some parts of the equipment of the biogas plant and as a result will bear additional expenses that were not provided by the contract. Such additional expenses are considered as the contractor's direct losses and shall be reimbursed by the contractor.
Naturally, the employer may also request the contractor to correct such design defects at their own expense, though, in practice, the contractors do not recognize their making mistakes while designing biogas plants, explaining the defects by the unclear or improperly stated technical assignment. Nevertheless, while resolving disputes on design defects, the court or arbitration tribunal normally take the employer's side since it is the contractor's obligation to design a biogas plant that will operate and produce biogas.
Inappropriate Design Supervision
The construction contract on design of the biogas plant, inter alia, provides for design control over the construction, since engineering companies as a rule do not supply equipment for biogas plants and do not render construction services. The contractor's responsible attitude to the design supervision over the construction of the biogas plant is important for its further operation. For example, failure to comply with the requirements for hermetic state of methane-tanks may preclude proper fermentation and methane production.
Thus, if the contract provides for the contractor's obligation to conduct designer control over construction, such contractor can be liable for the potential negative consequences and the respective damages of the employer. However, if a dispute arises, it can be difficult to prove the contractor's fault in damages caused by the contractor's negligence. In this case, if the contract fails to pay proper attention to construction process, does not appear on the site or fails to duly participate in selection of sub-contractors-suppliers of equipment, the employer shall record this and send relevant notices of demand to the contractor, which further may be used to prove the contractor's negligence in design supervision during the dispute resolution.
Biological Start-Up and Commissioning
While preparing design of the biogas plant the contractor undertakes to perform its biological start-up and commissioning. The commissioning of the biogas plant is possible upon testing of its equipment, procurement of its stable operation and regular production of methane in due amount and quality as provided by the contract and project documents.
The existing practice of dispute resolution involving contractors of biogas plants reveals that the common subject matter of such disputes is that the biogas plant does not conform the employer's requirements stipulated in the contract and that the biological start-up of the plant was unsuccessful or significantly delayed.
Most problems appear yet on the stage of the biological start-up of the plant: the biological start-up does not take place at all or requires considerably more time than it was provided by the contract. Thereat, the employer incurs additional expenses to procure biological start-up. These additional expenses are usually provided neither by the contract, nor by the employer's budget. As a result, the cost of the project for the employers increases, and the potential profit is delayed for indefinite term.
Successful biological start-up of the plant is of utmost importance for the complete discharge of obligations under the construction contract: it is highly unlikely that the employer may expect to receive idle biogas plant in the outcome. Thus, if it appears that the biogas plant is not able to operate at the capacity level set forth by the contract, the employer may claim from the contractor penalty payment if this option is provided by the contract. Additionally, the employer has right to claim compensation of direct damages suffered in the result of the contractor's failure to comply with their contractual obligations on biological start-up of the biogas-plant. Such direct damages may include additional expenses incurred in relation to the unsuccessful biological start-up of the plant (cost of the substrata, electricity, fuel, transport expenses, salaries, etc.), costs of reworks (substitution or installation of additional equipment), cost of repair works if any breakdowns occur.
In practice, the contractors do not recognize their omissions in designing and biological start-up of biogas complexes. They tend to blame the employers for providing low-quality substrata or for improper preparation of the biogas plant for biological start-up in order to escape responsibility. If that is the case, it may require to provide independent technical expertise of the accuracy of the biological start-up to establish the contractor's fault in the unsuccessful start-up of the biogas plant during respective proceedings.
In addition to the direct damages which the employer may incur in the result of the contractor's negligent performance of the biological start-up, the employer suffers also losses in the form of lost profit for sale of heat and electricity, which they expected to receive in the course of plant's operation. The employer can also claim such lost profit for recovery if the dispute is submitted for settlement to court or arbitration. It should be noted here that claims on recovery of the lost profit are difficult to substantiate: the employer shall provide evidence that they were deprived from the profit they expected to receive by the fault of the contractor; such lost profit shall be foreseeable; the employer shall provide quantification of the lost profit. Nevertheless, despite the mentioned difficulties if the claim for lost profit is satisfied, the amount of compensation may be equal to the value of the construction contract.
How to Minimize Your Risks
In order to claim recovery of the incurred damages from the contractor the employer shall secure themselves yet on the stage of negotiation of the construction contract. As a rule, the contractors try to exclude their liability for potential damages of the employer, confining to the minimal amounts for delay of fulfillment of their obligations. For the employer not to insist on additional guarantees and to speed-up the signing of the contract, the contractors may reduce the price of the contract significantly. The employer may not realize what problems such doubtful advantage may bring in future.
Therefore, while entering in a construction contract for implementation of the biogas plant the employer shall pay attention to the guarantees the contractor provides for the fulfilment of their obligations. In particular, it shall expressly state the amounts of liquidated damages for each stage of the contract and term of compensation of potential losses of the employer. One shall also pay attention to the detailed determination of the services quality criteria, namely, what result the employer shall receive upon completion of each stage of the contract.
It will be also useful to establish whether the contractor has professional activity insurance and indicate its amount and terms of liability insurance in the construction contract. Usually, the available professional liability insurance facilitated settlement of potential disputes and recovery under arbitral awards.
If you pay due attention to the determination of the contractor's liability during negotiation of the construction contract for implementation of the biogas complex you can effectively protect your interests if a dispute arises.