Force majeure limitations in the power sector

19 April 2020
Amid urgent discourse about the risk to contracts presented by force majeure declarations, power concessions present some exceptions

The worldwide outbreak of Covid-19 has caused global uncertainty for organisations, governments and individuals, and the legal fraternity has been busy producing client posts, dressing and redressing Covid-19 in the illusive cloak of force majeure.

Yet the discussion is misguided in the context of rigid contractual arrangements such as those used in regional concession-based power projects; perhaps the question is not so much about whether Covid-19 is force majeure, but rather whether its seemingly apocalyptic consequence is a valid claim for time, cost and possibly revenue relief under regional independent power producer (IPP) projects.

A global pandemic, while very consequential to our daily lives, does not necessarily constitute force majeure within the context of infrastructure and power projects.

Most regional IPPs – Iran being a notable exception – run off a single offtaker model, based on one power purchase agreement (PPA) between the generator and the regulated or industrial offtaker of energy.

The PPA is the sole memorandum regarding the commercial arrangements between the two parties, including with respect to the entitlement to force majeure relief. Additional debate about the treatment of force majeure under law generally is therefore of little consequence.

A global pandemic, while very consequential to our daily lives, does not necessarily constitute force majeure within the context of infrastructure and power projects

While each PPA will be different, force majeure usually means a condition or circumstance that is without fault or negligence of the affected party, that in spite of effort could not have been foreseen or avoided, and that prevents the affected party from performing its obligations under the PPA.

Moreover, depending on the circumstances or the event, force majeure could yield different results – so called “political” force majeure would usually give a generator time, cost and revenue protection under the PPA, while “natural” force majeure” would most likely only result in time relief and general excuse from performance, but no costs and revenue protection.

Types of force majeure

While the consequences of Covid-19 may qualify as force majeure, it is imperative to consider this point from the perspective of what event or circumstance is the direct cause of the impediment to the generator’s performance under the PPA and, to the extent that this constitutes force majeure in the first place, what type of force majeure this results in.

For example, a Covid-19 infection within the generator’s workforce – namely affecting the personnel of its construction contractor – might cause the generator to stop most on-site progress of construction works, resulting in delays in achievement of civils milestones.

While there might be other repercussions of such an occurrence, this impediment is likely under regional PPAs to constitute a “natural” force majeure, resulting in an extension of time relief for the generator to its PPA-based milestones.

However, if we also consider that the government of the jurisdiction in which the power station is being built may have imposed a travel restriction and, as is becoming common around the world, a total lockdown, the resultant impediment would be much greater.

If this was the case to the extent that the generator was unable to continue with necessary construction works – for example, not being able to bring human or material resources to site – that might be treated differently, and may indeed constitute “political” force majeure under many regional PPAs. This could entitle the generator to not only an extension of time relief, but possibly costs and revenue protection.

Most PPAs prescribe a specific timeline within which force majeure claims have to be lodged, usually a week or two from the date on which the generator realises that it is affected by force majeure

This can be contrasted with the possibility that the Covid-19 labour infection was exacerbated by inadequate hygiene practices at the site and other medical measures that the generator should have adopted. In this situation, the problem might not be force majeure at all, and would leave the generator without any relief under the PPA.

This is relevant because preoccupation with Covid-19 itself is not necessarily the correct legal analysis that governments and developers should be focusing on. The question remains one of causation – what is the cause of the impediment in question? While Covid-19 might be the root cause, the actual causal link to any specific impediment will most likely be something else, albeit an issue that originates from this unprecedented global crisis. 

Timely action

It is important to remeber that time is also key. Central to all relief claims under regional PPAs is the process that has to be followed. While this is not news to most infrastructure and power developers, it is the aspect of all claims that tends to be the most inaccurately followed and dispute-laden.

Most PPAs prescribe a specific timeline within which force majeure claims have to be lodged, usually a week or two from the date on which the generator realises that it is affected by force majeure.

This is not without complications, because the exact date on which that realisation occurred may not be clear. It is not necessarily the same date that Covid-19 hit the headlines worldwide.

Consideration needs to be given to the process of lodging relief claims under PPAs, whether these are related to force majeure or not, bearing in mind that the black-letter of the relevant contracts will be equally scrutinised by the recipients of those claims.


About the authors

Andrej Kormuth is a partner at Bracewell. Shayan Najib is an associate

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