COVID-19 (or “the coronavirus”) is never far from earshot, with the deadly disease impacting everything from public transportation to work conferences. National governments and public health organizations have understandably been focused on preserving human life, no small task given that the coronavirus has taken more than 4,000 lives and infected more than 100,000 patients. Businesses have also been forced to contemplate the economic impact of COVID-19, given the power of intricate international supply chains to make – or break – business models. One key to these deliberations is the widespread, inevitable invocation of a legal provision known as “force majeure.”
The legal concept, force majeure, typically allows companies to be held harmless for performance, costs and delays stemming from events that (a) are beyond reasonable control, (b) are not due to negligence, willful misconduct, breach of contract or intentional act or omission, and (c) could not have been foreseen. At a time of significant uncertainty and distress, suppliers around the world have found themselves eligible to invoke force majeure claims to excuse themselves from performing key contractual obligations due to extraordinary circumstances beyond their control. A Chinese company has claimed, for instance, that it simply cannot honor its commitments to import liquified natural gas (LNG) and has claimed a force majeure event to refuse deliveries from LNG suppliers. Companies are in a rush to exercise force majeure because they understand that, if they do not, they’d be liable to pay liquidated damages for abrogated contracts. The Chinese government has largely accommodated these sorts of requests and has rewarded roughly 5,000 force majeure certificates since the start of the epidemic.
These certificates have created significant uncertainty for an array of industries ranging from automobile manufacturing to energy generation and threaten to disrupt access to products and services for billions of consumers. The energy industry stands to be hit by force majeure claims, from the underlying price volatility for products such as LNG to equipment delivery, critical for a project’s construction and operation. The invocation of force majeure may mean that plans to procure equipment such as pressure regulator system parts or solar photovoltaic modules are set back for weeks and even months and the energy project is significantly disrupted as a result. During this time of uncertainty, project’s stakeholders need to be mindful of the project risk associated with force majeure claims, the provisions outlined under its contractual agreements, and have the technical acumen to determine the impacts on their projects. For projects in development, for instance, equipment procurement and project schedules may have to be rethought in response to force majeure claims. For projects already in operation, the spare parts pipeline may need to swiftly be reevaluated.
Some legal analysts believe that force majeure “protections” issued by countries such as China and India will be rejected by American and European courts. Brian Perrott, a London-based partner at international law firm Holman Fenwick Willan, told CNBC that “PRC (People’s Republic of China) entities that have been issued the certificates face a rude awakening if they think they will allow them to get out of contracts with international parties.” Most international contracts are governed under English law which generally only accepts force majeure claims under very specific – and prespecified – conditions. Therefore, it’s imperative that stakeholders be mindful of the force majeure provisions under its executed agreements, and how it affects the technical aspects of an energy project (i.e. equipment delivery, contractor’s obligations, utility interconnection, and qualification for tax incentives).
While we experience a time of uncertainty, stakeholders still require expert technical advisory services to ensure an understanding of project risk. Ensight Energy Consulting is an engineering and management consulting firm specialized in providing development advisory services and transactional support-including independent engineering and owner’s engineering for energy, power and renewable energy projects. If you have any questions or would like to speak with one of our consultants about your next energy project, feel free to contact us via email at info@ensightenergyllc.com or by phone at 720.648.6554.