Current trends in construction contracts for energy transition projects

1. Importance of certain EPC contract terms

Many energy transition projects adopt an engineer, procure, construct ("EPC") contract structure (although note that the greater interface risk where novel technologies are deployed on the same project (such as onshore wind co-located with battery energy storage systems and data centres with onsite power generation) may lead to different multi-contracting strategies or procurement forms such as engineer, procure, construct and manage (usually referred to as EPCM)).

A focus on specific EPC provisions and wider contractual arrangements is needed for particular sectors. For example, projects for hydrogen, ammonia and carbon capture facilities (which are largely aligned) and certain other process plants must ensure that the following flow through to the EPC contract:

• risk from the engineering and design phases

These phases are typically: (i) concept and feasibility; (ii) a stage immediately before front-end engineering and design ("FEED"); and (iii) FEED. The EPC contractor will take the final FEED study and use this to produce the detailed design to which the process plant will be constructed. The integrity of the facility relies on proper assurance during each engineering and design phase. If the EPC contractor is expected to take liability for the facility's design, the EPC contract should clearly oblige the EPC contractor to verify the FEED study and give an entitlement to additional time and money where the verification identifies errors. Alternatively, the EPC contract should deem the FEED study as "rely-upon information", meaning that the EPC contractor can rely on the FEED study as error free. If an error in the FEED study emerges and this was the root cause of a defect in the EPC contractor's detailed design and thereafter the facility itself, the employer will have to pay for the defect's rectification. However, to deem the FEED study as rely-upon information, the employer must be satisfied that adequate assurance has been carried out at each engineering and design phase (in-house or by having one contractor assure the design work of another). This can push up project costs, which may on occasion make some energy transition projects less financially attractive.

• rights from process and technology licensors

Without the necessary licences (covering key aspects of a project's design, construction, operation, maintenance and decommissioning), the employer will not have the intellectual property ("IP") rights to use the process plant as intended. There are two main approaches to process and technology licensing: either (i) the employer identifies the licences and makes sure that the right to use them is properly extended to the EPC contractor; or (ii) the EPC contractor secures the licences and passes them to the employer as part of completion of the facility. For larger process plants, the former approach prevails.

IP clauses are also crucial in energy transition construction and engineering contracts more generally because renewable energy-related equipment frequently incorporates state-of-the-art and grid-compliant technologies, many of which are protected by IP rights, most importantly patents. These have significant implications for some suppliers. For example, the EU's current IP framework generates challenges in that supplied products must violate neither the patent rights of EU competitors nor those of competitors validated in the home of the supplier. These rights may be difficult for fresh market entrants to identify and properly monitor, so developers and contractors are advised to allocate resources for verifying IP rights held by such suppliers to reduce the chances of infringement.

The above EPC contract considerations, alongside the following two drafting points, also mean more skill is called on to deliver bankable projects:

• longer lists of named force majeure events

Project owners are facing the fact that prices have risen substantially and that contractors' appetite for risk has decreased. As well as tensions over lump sum versus cost reimbursable items, and a push towards lower rates for liquidated damages and liability caps (and fewer exclusions from caps), contracts now tend to feature a growing number of events in force majeure clauses (and, in some cases, more contractor-friendly material adverse change and change-in-law provisions). It is no longer uncommon to see express inclusion in force majeure clauses of not only epidemics and pandemics, but also of wars and conflicts, blockades, extreme weather events and climate-related catastrophes (including those which might be located far from the project site, but nonetheless affect the supply of labour, equipment and materials), and the imposition of sanctions or equivalent export/import restrictions. Parties should also consider whether the persistence of such events over a few months would entitle the party claiming hardship to terminate the contract.

• clearly drafted delay provisions

Carefully examining the contractual mechanisms for dealing with causes of delay is particularly relevant for energy transition projects. At the moment, there are interconnection queues in several countries. Many energy transition projects are also "first-of-a-kind" and so likely to take longer and lead to the need for additional costs to be claimed. Establishing that there is a clear contractual entitlement to claim for such additional time and expenditure is essential.

2. Product safety and associated regulatory compliance

Contractors and their counterparties must navigate an evolving patchwork of product safety and other regulations, for example various rules for different types of energy storage.

Newly invented components and parts (highly likely on energy transition projects) are required to accord with applicable product safety and compliance laws, which in any given jurisdiction may comprise certification and testing regimes set out in diverse pieces of legislation and codes. For critical components, parties will need to conduct thorough due diligence, and also ensure that their agreements address product safety and performance properly, including dealing with the consequences of non-compliance. Product liability risks increase for companies using artificial intelligence on projects, especially in the growing number of jurisdictions where legislation covering damage caused by artificial intelligence systems has been or is about to be introduced.

3. The effect of international trade laws

Foreign subsidies laws could strengthen a contractor's negotiating position, if, for example, it receives incentives to develop a sustainable project.

Conversely, key trade tools such as the EU's anti-dumping measures (which protect industries of EU member states from the detrimental effects of dumped imports) mean that it is prudent for contractors when dealing with non-EU suppliers on EU-located projects to insert a contractual clause providing for unilateral termination of the contract if anti-dumping duties are imposed in relation to a non-EU supplier.

4. The impact of sanctions

Works contractors, individuals who control project parties, and suppliers of materials, equipment, components and labour from certain countries could become subject to trade or financial sanctions or export controls, such that contracting with them or their companies, or continuing existing contracts, is no longer permitted. State-owned organisations may present an even greater risk.

For example, restrictions imposed via sanctions against Russia due to the Ukraine war may disrupt trade with China or Chinese entities. These may be wider than initially assumed, such as the EU's import ban on Russian iron and steel products, which extends to third country iron and steel products made from Russian iron and steel.

Increasingly important therefore are contractual provisions dealing with this heightened risk, including clauses on how payment might occur in light of any asset freezes and that obligate the putting in place of robust security instruments that would facilitate at least some financial recovery if a contract had to be put on hold or terminated.

5. Scarce materials and equipment

In some renewables sectors, the supply chain for materials and equipment cannot match demand and may be especially sensitive to economic changes. The consequent potential for rising costs suggests that contractors and suppliers will want to agree stronger price and currency fluctuation provisions before signing.

Furthermore, whilst mining projects for the resources needed to support the energy transition are vital, they also pose environmental, social and governance questions. Those involved in such projects or reliant on minerals for their construction and engineering contracts must be aware of such risks and devote time and effort to minimising the fallout from their occurrence.

6. Broad ESG concerns, with supply chains attracting enhanced scrutiny

Governments have in recent years brought into force legislation requiring companies in their supply chains actively to monitor and mitigate human rights abuses (such as unfair wages, slavery and child labour, forced eviction, land expropriation destroying livelihoods, and aggressive behaviour by security personnel) and environmental risks (for example, soil, air and water contamination, excessive water utilisation adversely disturbing human wellbeing, the use of chemicals, and the import and export of hazardous waste). These laws may apply to companies with branches or a large workforce in the places where design and works sites are located, cover even indirect suppliers, and, sometimes, span the whole supply chain from the extraction of raw materials to their incorporation in the finished works. Hefty fines can be imposed for non-compliance, with the risk of reputational and financial loss also high.

In addition, lenders and advisers consider supply chain risk as part of their wider commercial and technical due diligence. This could include wide-ranging corporate identity checks and other in-depth forms of verification.

Besides adhering to contracts and mandatory laws, businesses operating in energy transition must also "walk the walk". Those that do not, perhaps by disregarding soft, non-binding provisions (such as the United Nations Sustainable Development Goals and Principles for Responsible Investment) could fall behind their competitors as a result of a public backlash through social media and consumer choice. This pressure may ultimately translate into ESG-based class action litigation, linked with assertions of greenwashing against those who may be doing or achieving less than they claim. As technologies continue to result in new ways of lowering emissions, companies could one day find themselves facing shareholder claims, arguing that they should have taken steps sooner to fight climate change.

Some jurisdictions have legislation mandating comprehensive disclosures on the impact of a company’s business on people and the environment. For example, the EU's Corporate Sustainability Reporting Directive has brought in additional sustainability reporting standards and an audit requirement. Companies also need to disclose environmental key performance indicators pursuant to the EU's Taxonomy Regulation.

7. Tighter control over cybersecurity

The digitalisation involved with the design, installation and use of energy transition technology, and with project delivery across multiple sites and offices globally, means that contracts must address all possible cybersecurity and data breach risks. Lack of or insufficient protection against cyberattacks has culminated in serious incidents, leading to not only considerable financial and reputational damage, but also liability of the company and its management. Many jurisdictions impose stringent cybersecurity regulations, especially in relation to critical infrastructure. These need to be tracked closely so that parties understand the reporting, certification and audit requirements with which they must comply. Attention too should be given to parts of the works for which a computer malfunction could have a material impact on the secure operation of the entire power grid. Additional restrictions may also be imposed on critical components, in particular products supplied by state-controlled companies.

8. Ensuring an appropriate dispute resolution mechanism

Finally, as the energy transition progresses, the norms and practices of the sector are constantly shifting. For this capital-intensive industry with long-term project horizons, this moment of transformation is conducive to disputes.

For most international projects in this arena, where project participants favour confidentiality, certainty of financial recovery and specialist decision makers who can deftly master the quantity of technical and other documents created, there is no reasonable alternative to international arbitration as the contractually agreed final dispute resolution mechanism, provided that the countries in which enforcement is likely to be necessary have signed up to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Parties should be aware, however, that barriers still exist in signatory states. For example, enforcement is subject to defences, including the public policy exception. The courts of some jurisdictions allow such defences to succeed more often than others.

The significant cost and time associated with the arbitration process is also driving interest among energy sector participants in alternative forms of dispute resolution, including mediation and early neutral evaluation. Direct negotiation should always be kept in mind as it features in most energy transition construction disputes (either mandated by an escalating dispute resolution clause or deployed by the parties when the dispute arises), but it is best used at an early stage (when parties' views are not usually entrenched) or after mediation or a similar structured alternative dispute resolution process.

Conclusion

The clean energy transition will take decades and vary between countries, but the infrastructure and facilities enabling this change are already being designed and built. If developers, owners, designers, and contractors are to be at the forefront of the new economy, they must quickly grasp and explore the topics in this article so that they can actively engage with their counterparties in well-informed and nuanced discussions when negotiating and carrying out construction and engineering contracts.

This is an amended version of an article first published in The OCAJI Bulletin, Vol 61, Winter 2025.

Authored by Matt Bubb, Tobias Faber, Christian Knuetel, Silvia Martinez, Rob Palmer, Malcolm Parry, Andrew Shaw, Tom Smith, Gillian Thomas, Scott Tindall, Arun Velusami, Adrian Walker, Inga Aryanova, Mark Crossley, and Amy Cleaves