Over the next 20 years, demand for power in the United States is expected to increase approximately 1 percent annually, with worldwide demand climbing even higher. Even as demand increases, engineering, procurement and construction (EPC) contracts likely will continue to be the predominant form of contracting in the energy sector. EPC contracts – sometimes referred to as turnkey contracts – are single design/build contracts for complete construction of a power plant and include provisions for all design, equipment procurement, fabrication and performance testing. The parties to an EPC contract typically are the project owner and a business entity specifically formed between contractors and design professionals to support the construction project.  

The entities created between contractors and design professionals may take the form of joint ventures, consortiums, limited liability companies, corporations and other businesses. Because the provisions in the consortium or joint venture contract often depend on the terms in the EPC contract with the owner, simultaneous negotiations will often occur among the individual members of the entity negotiating their own internal contract and between the entity as a whole and the project owner negotiating the terms of the EPC contract.

Legal Concerns

Contractual arrangements between the members of these entities present several issues about which counsel negotiating such contracts should be aware. As an initial matter, members may attempt to contractually disclaim the joint liability arising under partnership law, but such attempts are unlikely to succeed under the laws of most states. It is therefore essential that such parties consider the risks that they may assume. 

Key contract terms, often extensively negotiated by the members of joint ventures or consortiums, include: 

As demand for power increases and the attendant need for power plants grows, lawyers involved in energy-related projects will confront some of the same issues that arise in everyday construction disputes. However, with the expansion of sustainable energy and the utilization of novel technologies – such as new solar and wind technologies designed to be less costly than in the past and traditionally fueled power plants designed to be less environmentally harmful – contractors and design professionals will face escalating pressure to give owners performance guarantees and warranties on the plants they design and construct. 

Meeting Guarantees

Under such guarantees and warranties, contractors are obligated to construct plants that produce a specific amount of power under certain conditions, and they bear the risk that the plant will not perform as promised. Each guarantee may carry different consequences if not fulfilled, including an accelerated schedule under which the contractor must repair defective components or pay liquidated damages. These risks for contractors are heightened by the changing nature of technologies used in power plants. Without the benefit of a performance history for these new technologies, it is difficult to predict how they will function in a certain project, which amplifies opportunities for dispute about the fulfillment of contract terms and guarantees.

In addition, power plant projects are gradually changing the contractual relationships between relevant parties, and the EPC contract is a prime example. As a party to an EPC contract, a contractor hired to construct a power plant may be subject to claims by the design professional with whom the contractor formed the joint venture or other parties. Litigation surrounding such projects will therefore likely implicate multiple potential plaintiffs, defendants, and interested third parties, further complicating the legal environment for the construction industry within the energy sector.

Dispute Resolution

Considering the amount of time and money wrapped up in energy-related construction projects and the extremely technical issues forming the core of most disputes, contracts for such projects often include alternative dispute resolution clauses, requiring arbitration or mediation to resolve any conflicts. These procedures can take many forms, but the recent trend has been away from arbitration procedures resembling litigation. 

For example, parties may agree to a “one-off” process by which the parties select three arbitrators, which form a panel that then selects the one decision-making arbitrator from a list submitted by the parties. Efficiency in dispute resolution for large-scale construction projects in the energy sector is becoming increasingly important and is sometimes valued more than the resolution process itself. 

The changing legal landscape surrounding energy-related construction projects will continue to present unique challenges for major players in the construction industry and their lawyers. Being aware of the diverse issues presented in contracting for power generation plants, particularly as new technologies continue to develop, is essential and can allow contracting parties to deal with many of the issues outlined above at the outset through negotiations and careful drafting. 

Lawrence Dany and Jennifer Fletcher are with Sutherland Asbill & Brennan.