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Triage, Contract Language & Jurisdiction: Invoking COVID-19 Force Majeure in the Energy Industry

image credit: Is force majeure applicable due to COVID-19 in the energy industry?

The WHO recognized the spread of COVID-19 as a pandemic on 11 March 2020. Lockdowns delayed energy projects and reduced energy demand. So, does the declaration of the pandemic give you a provision to invoke the force majeure clause in your agreements automatically?

Enormous energy demand drop

Utilities, developers, and contractors are facing supply chain disruptions. Plant owners and project managers are receiving force majeure delay notices induced by COVID-19. 

Besides that in several key markets major incentives to invest in renewable energy expiring at the end of 2020. Stakeholders risk falling short to qualify for incentives due to delays to connect wind and solar projects in the US and China. The EU member states expected to reach binding renewable energy targets in 2020. What a year!

Electricity demand was reduced significantly due to lockdowns.
Electricity demand was reduced significantly due to lockdowns.

Every month of full lockdown reduced electricity demand by 20% on average. Increases in residential demand were far outweighed by the reductions in commercial and industrial domains.

The IEA projects a 5% fall in global electricity demand due to the pandemic, the largest drop since the Great Depression in the 1930s.

Utilities, developers, operators, and contractors have become exposed to business and financial risks due to delays and energy demand reduction caused by the pandemic. 

These circumstances require lawyers and contract managers to analyze carefully existing contractual risks to safeguard the company's interests. 

''Must run'' status

In April 2020, the Ministry of New and Renewable Energy of India granted renewable energy generating stations ''must run'' status which remained unchanged during the lockdown. This meant that those projects should continue generation and distribution companies should continue buying by the terms of the power purchase agreements. 

 

The concept of force majeure does not function in the same way in different jurisdictions. This becomes a complex matter for a multinational energy company.

 

Despite the power demand crash, the ministry wrote to the distribution companies they couldn’t stop using generated power citing force majeure. As a result, the ministry forced the distributors to pay generators regularly as was done before the lockdown. Force majeure wasn't applicable because:

  • of terms and conditions of the power purchase agreement
  • ''by the law of the land the renewable energy projects have a ''must run'' status (supply power under all conditions)''

Distributors ran into liquidity problems due to the payment collection problems during the lockdown.

Triage application

To prevent such situations the COVID-19 pandemic forces you to apply triage:

  1. understand what priorities are;
  2. move in what capacity you have.

While using the triage process you should be looking at 2 key categories of provisions:

  • terms/contracts that create risks
  • terms/contracts that mitigate or avoid risks.

These types of reviews help to understand what the leverages and fragility are before entering negotiations or avoiding disputes. You need to appreciate what you and your counterparty can do in such circumstances.

Contract language

Normally existing contracts have force majeure clauses to allocate risks between parties to identify who will bear the burden of a major unexpected event. COVID-19 pandemic is a major unexpected event. The coverage of that clause depends on how it was drafted. And to understand how that clause applies to you depends on which side of risk allocation you fall on.

Typically, a party who wants to limit, postpone, or eliminate their duty to perform by relying on the force majeure clause should:

  • show the event has occurred (the pandemic or government directives);
  • prove that the event is what has made it impossible to perform the contractual obligation.
  • prove that there is nothing more they can do to perform during the pandemic.

The applicable law in the jurisdiction

The concept of force majeure does not function in the same way in different jurisdictions. This becomes a complex matter for a multinational energy company.

In civil law legal systems found in continental Europe, South America, and parts of Africa and Japan there is a possibility to rely on force majeure doctrine. 

Whereas for common law jurisdictions, there is no unanimous definition of force majeure event. The way forward is decided case-by-case basis because courts initially assume that parties can agree on all matters by contract. 

P.S.:

Parties understand that these are unprecedented times when so many businesses experiencing operational and financial stresses all at the same time. Generally, no one wants to litigate now. The focus needs to be on negotiations, cooperation, and solution-finding while looking at dispute resolution as the last resort. Common sense and flexibility should prevail for you to sleep well.

 

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Rauf Fattakh's picture

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