The success of an infrastructure project can rest on its on-going operation and maintenance. This can extend to how bankable the project is for finance and how attractive it would be to subsequent purchasers.
With so much at stake, it is crucial to have a sound operation and maintenance (O&M) agreement in place.
In considering the O&M legal terms and services scope, a customer should focus on the following:
1. Initial considerations for operation and maintenance – contractor’s links with project
When considering the operation and maintenance, at the outset it should be evident whether the contractor is also somehow further linked to the project. For example, is the contractor a member of the same group of companies as the construction provider under the terms of the engineering, procurement and construction contract (EPC)?
If so, the interface between the O&M and the EPC will need to be considered and back to back provisions built into each contract, preventing the contractor and the construction provider from relying on: (i) the acts or omissions of the other as a defence to its own delay, or non-performance of the relevant contract; or (ii) delays or underperformance by the other to obtain relief from the customer under the relevant contracts.
The dovetailing of the front end legal terms and the services scope detailed in the O&M schedules is sometimes not fully focussed on and this can lead to a disconnect between each of the parties’ service expectations and in the worst case scenario, a complete contradiction leading to dispute. This is because the description of the contractor’s services obligations will be complex and require project specific technical expertise, which in turn needs to be wrapped in effective legal drafting.
2. Services
Agree the scope of, and clearly define, the services. These will include scheduled maintenance services, unscheduled maintenance services, and any add-on additional services.
3. Scope and pricing for operation and maintenance
Ensure that the essential services are captured within the scope and pricing of the O&M.
For example, do consumables and spare parts form part of an agreed annual base fee? Additional services should be just that – additional to the essential services – and the rates and pricing mechanisms for them, when called upon, should ideally be contained within the terms of the operation and maintenance.
4. Exclusivity
Agree when exclusivity (i.e. the restriction on the ability of the customer to appoint another contractor to provide the services) does not apply in relation to the scheduled and unscheduled services.
As the customer, consider if and when you should be able to source services from third parties. For example: (i) in circumstances when the contractor has not performed, or is not able to perform; and (ii) in relation to additional services, if the scope and pricing for those additional services doesn’t work for you.
5. Consider when the contractor should be relieved from performing
This could include:
- As mentioned in point 1, consider the interface between the O&M and the EPC and what, if any, reliefs the contractor should have for the non-performance;
- Will the impact of third parties, or the other providers under other project contracts, allow relief by the contractor of certain of its O&M obligations?; and
- Adverse condition and force majeure: force majeure is an often overlooked concept which allows for partial or complete relief from the performance of obligations in certain defined circumstances. Force majeure is therefore a powerful exclusion of liability clause, introduced via the back door, and should be carefully reviewed and properly negotiated. Given the unprecedented lockdowns caused by the coronavirus during 2020, many force majeure clauses are now being updated to include pandemics or epidemics as events which relieve parties of their obligations. You can learn more about that here.
6. Spare parts and associated warranties
Including:
- The supply of spare parts, and warranties relating to their defects, should ideally be included within the operation and maintenance agreement;
- Consider availability of spare parts and pricing and whether you wish to pin down prices (subject to an agreed indexation mechanism) within a parts list in the O&M. With the transition period following the UK’s exit from the EU set to end on 31 December 2020, it will be important to consider how currency exchange fluctuations will be dealt with;
- Ownership of replaced parts and use by the contractor of refurbished parts should be considered as well as the value of the replaced part. This may form part of the overall pricing negotiation for the O&M; and
- The interaction between the terms of the various warranties in the EPC relating to defects and replacement parts, and the similar warranties in the O&M, will be important. For example, the EPC warranties and obligations under the EPC may need to be managed by the contractor as part of the O&M services.
7. Performance
This is a fundamental part of the O&M. The extent to which the contractor guarantees that the project will achieve specified operating levels and performance standards (or whether it only agrees to comply with applicable industry standards with a view to achieving a particular level or standard) will be negotiated by both parties.
Generation/performance availability and related liquidated damages will need to be considered, and further considered in the context of those warranties and guarantees provided in the EPC.
8. Compliance
Given the usual longer term nature of O&M arrangements, there is a high likelihood that during the term of the O&M regulatory and legislative regimes, and compliance with those, will change. As a customer you will need to consider the relief and compensation sought by the contractor and what knock-on effects this will have on your ongoing obligations and entitlements in other project agreements.
9. Liability
The contractor will want to ensure some form of liability cap is included in the O&M and the customer should consider what those caps should be and what liabilities are carved out of the cap. If and when a cap is met, what further remedies should the customer have? These would usually include the ability to terminate the O&M or to source services from elsewhere. Bear in mind that contractor fault will potentially have an impact on project revenue and the ability of the project to service any debt.
10. Terms of operation and maintenance and termination
Consider the operational life of the project asset, which in the renewables sector is likely to be between 20-25 years. A typical O&M will run for around five years and given the operational life of the project, together with the falling away of any EPC guarantees and product warranties, it is likely that the maintenance cost of the project will increase.
This means the scope, pricing and liability of contractors under these projects will evolve and, as a result, contractors will likely be reluctant to enter into longer term contracts on the same terms. The customer should look for an option to extend after five years and be mindful of the need to find new contractors to replace the old, in timely fashion.
These ten points are a starting point, and depending on the nature of the project there may be a number of additional, and project specific, issues and matters which will need to be considered on a case by case basis.