PI claims and renewable energy disputes

windfarm

Jonathan Spencer (Partner) and Harry Speak (Trainee Solicitor) of Simmons & Simmons look at some of the key areas of disputes and consequent professional indemnity (PI) claims in projects relating to wind power, waste to energy plants, solar power installations and hydroelectric schemes.

Introduction

PI claims in respect of renewable energy projects usually arise from the negligence of either the designer or the contractor who has breached their obligation to act with ‘reasonable care and skill’.
 
The distinction between a designer and contractor is sometimes blurred, particularly with renewable energy products where the product designer may also be responsible for the implementation of the product. This is usually the case with smaller-scale renewable energy solutions.
 
PI insurance is only likely to cover a designer/contractor’s liability where they have contracted to provide a service with ‘reasonable skill and care’ (which would be implied into the contract in any case), rather than the higher duty associated with warranting that their product will be ‘fit for purpose’. That said, if an employer demands that a fitness for purpose obligation is included in the designer/contractor’s appointment, an endorsement to the PI policy could be agreed.
 
Given renewable technologies are relatively new and are under constant development, it is to be expected that designers and contractors will encounter issues while they gather experience of designing and deploying these technologies, and subsequently incur liability.
 
Furthermore, Californian-based GCube Insurance recently indicated that there has been a significant rise over the last 5 years in the number of claims in the U.S. renewable energy market as construction firms have come under pressure to build projects more efficiently and in shorter timeframes. With less experienced personnel being used to handle increasingly complex equipment, the frequency and severity of claims is on the rise. Similar risks likely apply in the UK. It is, therefore, essential that insurance policies are drafted carefully to avoid coverage where operators of equipment are inadequately trained.
 

This note focuses on key areas of disputes and liability in respect of: (1) wind power; (2) waste to energy plants; and (3) solar installations. It also considers briefly a recent and apparently ongoing claim regarding hydroelectric power. While the examples considered are not exhaustive, given the ever-shifting landscape of liability, they address known ‘hot spots’ for liability that have emerged.

Wind power

Generally, throughout the construction stage for wind power, the possibilities of disputes (and consequent PI claims) arising would be like any conventional construction project. However, one specific issue which has affected wind turbines on several occasions has been the failure of their foundations.

MT Højgaard v E.On [2017] UKSC 59 is the most widely reported example of a case concerning wind turbines: is the most widely reported example of a case concerning wind turbines:

  • Facts: Shortly after completion of the project, the foundation structures of two offshore wind farms, designed and installed by MT Højgaard A/S (MTH) at Robin Rigg, failed. The foundations had been made in accordance with an international standard for the design of offshore wind turbines. However, a formula contained within the standard was incorrect, meaning that the foundation strength had been overestimated and repairs were necessary. The resulting dispute considered who was responsible for the €26.25m of remedial costs.
  • Supreme Court decision: It was MTH’s responsibility, as contractor, to identify whether the works required a design which exceeded the minimum expectations provided for by the international standard. Furthermore, MTH had given and breached a warranty that the foundations would last for 20 years, placing them at the higher ‘fitness for purpose’ standard, rather than the mere duty to exercise ‘reasonable care and skill’. Therefore, MTH was liable despite having exercised reasonable skill and care in the design of the foundations.

Although each case will turn on its own facts and the specific wording of the contract, the Supreme Court’s decision serves as a useful reminder that a contractor/construction professional cannot always rely on the defence that they exercised reasonable skill and care. This case is also of concern to construction professionals as, typically, PI policies exclude cover for strict liability (e.g. for guaranteeing fitness for purpose). Agreeing absolute design obligations could, therefore, leave construction professionals in a situation where there is a gap in cover.

There are other scenarios in which claims could arise, including:

  • With off-shore wind farms, disputes can arise where subsea cables have been positioned poorly, or where the incorrect cable has been selected at a design stage, resulting in the cables being damaged by anchors or by the dragging of fishing nets. Repairs to damaged cables are likely to have significant financial implications because their (usually) remote location makes it difficult to carry out repairs, as does the limited number of skilled professionals with the expertise to undertake such repairs. This type of liability might affect parties acting at a design stage (who have made decisions regarding the location of the cable), or those involved at a construction/installation stage where a contractor has laid the cables in the wrong position, not in accordance with the design, thereby acting without ‘reasonable care and skill’.
  • Another issue in relation to the construction of off-shore wind turbines was recently seen in the High Court case of Fluor v Shanghai Zhenhua Heavy Industry [2018] EWHC 1 (TCC). In this case, the Claimant had contracted to construct the infrastructure for 140 wind turbine generators at sea. The materials provided by the Defendant were found to have cracks in the welding, which resulted in the Claimant incurring added costs of inspection and repair of these parts, as well delay in installing the turbines at sea.
  • Following the installation of wind turbines, claims can arise if the installation does not perform as well as the consultant had estimated. A consultant cannot be expected to predict the output of a wind turbine entirely accurately, so the notion of what is an ‘acceptable margin of error’ remains unsettled. However, the consultant may still be exposed to claims where the reality of the performance of the turbines proves to be far from what their analysis had suggested would be the case when the location for a development was selected.
  • It is standard practice following completion of a power project that a review of the technical capabilities of the project will be undertaken by an independent engineer who will prepare a report for the benefit of the lender. This report will validate that the project has been completed in accordance with the design specifications and that the wind turbines will operate as expected under that design. In providing these assurances, it also opens the possibility of the independent engineer themselves being exposed to a claim (i.e. should their assessment of the wind farm not be conducted with reasonable care and skill).

Waste to energy

Waste to energy (W2E) projects are not technically ‘renewable energy’ projects. Rather, they provide an alternative to landfill. These projects take waste and convert it into a valuable product; usually electricity and heat. Typically, this is often done by burning waste and using the hot gases to boil steam and turn a steam turbine. However, new technologies also allow for ‘baking’ of the waste at a high temperature to produce synthetic gas, ‘syngas’, which can be burned directly in gas turbines. W2E projects generate revenue both through the collection of waste products and through the generation and export of power.

The most prominent reported case involving W2E is MW High Tech v Haase [2015] EWHC 152 (TCC). In this case, the contractor submitted a fixed price tender to an employer which relied on a basic design prepared by its process engineer for an anaerobic digester. The engineer subsequently developed a detailed design which went beyond the parameters required in the ‘Delivery Plan’, adding substantially to the contractor’s costs. The court held that the reasonable skill and care obligation overrode a specific obligation to comply with the Delivery Plan. This meant that if compliance with the Delivery Plan was not possible without the engineer being negligent, then the engineer was not obliged to comply with the Delivery Plan. However, if compliance with the Delivery Plan was possible with a non-negligent design and the engineer failed to use reasonable skill to produce the expected design, that was a prima facie breach of contract. Therefore, the engineer was liable for the contractor’s increased costs.

Once operational, ‘throughput’ is the term denoted to the amount of material, or the number of items, which pass through a W2E system. A high throughput is necessary to ensure maximum intake of waste and maximum electricity generation and, therefore, maximum income for the plant.

Plants are designed for a particular waste composition. Faults with the design of the plant may prevent the planned composition of waste in the W2E system from being used effectively by the plant, reducing throughput and leading to a loss of income for the plant. This, in turn, can then lead to claims for negligence against the designer.

On the other hand, the operator of the plant is usually responsible for the provision of the waste and may fail to provide the composition of waste necessary for the plant to operate in accordance with its design. Subsequently, the operator may be subject to a professional negligence claim for failing to act with reasonable care and skill in gathering the necessary composition of waste, although, in reality, it is difficult for the operator to control this.

Disagreements may arise between the designer and the operator in respect of where the responsibility for the composition of the waste lies and the criteria the plant should have been designed to meet, opening both parties up to the possibility of professional negligence claims.

As W2E technologies continue to develop, designers may also find that they incur liability where a major component of a system that they have designed simply does not operate as expected. Where remedial works are required, claims may be brought against the designer for loss of income resulting from operating the plant at a reduced capacity.

Solar

A key element of claims arising from solar energy systems comes from the installation of the system itself to the existing infrastructure (particularly in a residential context). First, the contractor responsible for installation must ensure that the existing roof structure can actually accommodate the additional load of a solar panel. When assessing the risk, underwriters should check that the individuals at the potential insured have (1) an appropriate dual-qualification to make the assessment of the structural stability of the roof, or (2) had a certified professional make the assessment, before any installation takes place.

Where solar energy is not being used for electricity generation, but simply for thermal water heating, an assessment of the existing infrastructure of the property is also necessary. A failure to do so could result in a substantial claim should the system later fail.

The UK government closed its Feed-in Tariffs scheme to new applicants on 31 March 2019 (though applications to the scheme can be made until 31 March 2020 in respect of eligible systems installed before 31 March 2019). There is a possibility, therefore, that liability could also arise where a contractor delayed the installation of a renewable technology meaning that the consumer lost the benefit of an applicable subsidy or tariff. See, for example, GPP Big Field LLP v Solar EPC Solutions [2018] EWHC 2866 (Comm) in which the court held that, had a liquidated damages clause not been effective, it would have awarded general damages because the delay meant that the claimant was not eligible for a particular Renewable Obligations Order Feed-In Tariff (it qualified instead for a lesser tariff which was still available). See News Analysis: Liquidated damages clauses were not unenforceable penalties (GPP Big Field v Solar EPC) for further details.

Hydroelectric

Hydroelectric claims can arise from: water turbines failing; the breakdown of electrical and mechanical machinery; and damage from water surges. SSE v Hochtief [2018] CSIH 26 is a recent Scottish decision which involved a claim concerning a hydroelectric power scheme.

  • Only 7 months after opening, the Glendoe hydroelectric power plant stopped generating electricity as a result of falling rock material which had gradually and completely blocked the tunnel. While out of operation, SSE lost substantial amounts of revenue. It asked the contractor, Hochtief, to carry out the remedial works, but the two parties were unable to reach agreement about who should pay. The dispute between the parties considered whether the collapse was caused by a defect in the design or in the construction.
  • The engineering geologists had been aware of the risks of a fault zone at the part of the tunnel where the collapse occurred but, having not found poor rock conditions, they did not reinforce the tunnel perimeter at that section. The collapse was then caused by insufficient support.
  • As such, it was not the design that had caused the loss, but the implementation of that design. The tunnel’s collapse was a contractor’s risk, and the contractor was found liable for in excess of £100m.
  • It was announced that Hochtief had been granted leave to appeal to the UK Supreme Court. However, at the time of writing the case does not appear to have advanced past this initial step towards securing a Supreme Court hearing.

First published on LexisPSL Construction. The views expressed by our Legal Analysis contributors are not necessarily those of the proprietor.

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