Smart Power | How to make an 'orderly exit' from O&M agreements on renewable energy assets

Every owner of or investor in renewable energy assets wants to ensure that their assets are operating to  maximise generation or production, particularly during peak periods of production. Owners often pass on the responsibility for ensuring the availability and operation of green energy assets through maintenance and repair to operation and maintenance (O&M) contractors.

An asset that is not properly operated or maintained can have a significant impact on production and, therefore, the generation potential that the owner can achieve. Where an O&M contractor fails to ensure that an asset is performing as required, which results in production being severely affected (particularly over a prolonged period of time), owners may look to exit existing O&M contracts and engage replacement O&M contractors to improve performance.

Commercial solutions

It is usually preferable to explore whether a commercial solution is possible in order to minimise the risks associated with termination. This can often have benefits in ensuring a smoother handover to a replacement O&M contractor and in minimising the potential for disputes around the exit.

If an asset manager is engaging in discussions or negotiations to explore whether a commercial exit to an O&M contract can be agreed, those discussions would usually be conducted on a "Without Prejudice and Subject to Contract" basis. This should ensure that such discussions are could not be put before the court in any future disputes and that no binding agreement as to the terms is made until a formal agreement is prepared. However, in order for without prejudice privilege to attach to any such discussions, those discussions must be entered into as part of a genuine attempt to settle a dispute.

Parties can agree to bring an O&M contract to an early end on whatever terms they choose. If this approach is adopted, a settlement agreement to document the terms on which the contract has been brought to an end, as well as the consequences of any such exit is recommended.

Contractual rights

If a commercial solution is not possible, then it may be necessary to explore any termination rights that are available under the relevant contract(s). Relevant considerations include:

• Whether there is any right to terminate for convenience or at will. If so, is that right engaged? Some contracts may provide for a right to terminate for convenience within a certain number of years of the start of the O&M contract.
• Whether any substantive termination rights have been activated. For example, this may include the right to terminate for a material breach, breach of health and safety obligations or exceeding a liability cap. It is advisable to have a good bank of evidence to support reliance on any substantive termination right.
• Whether termination is effective immediately, or whether there is a cure or rectification period within which the contractor can seek to put right any default prior to the right to terminate being triggered. If there is a cure or rectification period, is the default likely or able to be cured and how long does the contractor have to seek to rectify the default? If the default is cured, would that improve performance and alleviate any concerns?
• Whether notices need to be issued and, if so, how. Strict compliance with notice requirements is required on any termination. How do the relevant notices that need to be issued fit with the termination timetable?
• What are the consequences of the exercise of any termination right? Is a fee payable on a termination for convenience or does the exercise of a substantive termination right give rise to a claim for loss and expense arising out of the termination?

Incorrectly terminating a contract can put a party in repudiatory breach of contract and result in exposure to a claim for damages from the other party. Therefore, termination carries risk and legal advice should be sought prior to exercising any such right.

Practical considerations

Whatever option is pursued, there are a number of practical issues to consider:

• How will handover to the replacement O&M contractor be arranged and is the replacement contractor available to take over immediately on exit? Care also needs to be taken that an owner does not inadvertently put itself in repudiatory breach by engaging a replacement contractor before an exit from the previous contract(s) is implemented.
• What impact does your chosen course of action have on any rights or claims that might be pursued, for example, liquidated damages claims. When do those rights accrue? Do you need to reserve your rights in relation to any such claims?
• What is the dispute resolution process in the contract if matters are not resolve amicably? What is the likely time and cost of any such dispute and are there ways to seek to minimise the potential for any such disputes or claims?

Seeking to exit any contract carries risk and we would recommend that legal advice is sought early in order to minimise the risks associated with any approach adopted.