Not Always a Breeze: Considerations in Contracting for Offshore Wind Projects
As major energy operators and developers enter into strategic partnerships to develop offshore wind farms in the United States, contractors and subcontractors who will support those efforts are currently bidding on projects and negotiating their contractor and subcontractor agreements. The European wind developers will likely use their European contracting forms for use in the United States; these agreements may not resemble the agreements offshore contractors are accustomed to working under in the United States. This article outlines some key provisions that will require close consideration in those negotiations by owners and contractors.
Choice of Law and Indemnities
For commercial purposes, some wind developers choose New York law to govern the rights and obligations between the developer and its prime contractors. Many states, including New York, disfavor indemnity agreements common in most offshore agreements with energy operators in the United States. In particular, operators who construct, operate, and maintain offshore oil and gas structures typically elect for general maritime law to govern their agreements and choose a knock-for-knock indemnity scheme. Commonly, knock-for-knock indemnities are reciprocal indemnities under which the parties agree to indemnify and hold each other harmless regardless of negligence against any claims or liabilities arising from bodily injury to the party’s own personnel or property damage to the party’s own property. While not all such agreements are considered maritime contracts, to the extent state laws apply, most operators and contractors in the Gulf of Mexico are skilled at navigating the enforceability of indemnities and some “work-arounds” under the Louisiana and Texas oilfield and construction anti-indemnity statutes. By contrast, in most states, statutes render unenforceable those indemnity obligations that are intended to indemnify a party against its own negligence, making traditional knock-for-knock indemnities unenforceable for public policy reasons. If an indemnity scheme is found to be unenforceable, the parties may not have any viable indemnity protection, but instead would be “at law,” or liable for their negligence or other fault as provided by law. An “at law” risk calculation is not always desirable in a highly negotiated contract with considerable risks in an offshore environment.
Because of the different choice of law decisions possible in offshore wind development and the added complication of determining whether any particular contract is a maritime contract, operators and contractors will have to take care to review their existing indemnity schemes in their prime and supply chain agreements to ensure the parties understand the risks. It is important to ensure that the provisions negotiated between owners, contractors, and subcontractors are actually enforceable under the choice of law.
Additionally, a prime contractor must understand the scope of the indemnities it gives and receives under the prime agreement and those provided to its subcontractors to ensure that the prime contractor is not in a gap between the two contracts. The prime agreement may require the prime contractor to require its subcontractor to accept the terms and conditions of the prime agreement on a “back-to-back” basis, or at least, accept certain mandatory flow-down provisions from the prime agreement. Typically, indemnity provisions are included in a list of mandatory flow-down provisions. If the subcontract agreement incorporates the prime agreement by reference on a back-to-back basis, the choice of law provisions in the prime will likely control. For contractors with master service agreements (MSAs) with existing oil and gas service and marine providers, the use of existing contracts and standard forms may well put the prime contractor in a gap between the offshore wind developer/owner indemnity scheme and the typical MSAs used in the US oil and gas industry. The heightened attention to pollution risks in indemnity provisions in oil and gas contracts may not be a risk-shifting imperative in a windfarm development project in a greenfield. Care should be taken to amend or replace these agreements for any windfarm development.
Moreover, with respect to the terms of the indemnities, because some developers are separating discrete scopes under different prime contractors, the parties should pay close attention to the definitions of indemnified parties. The parties should understand whether the indemnities in the agreement extend to claims in favor of or against any other contractor the contracting party might interact with or otherwise have potential to cause damage to in their scope of work. Particular attention should be paid to those conducting simultaneous and adjacent operations. Alternatives are available outside of the prime agreement to address these risks.
The analysis of choice of law and the enforceability and scope of the indemnity scheme is key to the allocation of risks between the parties. As part of that consideration, the parties should consider the insurance made available by the parties for the benefit of the project.
Owner-Controlled Insurance Programs (OCIPs) are often used for larger construction projects. An OCIP can provide protection to contractors, especially against larger claims. Rather than each contractor or subcontractor putting their own individual policies at risk for claims arising out of the work, OCIPs are sometimes purchased by the owner and consolidate different insurance plans to cover risks for all parties and the entire project. OCIPs may include commercial general liability, workers’ compensation, builders risk, and excess liability coverages. An OCIP may state that the coverages provided are primary to the contractor’s own policies; however, because of the size of the project as a whole, the deductible under an OCIP policy is proportional to the entire project value and could be much higher than the deductible exposures under contractor or marine operator policies. An OCIP is not a cure-all for an unconventional indemnity scheme. Instead, care should be taken to understand the actual coverage provided and any deductibles, self-insured retentions, aggregates, or sub-limits in OCIP policies.
Construction All Risk (CAR) policies are also important, to insure against loss or damage to the work during construction. The insurance industry has developed a WINDCAR policy as a product to address the construction risks in windfarm development. Such policies can offer protection against loss or damage to contract works, construction plant, equipment, and machinery, and provide coverage with lower sub-limits for certain offshore cancellation costs or standby time of marine assets during a repair of any loss or damage. CAR policies may also include additional coverage for third-party claims for property damage and bodily injury arising out of a construction project. In any given project, these risks may be insured under an OCIP, a WINDCAR policy with third-party liability coverage, or the contractor group’s own policies. The parties should fully understand the breadth and limits of available insurance to properly assess the potential risks associated with performance of the work.
In some offshore construction agreements, the engineering may be performed by the operator, with the contractor providing only transportation and installation services. Other times, engineering, procurement, construction, and installation agreements are used. In most cases, a typical warranty period is the 12 months following completion. In windfarm development, contractors should expect more challenging representation and warranty obligations and longer warranty periods. Care should be taken to ensure that any subcontractor agreements include representation and warranty obligations that are commensurate with the prime obligation, both in scope and duration.
Many construction contracts contain liquidated damages provisions to ensure timely performance and delivery of the facilities. On an offshore wind project, considering the expected interface between multiple prime contractors and the time limits under applicable permits, liquidated damages provisions may be an appropriate method to incentivize timely performance while providing a limit on exposure for delay. Liquidated damages provisions must meet certain criteria to be enforceable under applicable law and must be carefully drafted to ensure that they are enforceable and clearly reflect the intent of the parties.
Limitations of Liability
Many construction contracts contain provisions to limit the liability of the contractor, including a reciprocal waiver of consequential damages and an aggregate limit of liability. The amount of an aggregate limit is highly negotiable. These provisions are most helpful in worst-case scenarios, when something has gone awry. Parties include these provisions in varying degrees, with many different exceptions that can be traps for the unwary.
Compliance with Jones Act Cabotage Laws
Compliance with the Jones Act cabotage laws is a key consideration in windfarm development. The parties should understand the implications of the Jones Act at the bidding phase to make sure the proper vessels are considered when planning the work. During contract negotiations, if a bidder proposes to use a non-Jones Act vessel for certain portions of the work, a developer may require the contractor to provide, prior to commencing the work, an opinion from US Customs and Border Protection that the work as proposed does not violate the Jones Act. As part of an indemnity for failure to comply with applicable law, the developer may also demand an indemnity for any fees, fines, or penalties associated with the contractor’s use of a foreign-flagged vessel to perform the work.
The offshore wind industry in the United States is new and growing. As new entrants and existing industry participants grow and adapt to this new industry, care should be taken to negotiate bespoke contracts that take into consideration the real risks involved in offshore construction and the economic drivers, and complexity, of pricing structures for such work. Parties should pay close attention to the issues highlighted in this article, especially the choice of law, indemnity, and insurance provisions, which can be quite complex. Added to that complexity are provisions designed to address and mitigate certain commercial risks inherent in offshore construction and heightened in construction of emerging and evolving technology. Considering the value of the projects and projected size of the industry, the opportunity and risks justify the investment in well-crafted agreements.