Disputes are inevitable. Planning is essential.
19 min read
Offshore wind projects are looking to be an integral part of Australia’s energy transition strategy, emphasised by the Federal Government’s indication of an initial six offshore wind energy zones and agreement to make available $1.5 billion in concessional funding for Renewable Energy Zone projects in Victoria, including offshore wind projects.1
The Victorian Government has also awarded grants of almost $40 million across three different projects to kick-start the industry that is hoped to provide 4GW worth of energy by 2035 and help underpin the national energy transition2, as well as more recently announcing transmission line procurement, port development and a new offshore wind body.
With the volume of projects in the pipeline and the nature of the associated challenges in fabrication, construction and installation, there will inevitably be disputes arising from the emergence of development of offshore wind projects. In particular, as a result of the complexity of offshore projects, the ever-changing technological and regulatory landscape and the nascent state of the Australian market.
In this Insight, we outline some of the key risks which might give rise to disputes and how those risks can best be managed as Australia aims for fair winds ahead.
Regulatory, procurement and stakeholder management
Many operating in the offshore wind market will be familiar with the various potential risks and areas that could give rise to disputes from hard-won experience in other jurisdictions. Keeping these in mind from early in the project life cycle will help to avoid disputes. Upfront time investment and management in project procurement and contracting can also help to minimise the time and money spent on resolving any disputes that do arise.
The offshore wind industry is generally heavily regulated. In Australia, this includes a specific licensing regime and can extend to the way the new assets can connect and interact with the electricity grid. Approvals and permits can cause significant delays to offshore wind projects. This makes it important to be aware of the timeframes and requirements of each permit so that regulatory approval mechanisms can be properly factored into plans from the beginning.
Proactively allocating the risk of any regulatory delay can avoid disputes. This is especially important in the context of offshore wind, given the regulations are new and the industry, at least in the Australian context, is not yet established. That creates risks in anticipating the likelihood of regulatory hurdles and how this might impact delivery of the project. Later in the project lifecycle, changes in regulations can also cause unexpected increases in costs by increasing compliance burden during delivery and post-delivery phases.
Contractors may seek concessions for these risks so that they do not have to bear the full burden of any increased costs of compliance with changed regulations. To address these concerns effectively, it is important to stay across the fast-moving regulatory landscape as it evolves.
Unwrapped and disaggregated
The early experience overseas made clear that the EPC wrap approach to a (then) technically immature industry gave rise to the modern approach of letting work in packages. Contractors will not take turnkey risk in this space. Technical lessons have also been learned in the North Sea, with the difficulties caused by sub-standard fabrication of key components and the error in the DNV-OS-J101 standard the cause of high profile litigation in the UK and multiple arbitrations.
Contracting parties, particularly developers, should carefully consider their dispute resolution procedures and their rights to consolidate dispute resolution processes such as arbitrations.
Procurement strategies have evolved since the earliest offshore farms were constructed in the UK and Europe. The modern approach involves ‘unwrapped’ disaggregated contracting strategies where multiple packages and contracts are awarded. This is often due to the specialised nature of the work required and contractors being unwilling to take on EPC/turnkey risk.
When defects arise, this procurement approach can lead to misaligned warranty periods for different components and disputes as to the root cause of a defect. This has the potential to result in multi-party disputes. Contracting parties, particularly developers, should carefully consider their dispute resolution procedures and their rights to consolidate dispute resolution processes such as arbitrations.
Offshore floating wind technology is likely to exacerbate these types of issues. New ‘flexible’ cabling systems will be required to connect platforms. Disputes might arise as to the impact of the behaviour of the floating platform itself on the availability and performance warranties given by turbine suppliers.
Given the nascent state of the Australian market, international suppliers and contractors will be critical in the development of offshore wind in Australia. When dealing with these counterparties, the governing law of the relevant agreements and mechanisms for resolving disputes will need to be carefully considered.
When a dispute arises, imprecision or a lack of clarity in how that dispute will be dealt with can give rise to further disputes concerning the correct procedure and forum for dispute resolution. This can result in additional costs and further delays to the determination of the real issues in dispute.
Generally, arbitration is the favoured approach for dispute resolution with foreign parties. It offers flexibility in approach, can avoid any perceived ‘home state’ risk and allows for easier overseas enforcement (when compared against enforcing a domestic court judgement) against counterparties domiciled in countries which are signatories to the New York Convention.
When nominating arbitration as a dispute resolution method, consideration of key issues such as procedure and enforceability of decisions should be undertaken and reflected in clear contractual drafting to avoid ‘disputes about disputes’.
Rise and fall
In the current economic climate, the broader construction industry is particularly sensitive to rising inflation in the costs of labour and materials. If this climate persists, this will likely need to be addressed through escalation or ‘rise and fall’ clauses in contracts, to manage this risk and ensure projects are delivered sustainably for all stakeholders.
As mentioned above, offshore wind projects are generally delivered through disaggregated contracting structures. This can also give rise to interface risk between suppliers and contractors, which should be managed to avoid disputes.
The interface between the construction, and operations and maintenance phases of an offshore wind project can also give rise to disputes where there are clashes between contractors and service providers.
The potential for interface risk should be considered and managed to avoid disputes. Identifying interfaces early and implementing plans to manage them is key, as is ensuring that contractual documentation adequately allocates the risks.
Other stakeholders who occupy the waters surrounding an offshore wind project also need to be managed, as these relationships can give rise to disputes and disrupt the delivery of the project.
For example, submarine cables might need to be disturbed or removed before the project can proceed (as can sometime occur with offshore oil & gas projects).3
The fishing industry will also need to be kept in mind. We have seen examples of fisheries objecting to offshore wind projects overseas because of the alleged disruptions they may cause to ordinary fishing practices.4
Dealing with these third-party stakeholders can be expensive and cause delay. Therefore, it is helpful to not only address this specific risk with your contractors but also be proactive about identifying the likelihood of these risks and engage early with third parties to avoid a full-scale dispute once the project is already underway. Community consultation is key, and we have seen key industry participants in Victoria focus on that process.
The interests of other stakeholders may also impact the regulatory approval processes discussed above. Other interest groups commonly challenge the granting of an offshore wind license. For example, in a case concerning the development of four major windfarms in the North Sea, Scotland,5 an interested group concerned with bird conservation challenged the planning permissions given to operate those windfarms. The issues in dispute concerned, among other things, judicial review of the validity of consents issued, including whether the interest group ought to have been allowed to comment, and whether the consents involved incorrect findings of scientific fact or methodology. While the interested group was successful in halting development at first instance, that decision was overturned on appeal allowing development to proceed, and leave to further appeal the decision was refused.
These overseas experiences may be relevant to the new legislative regime implemented by the Australian Government for offshore wind licensing, given the regime includes the ability to apply to the Administrative Appeals Tribunal for a review of decisions made under the regime.
Delivery issues: supply chain, product quality and installation
While contractors will likely rely on specialised international talent and resources, it is likely that the supply chain will, at least initially, have limited experience in offshore wind installation.
Disputes arising from the quality of offshore wind projects have been the subject of litigation overseas. Litigation in the United Kingdom gave rise to a notable Supreme Court case on the interpretation of a ‘fitness for purpose’ warranty for an offshore wind farm in the Solway Firth.6
A dispute arose from the quality of the works and the contractor was alleged to be in breach of its contractual warranties. Specifically, grouted connections between the monopile foundations and the transition pieces failed due to slippage.
The contract between the parties contained technical design documentation which required that design of the foundations ‘shall ensure a lifetime of 20 years in every aspect without planned replacement’. A separate contractual obligation required compliance with the DNV-OS-J101 industry standard, which, although regarded as providing for a 20-year design life with probabilistic failure, contained an error meaning such compliance did not guarantee foundations with an operational life of 20 years.
The case commenced in the English High Court and was then appealed to the English Court of Appeal. The Court of Appeal held that there was no ‘fitness for purpose’ obligation within the parties’ contract and that the contractual technical design documentation did not otherwise support that the contractor had warranted a 20-year design life for the foundations. The UK Supreme Court overturned the Court of Appeal’s decision.
In considering the contractor’s duties to exercise reasonable care and skill and ensure their workmanship is fit for purpose, the Supreme Court upheld that the ‘fitness for purpose’ warranty in the contract—which set a higher standard than the technical design documentation—was to be given its natural effect and was not inconsistent with other terms of the contract (including the technical design documentation). The contractor was therefore held liable for the costs of repairs.
This case demonstrates the importance of clear contractual drafting and setting expectations for the quality and standard of work. For offshore wind projects, given the technical requirements and challenges of weather, waves and wind in the offshore environment, engaging thoroughly in the detail of the technical requirements at the time of contracting could avoid potentially lengthy and costly future disputes.
Quality control in overseas fabrication is a challenge across the entire construction industry. Offshore wind is no different, particularly having regard to the likelihood that key components will be manufactured offshore. By way of an example that found its way to the High Court in England, a contractor subcontracted the fabrication of monopiles and transition pieces for an offshore windfarm to an overseas supplier.7 In that case, the steel monopiles fabricated by the subcontractor developed cracks prior to installation, costing significant time and money to rectify. The court held that the steel monopiles were not fit for purpose.
Gwynt y Mor highlights the importance of understanding the scope of the warranties and indemnities given in relation to critical technology and components.
In another case, arising from the Gwynt y Mor windfarm off the coast of Wales,8 subsea cables used to transmit electricity began to severely erode, most likely because they were damaged during manufacturing. The cost of repair for two of the four cables was £15 million.9 The dispute concerned whether damage was covered by an indemnity for ‘pre-completion damage’ under a sale and purchase agreement. Ultimately, the damage was found to fall outside of the indemnity and the owner bore the significant cost of repairing the cables.10 The case highlights the importance of understanding the scope of the warranties and indemnities given in relation to critical technology and components.
In 2021, a Danish multinational renewables company and the world’s largest developer of offshore windfarms indicated it was experiencing erosion issues in undersea cables arising as a result of movement of the cables against the scour protection system. Although estimates for the cost of rectification have now fallen, this example highlights the importance of carefully considering the warranties given by cable providers as to the fitness of their cables, the owner’s right to fix defects in the cables and potentially recover costs from suppliers or installers, and warranties given by scour installers.
As is clear from the above, well-drafted warranties and obligations which allocate the risk of poorly fabricated or damaged components can assist in avoiding unexpected costs and disputes relating to these issues.
The offshore environment makes for a very challenging construction site. Managing the construction risks associated with an offshore project is therefore vital to avoiding disputes.
Offshore wind turbines must necessarily be affixed to the seabed, traditionally by using a monopile foundation piece and, in more recent years, with the advent of ‘floating’ turbines affixed via cables. A technical understanding of factors such as the depth and geotechnical qualities of the seafloor is vital to success. The depth of the seabed might inform the type of pile used to anchor the structure, while the geotechnical attributes of the seabed might impact how difficult and costly it is to install an appropriate foundation. As a result, the quality and accuracy of the information gathered about the seabed can have significant consequences for the duration, cost and ultimate success of the project.
Unfortunately, assessing the seabed can be an expensive and sometimes imprecise endeavour. To mitigate the risks, implementing a seabed risk-management framework early in the project life cycle is key.
While strategies can be adopted to mitigate seabed risks, those risks cannot be avoided entirely. This is particularly so given it is also possible for the seabed to change during the course of a project, meaning there is always potential for unexpected seabed conditions to cause delay or increased costs. It is therefore vital for the parties to the construction contract to give sufficient consideration to the risk allocation and drafting pertaining to this eventuality.
The risk of weather conditions is also an important factor that needs to be managed in offshore wind projects. Construction progress can grind to a halt as a result of strong waves, heavy rain and excessive wind. This can result in serious delays and severe costs impacts, particularly where there is prolongation in the hire of specialised equipment such as jack-up barges or sea excavators. Such equipment often cannot be easily or suitably replaced and, depending on hire arrangements, there is also a risk that windows of vessel availability can be missed and vessels will mobilise to other projects, rendering them unavailable for significant periods of time.
Bespoke regimes to manage the risk of weather impact are common. These regimes can recognise that certain windows of work are more important than others in the context of weather risk and delay. Working with stakeholders to realistically manage the inevitable impacts of weather conditions is crucial.11
In a UK case relating to the development of offshore windfarms in the North Sea,12 a dispute arose following the failure of a turnkey contractor engaged to fabricate and install a meteorological mast in time, leading to concern about the need for installation before the winter weather set in. Although weather had been a factor causing installation to be more difficult, the dominant cause of the failure to install the mast had been the contractor’s inadequate advice on sea-bed soil conditions. However, the case does illustrate the importance parties place on weather and their claims as to the impact that winter weather can have on work. In practice, work is often prioritised in summer months in an effort to avoid the increased risks of winter weather.
Significant prior air should be given to weather risk allocations in contractual negotiations, so the parties are clear on their risk allocations and the drafting is as precise as possible should a dispute arise.
Connecting any new asset to the grid can be a difficult process. On land, delays commonly arise in renewable projects during the registration and commissioning phase, as performance of the otherwise-completed project falls short of the regulatory and technical standards required for connection to the grid. Connection difficulties are pronounced for offshore wind generation, with both licensing and technical requirements possibly delaying connection. The risk of the generator and all component equipment (including turbines and substations) meeting the agreed Generator Performance Standards and all other connection and licensing requirements set by AEMO, the transmission network service provider and the AER must be appropriately assigned between principals, installation contractors and suppliers.
This risk will continue to increase as the volume of offshore wind projects increases, potentially exhausting the grid’s capacity to seamlessly integrate new energy sources. If a significant number of offshore turbines are connected in the same region, the land-based grid facilities nearest to the coast can become overwhelmed, requiring either upgrades or transmission of power further inland to facilities with capacity. Delays will ensue.
Development of future solutions (such as conversion to hydrogen for transportation) is likely to be costly and time-consuming in the short term.
Dealing with connection risks, including where appropriate by a separate connection agreement, can help clearly define the party responsible for ensuring connection and whether technical or regulatory hurdles in relation to connection will give rise to an entitlement to costs or an extension of time.
Availability and adequacy of vessels
Due to constraints on the availability of heavy-lift vessels, crane barges and accompanying ships, developers need to be mindful of the availability windows they have secured for such vessels. The availability of these vessels when required is critical. If vessels are not available, it might be the case that work must stop in its entirety.
The state of availability in the Australian market for these specialised vessels has been described as ‘an arms race with other countries’,13 as specialist installation vessels are largely operated by European marine contractors and difficult to charter. Key industry participants have suggested that increasing the number of developments will help ‘lure’ overseas suppliers to Australia.14 The sailing time involved in mobilising these vessels to Australia also cannot be ignored, and may require more detailed logistical planning and magnify the consequences of a project being delayed outside of vessel availability windows.
In some instances, market participants have considered purchasing vessels and sharing them across planned projects to alleviate the risk of vessels being unavailable when required. Simulated studies have suggested that cost benefits of up to 45% can be achieved compared with leasing vessels from the spot market, depending on factors including the number of participants and geographical distances between projects.15
There is a risk of potentially disproportionate delays that could occur if a contractor delays the project outside of vessel availability windows. This might be relevant to determination of liability caps and liquidated damages rates. The same issue arises in the context of remedying defects. Owners will need to diligently check for defects during defects-correction periods when the contractor is responsible for remedying defects (and therefore procuring unavailable vessels at its cost).
The capacity of vessels can also present issues. In yet another dispute on the same Robin Rigg offshore wind project in the Solway Firth,16 the contract stated that a specific jack-up barge was to be provided by the contractor and used for installing the foundations.17 However, after just two installations it was clear the specified barge was inadequate.18 The principal ordered variations, sourced a new, superior barge and provided it to the contractor so they could complete the installations. The dispute was over the financial consequences of this arrangement.19 The trial judge held that the changes should be characterised as variations under the contract and valued accordingly.20 This was upheld on appeal.21
Similarly, in another case,22 a sea excavator got stuck on the seabed for four months. Wages and hire costs were wasted as a result. The dispute centred on how this delay should be characterised under the contract (which would inform the rates payable for the delay).
These cases are illustrative of the need to be alive to the risk that the specified technology and supply-chain equipment might prove inadequate. Parties need to accept that these risks are inevitable and be clear about who bears them. Furthermore, they show it is important to understand how contractual mechanisms operate where work needs to be modified or delayed when these particular risks crystallise.
Innovations and changes in cost of components
The pace at which technology advances can result in tender designs or specifications being outdated by the time of construction. This might require a variation to scope or mean the position originally bargained for is no longer the case (ie a party will be in a better or worse position as a result of the change in technology). This can lead to disputes.
One method of mitigating this risk is to progress designs and specifications in stages, eg only selecting key components (such as turbines) closer to the time of construction/installation once further investigations and feasibility studies are complete so that the most efficient and advanced technology can be employed.23
Intellectual property rights
It is important to remember that intellectual property rights might impact the technology available for a given project. In Australia, the patents regime explicitly extends to the continental shelf and the waters above it.24 This means an Australian patent holder can enforce their rights in the offshore wind context if the project is close enough to shore.
This has already become a live issue in the United States where an offshore turbine was held to infringe a patent and this issue has also come up in the context of other offshore projects.25
Unique problems require special understanding
Offshore wind projects are an exciting opportunity to continue Australia’s transition to renewable energy. However, their complexity and relative novelty in the various Australian jurisdictions make disputes during and after delivery likely. By understanding the unique problems that offshore wind projects face, parties can be better placed to prevent disputes from arising and be able to deal with them when they do arise without incurring undue time and expense.