It has been nearly a year since the World Health Organisation declared the outbreak of the Coronavirus Disease 2019 (COVID-19) as a global pandemic. As we approach the first anniversary of such declaration, this article reflects on certain issues arising as a consequence of COVID-19 on the financing of infrastructure projects in emerging markets. In connection with the impact of COVID-19, Channing Law continues to advise clients on contractual arrangements and risk mitigation measures needed to address the plethora of issues that continue to arise.
Force Majeure
As a generality, a force majeure clause will typically be formulated as an event beyond the reasonable control of an affected party that could not be prevented or avoided by such affected party in accordance with prudent industry practices. A force majeure may have different categories, for example “natural” force majeure or “governmental” force majeure. The reliefs available for such a force majeure event are usually an extension of time, but in respect of governmental force majeure, certain project documents may allow for both time relief and cost relief.
It is important to emphasise that a force majeure formulation may differ from contract to contract and the corresponding legal analysis will depend on the precise drafting of a particular contract. As a result of force majeure relief, the affected party is typically excused from performance of its obligations prevented by force majeure. However, notwithstanding the existence of any force majeure event, the affected party is usually under an obligation to continue to perform all of its obligations not affected by force majeure.
In order for an event to qualify for force majeure relief, it would not be sufficient to simply state that a global pandemic has occurred, it is critical for the affected party to establish and evidence causation between the effect of COVID-19 (in this instance) and a particular contractual obligation that has been impacted. Moreover, the affected party is usually under a duty to mitigate the impact of such force majeure. An example in a construction contract of a duty to mitigate is the contractor evidencing that it has sought alternative suppliers where, for example, the equipment supply chain has been impacted by the effect of COVID-19. Change in Law
As a result of COVID-19, governments have introduced measures including in relation to restrictions on travelling and health and safety obligations. This has resulted in “change in law” claims being raised across the project documents.
A “change in law” clause provides that the law in force at the time of signing a project agreement will continue to apply for the duration of the agreement. In current market practice, the concept of a “change in law” clause includes protection against (i) the introduction of new law; (ii) modification of existing law; and (iii) changes in the interpretation of law by anybody that has applicable jurisdiction or regulatory oversight with respect to the project or project companies. Subject to appropriate materiality thresholds, a project agreement will agree that the project company will be in no better or worse position than if the relevant change in law had not occurred, entitling the project company to direct compensation for cost or revenue shortfall, or (in the case of a PPA) an appropriate tariff increase.
Change in law claims as a consequence of COVID-19 have included (i) claims as a result of visa/travel restrictions preventing project contractors entering into the country where a project is being constructed; (ii) the introduction of curfews with legislative force impacting the duration of working days; (iii) legislation restricting mixing in the workplace (which would include construction sites); and (iv) the introduction of regulations requiring the implementation of COVID-19 protective measures – all the above could hinder project timelines and the incurring of additional costs, resulting in change in law claims.
Demand Risk
As result of COVID-19, certain governments, particularly in emerging markets, have purportedly seen reduced demand for electricity and have sought in certain instances to transfer such “demand risk” to project companies. PPAs in project finance transactions are based on a principle called “take or pay”. This is a key principle in project finance power projects and underpins the basis on which all parties enter into agreements. In a “take or pay” PPA, the project company does not commit to selling a minimum amount of energy and the buyer will purchase all energy that is generated by the facility regardless of whether the offtaker “takes” such power. In a project finance transaction, the project company does not bear the electricity demand risk, the party best placed to bear such demand risk is the offtaker as the electricity distributor. Typically, in project finance transactions the project company connects to the national grid when it is technically ready and the offtaker “takes or pays” for power accordingly, rather than from a specific date determined by a government or an offtaker, in accordance with its power demand requirements. Without a “take or pay” mechanism in project financing transactions, lenders would not have certainty in relation to revenue stream. Hence, where a project company is asked to take a “demand risk” as a result of COVID-19, it would be uncommon in a project financing context for it to be able to take such risk pursuant to the terms of the PPA.
Concurrency
Another issue that has been the focus of much attention as a result of COIVD-19 is the issue of concurrency. Concurrent delay describes a situation when two (2) or more critical delay events (one a contractor culpable event and one not a contractor culpable event) occur at the same time and their effects are felt at the same time. A challenge in determining true concurrency is that one delay event may be more dominant than another delay event. The impact of COVID-19 underscores this issue as notwithstanding historic delays, a contractor may still be entitled to an extension of time due to force majeure as a result of COVID-19 as this may be the “dominant” delay event despite the contractor experiencing parallel days unrelated to COVID-19. It is important that as a result of the pandemic, parties do not seek to “hide behind” the impact of COVID-19 as a result of pre-existing delays and the affected party is put to strict proof on causation.
Financing
As a result of the impact of COVID-19, notification obligations may arise under the financing documents and project documents.
It is important to review the agreements carefully to establish the notification requirements under such agreements. The agreements are likely to contain procedural requirements (for example, to be issued in a prescribed format within a prescribed time) and substantive requirements (for example, particulars of the claim evidencing causation). Under construction contracts, prescriptive provisions in respect of contractors’ claims are typically included. Further, force majeure notifications in a construction contract may mirror PPA timeframes for notifications (often with a shorter buffer timeframe). Certain construction contracts may provide that if notice is not provided in the prescribed form and in the prescribed time, an affected party may not be entitled to remedies (e.g. extension of time or costs). For a project company, procedural requirements form part of the overall protections afforded to owners, meaning the requirement that contractors must provide notifications in the prescribed time and in the prescribed matter, protect the owner against claims not made in accordance with such contractual requirements.
In a project finance transaction, the project company is often a newly created special purpose vehicle with no recourse beyond its initial equity and its debt. Further, during the construction phase of a project a project does not generate any revenue, completion delay is therefore a serious concern for lenders. As a result of delays due to COVID-19, certain projects have delayed completion dates resulting in delays to revenue, which means that the project company may not have sufficient revenue to meet its scheduled debt repayment dates. Further, if a contractor has been entitled to an extension of time, delay liquidated damages (classified as another revenue stream for the project company) would not be available to repay debt. It is important therefore to engage with lenders in a project financing transaction to determine which entity will bear
It has been a privilege to be a part of and to witness the sheer tenacity across the sector in overcoming the challenges of COVID-19
