Anaerobic Digestion Plant
Thursday 27th November 2014
We have advised on a number of Anaerobic Digestion (AD) plant projects. AD is a naturally occurring chemical and biological process creating methane gas which can be used as a renewable energy source. Recently, there has been a sharp increase in commercial AD installations, whether they are small private schemes or on a large industrial scale.
Here are some of the legal risks that prospective buyers of AD plant should address.
Clarify who is responsible for design of the overall scheme. If a single turnkey contractor is involved, ensure they are fully responsible for the design as well as the installation work. If various consultants, contractors and suppliers are to be employed directly, ensure that design responsibility does not fall somewhere between each of them.
Ensure that, once the AD plant is up and running, you are protected from the risk of latent installation defects arising years later. You will need an effective operation and maintenance contract, either with the original supplier or someone else. It is worth getting direct warranties from suppliers of key pieces of kit, and from any significant sub-contractors involved in the installation. If the main contractor became insolvent later on, you could still claim against others.
There are other forms of protection, including a defects insurance policy which may provide cover for 10 years. Beware of insurers’ attempts to restrict cover. If a policy limits your ability to be compensated for loss of revenue during a ‘shut down’ period it may not be commercially worthwhile. Alternatively you might accept a ‘warranty bond’. Subject to satisfactory duration and value this may protect against major latent defects.
Many suppliers of AD plant are overseas companies, so beware of entering into contracts which may be subject to foreign law and jurisdiction. If you need to make a claim it could be much more complicated to enforce your rights overseas. Ideally, the law and jurisdiction of the contract should be the country where the AD plant is situated.
Many suppliers will want some guarantee that they will receive prompt payment, especially when they have to pay large sums for specialist kit. You may be asked to give a payment guarantee or put funds into an escrow or trustee account. This needs careful negotiation to ensure a fair balance of risk between the parties and that arrangements are consistent with the agreed terms of the underlying contract. For example, if there are installation defects you do not want to find that you have no right to hold back payment which would otherwise be due. The contractor should not be able to withdraw funds from an escrow account when he would not be able to under the main agreement.
It is vital to consider carefully the critical project milestones and the triggers for releasing stage payments. The contractor’s own outlay has to be balanced against the need to be satisfied that each stage of the scheme’s installation, testing and commissioning are satisfactorily completed.
This is where an experienced and effective contract administrator or project manager adds value. They can supervise the progress of the works, check that each milestone is properly achieved and, critically, who will oversee not only the installation but also the testing and commissioning. Unlike a standard building contract where practical completion of the building is the key milestone, an AD plant is useless until it has been commissioned as it will not generate income or renewable energy until then.
As well as heat and power output, clarify what can best be done with the “waste product” from the AD plant. Is there commercial value in it? You may need a legal agreement with whoever takes the waste product away (e.g. for fertiliser). Equally, make sure that your input source of feedstock will remain commercially available. Without certainty and continuity of supply, the AD plant may be financially unviable.
For further information please contact Richard Piper, Partner and Head of Construction on 0113 227 0238 or email@example.com.