• Tuesday, February 27, 2024
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BusinessDay

Watch those boilerplate provisions in power sector contracts and others!

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Ihad been on annual leave a few days and taught to take the opportunity given me to act as faculty at a-day’s training on Power Purchase Agreements for new commercial negotiators in Calgary.

At some point, we got discussing boilerplate provisions in contracts and came to the realization that in many contract negotiations, parties typically focus on the business terms and conditions of their contracts or agreements spending very little or no time addressing the “boilerplate” provisions typically found at the concluding parts of such contracts or agreements.

We agreed that boilerplate clauses are usual clauses contained in agreements and which could easily be copied from a similar agreement and inserted in another. We also reached the conclusion that, not all boilerplate clauses, however, are appropriate for all types of agreements as industry practices often times dictate what boilerplate provisions should be placed in certain types of contracts.

Generally, there are various examples of boilerplate provisions and these include notices, force majeure events, expert determination, further assurances, governing law, liability provision (i.e. whether liability is joint, several or joint and several) etc.

It is not uncommon for people to adapt (by copying and pasting) the boilerplate clauses used in one agreement, for a similar agreement. At other times reviewers or drafters of agreements merely change the factual circumstances (e.g. for notices addresses of the parties are changed).

BOILERPLATE CLAUSES IN THE ENERGY SECTOR:

Where boilerplates are not given the requisite attention when reviewing, drafting or negotiating energy sector contracts, huge financial liability, which could have been prevented, may arise; more so where it is the energy sector where deals or transactions are worth, in many situations, billions of United States Dollars.

In the energy sector in particular, many of the boilerplate provisions require more than just copying and pasting. Some usual boilerplate provisions in energy sector contracts include clauses relating to force majeure, liquidated damages, confidentiality, expert determination, liability (joint and or several) etc.

BOILERPLATE CLAUSES REQUIRING PROPER REVIEW

Force Majeure

A force majeure clause sets out the circumstances in which a party to a contract could be excused from performing its contractual obligations where such performance is precluded or made impossible by state of affairs outside that party’s control.

In the absence of a force majeure clause, the parties to an agreement may only be able to rely on the common law doctrine of “frustration” which may be inauspicious for one or more parties.  Although, the term “force majeure” is frequently used, it should be properly defined and not just copied and pasted. This is so because, apart from not being an English word, a clause in an agreement which provided that “the usual force majeure clauses shall apply” was held by an English court to be void for uncertainty. There is, therefore, the need for certainty. From my experience negotiating contracts, force majeure clauses are very important clauses although, several persons treat them as merely boiler plate.

I would, for example, negotiate that for a Force Majeure to avail a party, the circumstances must be such that it is not within the reasonable control, directly or indirectly, of such party, was not the result of fault or negligence on the part of that affected party and could not have been prevented by due diligence. Further, I would also argue that the inability of a party to fulfill its financial obligations should not be a Force Majeure Event.

Setoffs:

This clause may or may not prevent one party from deducting money owed from money payable to the other party pursuant to a contract or transaction. A company which intends to obtain receivables financing should be wary of having a set-off against it in its agreement. This is because financial institutions are reluctant to give receivables financing where a contract which is the basis for obtaining receivables financing contains a set-off clause.

Confidentiality Clauses:

As far as the energy sector is concerned, there are lots of collaborative efforts seen in the form of Areas of Mutual Interests, Joint Bidding and studies etc., which lead to the execution of agreements with confidentiality clauses.

Typically, in these agreements, each party covenants to keep confidential the existence and terms of those agreements and all information received or obtained as a result of negotiating, preparing, executing, performing or implementing it and in particular, information which relates to the other party or any member of its Group or any agent or subcontractor acting on its behalf.

In this respect, it is advisable for advisors to such companies, to consider very importantly, the size of persons authorized to receive these pieces of information without the company which is giving such information being in breach under any confidentiality clause. In this case, the inclusion of prospective financiers and prospective partners, should be given due consideration by a party likely to seek some form of financing or the other, as financiers may need some of the information considered confidential.

Expert Determination Clause

In many energy related contracts such as Engineering, Procurement and Construction (EPC) contracts, it is not unusual for expert determination to be a dispute resolution mechanism for certain technical matters. It is therefore, important for a person drafting or reviewing such a contract to consider a number of issues including the qualification/ disqualification of experts. In this instance, it may be circumspect to exclude any persons who may have had any relationship of a pecuniary nature with any of the parties to the contract.

Liability (Joint and or Several)

Considering that many energy sector contracts involve collaborative efforts, it is not strange to have two or more parties owing obligations under a contract to one or more counterparties.

Where a party under an energy sector contract is entitled to receive the benefit of obligations from two or more parties (“co-obligors”), it makes good commercial and legal sense to insist that such obligations are given on joint and several bases.

If the parties assume liability jointly and severally in relation to a particular obligation, each is treated as having assumed the obligation both collectively, on behalf of all those bound by the relevant obligations, and also individually.

Where these obligations arise and become enforceable; in such circumstances, the obligee may choose to proceed against any one or more of the co-obligors for the full performance of the obligation, or for all his loss or damage arising from a breach or failure by any of them to perform, irrespective of which of them caused the breach.

By way of illustration, if James and John jointly and severally agree to pay Peter $1 million, then Peter is entitled to $1 million and may claim the whole of it from either James or John.  Therefore, there is a joint obligation and there are also separate obligations.  However, the obligations are not cumulative and Peter is entitled to $1 million in total. 

Payment of $1 million by either obligor will discharge the liability of both of them (James and John). Where two or more parties are jointly liable, the position is in many respects the same as if they were liable jointly and severally.  However, if one party jointly liable with others dies, his personal representatives are released from liability, leaving the survivor(s) solely liable.

On the other hand, either or both obligors may want to consider negotiating a several liability clause, so that they are not liable for a breach or some other obligations arising on the part of another party to the contract. The Obligee would be happy to be owed a joint and several obligation whilst each obligor should be happy having several liability to the oblige.

Arbitration

Parties need to think through this clause very well as they need to choose the number of arbitrators and the manner of selection and the place of arbitration and in this regard, there are rules of the forum which are mandatory, whether or not parties envisage them. Therefore, a more familiar seat of arbitration is important and advisable. Also, for smaller deals, it is pertinent to be circumspect about the use of certain dispute resolution means which can be very expensive.

Conclusion:

When due consideration is not given and critically analysis done when adapting or adopting  boilerplate provisions, the consequences, which may arise several years after drafting such contracts, may be very dire. It is therefore very important to avoid wholesale adoption of boilerplate clauses without taking a party’s interests and circumstances into consideration. A good grasp of industry practices and the relevant laws and statutory instruments is also very important when drafting even boilerplate clauses. For more on energy contracts, please read the book, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni.

Ayodele Oni [email protected]}” {[email protected]}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni