Ashfords Solicitors - Renewable Energy Contracts

How to draft successful contracts

As is often the case in practice, businesses often agree short contracts or forego a written contract completely, in order to achieve speed and to keep costs to a minimum. So far so good, but what happens when the relationship between the parties breaks down and the parties find themselves in court before a judge?

How do Courts interpret contracts

One leading case on the interpretation of contracts is the Investors Compensation Scheme Ltd v West Bromwich Building Society which was decided back in 1998.

In this case, the Judge held that the Court will take the meaning which the contract would convey "to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract".

The starting point when looking at what words mean is that they are to be given their ordinary and natural meaning.

The Courts have also held that pre-contractual negotiations which preceded the formation of the contract are inadmissible. A Court will therefore normally make an objective judgment based on the document in front of them.

Practical Guidance

Make sure your contract accurately reflects the intention of the parties, so:

Do not use technical terms without defining them – where there is a term which does not have a universal meaning or which is industry specific or which could be interpreted differently by the parties it is wise to be clear about what the word or phrase means;
Beware of words with two meanings or which could be interpreted differently by the parties – if there is a phrase which is particularly important to your business then spell it out in the contract;
Don't leave gaps – don't fall into the trap of leaving things out of the contract on the basis that a certain issue is assumed to be understood by the parties.

The main message is, if a point is important to your business then make sure it is in the contract! It may take a little more effort in management hours and incur some upfront legal cost, but in the long run, having a document which clearly sets out each parties' rights and obligations will prove invaluable. This is both from the point of view of protecting your position in the event of litigation and as a commercial tool to keep the parties focused on the performance of the contract.

In the Renewables Sector

To illustrate the above, we have set out below examples of the sort of issues that can apply in the renewables sector and which benefit from having clear contract terms with your supplier or customer.

Buyers of renewables

If you are buying a renewable crop, it is very important to make sure that the specification is set out in full in the contract. As the purchaser, it will be important that the crop is compliant with a particular specification to suit your requirements. For example, does the product have to be of a certain humidity? Do the dimensions of the input material need to be specified so that the product is suitable for your machinery? What percentage of contamination, if any, is acceptable?

Suppliers of renewable energy

On the other side of the coin, when supplying renewable electricity to customers there are a number of points that should be made clear in the contract. You may want to have the right to increase your prices in the event that any energy-related tax, levy or duty, including for example renewables legislation, increases your costs of doing business.

For Buyers and Sellers

Most businesses are familiar with the concept of a force majeure clause which enables the seller to be excused for a failure to deliver the goods on time where there has been an event of force majeure (broadly speaking something outside of the reasonable control of a party). What may not be known is that force majeure will not be implied into a contract in the absence of an express clause. It is therefore very important for buyers and sellers to ensure that a reasonable force majeure clause is agreed and incorporated into the contract.

Overall

The message to take away is that if you are operating within the renewables sector, it is good practice to produce a robust contract which reflects the parties' agreement and which you can make use of if the commercial relationship deteriorates. Whilst it may seem faster and cheaper to produce something that is short-form, it is important to remember that the Courts will not look at the parties' previous negotiations or what they say they intended, if its not in the contract and if it is not clear.

Given the regulatory background to the renewables sector and the fact that certain terms may be not be so well established we have provided a short glossary.

Glossary

The emerging vocabulary can be illustrated by the number of acronyms and terms which have come into play in recent years. The emerging "green" legislation is responsible for some of the new terminology. The examples below illustrate some of the new language:

Stoichiometric
Advanced Conversion Technology
MSW
Photovoltaics*

* Definitions below:

Stoichiometric - a term used in thermodynamics to refer to the ideal combustion process during which a fuel is burned completely
Advanced Conversion Technology – new and developing thermal processes, such as gasification and pyrolysis for the conversion of biomass (usually waste wood / chipped wood and/or MSW) into heat and/or electrical power.
[Pyrolysis is the chemical decomposition of organic materials by heating in the absence of oxygen or other reagents.]
MSW – Municipal Solid Waste – is made up of household waste and other wastes collected by a waste collection authority or its contractors. This includes residential, municipal and commercial wastes.
Photovoltaics – the ability to generate electricity from sunlight. Photovoltaic systems are different to solar thermal technology as they convert sunlight directly to electricity rather than simply heating water.

Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.

Key Contacts

Renewable Energy Contracts

Introduction