1. Overview
Technologies are evolving rapidly, with continued focus on those that support the energy transition and shift towards circular economies. New technologies are increasingly deployed across projects in multiple sectors, for example, in carbon capture and utilisation, production of sustainable aviation fuel and other power-to-x or waste-to-x processes. The selected technology will be central to determining overall levels of performance and therefore critical to success.
Incorporating technology into the design and construction of facilities is not new – for example, this has been a staple of refinery facilities for many years. However, there are different challenges where it is nascent or involves 'first of a kind' (FOAK) elements, whether it is innovative, newly modified, deployed at a materially increased scale or otherwise lacking maturity or track record. Whilst the use of new technology offers investors potential upside and first-mover advantages, there are risks associated with something that is not operationally proven in the field.
Structuring procurement for new technology projects1 requires careful contractual planning, especially where project finance or risk-sharing arrangements are involved. Risk allocation must be clear and appropriate, and early strategic decisions are needed on how the technology package will integrate into the overall project structure. This chapter first considers some of the challenges associated with the procurement of new technology projects. The second section explores disputes that might arise in relation to them.
2. Procurement of New Technology Projects2
What does a 'technology package' include?
Projects that require the use of proprietary technology in their operations will need to secure a bundle of rights and services (a 'technology package') from the owner (licensor). Where the licensor is a third party to the developer, this introduces an additional contracting party and additional project documents into the overall procurement process.
A process technology package will usually include several agreements covering:
- the grant of an intellectual property licence to use and implement the relevant technology (typically confined to specified geographical and technical limits and addressing future updates and improvements);
- engineering services to produce a process design package (necessary to enable design and construction of the wider facility);
- supply of any necessary proprietary equipment (if the process works only in combination with proprietary equipment);
- supply of catalysts or solvents integral to the process (i.e. to launch specific chemical reactions in the process that make the technology work);
- provision of technical support (including support during installation, commissioning, start-up and into operations); and
- a guarantee that the process will perform as promised under specified operating conditions (the performance guarantee).
Consideration typically comprises a royalty fee for use of the licensed technology plus agreed compensation for supplies and services.
Process technology is likely to include 'black-box' information, i.e. information to a sufficient level of detail for the project client (and its other engineer(s) and contractor(s)) to understand the inputs and outputs necessary to implement, use and work with the licensed technology (for example, at interface points with the wider facility), but with the inner workings remaining hidden.
It should be readily apparent that the use of proprietary technology and black-box information will introduce additional interfaces in relation to design as well as execution, commissioning, testing, and overall facility performance. More specifically, key risks include the coordination and integration of the technology (including related design and equipment) with all other design for, and components of, the facility (including all other plant, equipment, materials and structures), and the integrity and performance of the licensed process within the completed facility.
The level of maturity of technology, the nature and extent of black-box information and the scope and size of the licensor's responsibilities for failure (not only for performance shortfall but also for late or defective information or materials) all have implications for allocating risks for technology failure and related design defects in completed works. Early consideration needs to be given to securing the technology package, and how it will fit into the overall procurement strategy.
Typical methods of securing a technology package
The required process will need to be identified, and the relevant licensor selected at an early stage to support the preparation of front-end engineering design (FEED) for the project. The use of new technology may require greater investment in design development, and licensors may require payment for providing design input. Because engagement of the licensor is likely to be prior to the final investment decision (FID) to proceed with the project, where possible, project clients will be keen to structure payments before and after FID. Pre-FID amounts may still be material and represent abortive development expenditure if the project does not proceed.
Due to the need to involve licensors at an early stage, they are often, but not always, engaged directly by the project client. Direct engagement enables a client to manage negotiations with a view to securing appropriately sculpted commercial terms and retaining greatest flexibility when it comes to structuring allocation of technology risks (for example, to support later stage tendering of an engineering, procurement and construction (EPC) contract where risk transfer is practicable).
In some cases, a contractor may partner with a technology licensor to provide an integrated FEED. This is typically associated with EPC contracting strategies. Care is needed to ensure the project client has access to appropriate rights during the operating period and to cut through and directly access the technology pack if circumstances require the project to be progressed without the contractor (for example, if the contractor becomes insolvent or needs replacing).
In either arrangement, a key consideration for lenders to any technology project will be the preservation of the technology licence in the case of defaults by the relevant licensee. This may be addressed by way of a direct agreement that provides an opportunity to cure the default.
Liability for failure of technology
Performance of technology in line with requirements is central to any technology-led project. However, licensors in a narrow field often have a strong market position to drive a hard bargain on contract terms, including relatively low caps on liability for performance (sized by reference to royalties/fees rather than project capital expenditure), time-limited duties to make-good defects, exclusive remedies for delay, shortfall performance and defects and extensive exclusions of liability for financial losses (whether direct or indirect, including loss of use, production, revenue, profit, etc.).
A key point will be to establish the extent to which a licensor would agree to aggregate prices across the technology pack (including royalties for the technology licence as well as fees for services and supplies) for the purpose of fixing the overall limits of liability. However, almost inevitably, the sizing of caps and exclusions of liability mean that damages are unlikely to provide a complete remedy for a project client.
New technology suppliers may require still lower limitations and broader exclusions of liability, including possibly with regard to required standards of performance and performance guarantees. These suppliers may be unwilling to offer fitness for purpose (FFP) obligations more commonly associated with mature technology and turnkey contracting, or go beyond the use of reasonable skill and care (RS&C):
- RS&C is a process-based obligation: for example, under English law, in the absence of express terms to the contrary, a person responsible for design will be expected to perform/prepare that design with reasonable skill and care or following a standard method, i.e. they will not be liable unless they have acted negligently. In some jurisdictions, there may be a 'state of the art' defence against liability for failure to exercise RS&C if design is innovative or FOAK and the designer could not have made it any better considering the knowledge available at the time. However, even pioneering designers usually must be prudent (i.e. merely being new or innovative is not a complete defence against liability).3
- FFP is a results-based obligation: under English law, it is a more stringent standard under which a supplier or contractor guarantees that its product or work will achieve a particular outcome. It is irrelevant that accepted methods or standards were followed or that the design was developed using skilled and competent designers.
For new technology projects, there may be some perceived attraction to approaching risk through the prism of rewarding success rather than penalising failure only, such as elements of pricing or budgeted upside payments being conditional upon the project meeting performance targets. For example, royalties under the technology licence could be structured in an incentivised way.
In many ways, 'at-risk' pricing can address the same issues as contracts set up for conventional remedies and damages. For example, the impact of shortfall performance that would trigger liability for capped performance damages could instead operate to reduce entitlement to an agreed portion of prices or upside amount. In both cases, there will be a finite amount of money available to cover technology failure, whether in the form of damages or reduced/lost entitlements. However, one involves negative implications and claims, and the other involves rewards for success. Naturally, there would be cashflow implications for the project client if risk is allocated through reductions in future payments, rather than immediately recoverable as damages. A mixture of 'at-risk' pricing, upside and conventional damages could operate in combination.
Generally, clients procuring new technology projects may look at closer definition and control over payments at appropriate points in design, engineering and execution (including commissioning and testing) so that they can be satisfied that progress towards a successful outcome is being made and mitigate the risk of design failures leading to costly knock-on effects. If new technology requires certification by an independent third party as conforming to international standards, this may be a requirement of insurers and any lenders, and hence a key gating item for investment.
Conventional features of a technology 'wrap'
The construction of facilities incorporating technology involves risks for a project client in terms of the interface between technology (and related design) and the design and components for the rest of the facility, and responsibility for technology failure and related design defects in the completed works.
In a procurement designed to meet conventional straight-jacket requirements of project finance lenders, a client would seek to avoid interface issues by transferring these risks to a willing contractor with single-point responsibility for design, engineering, procurement, construction, commissioning, start-up and achieving whole facility performance guarantees in line with client requirements (i.e. a technology 'wrap' within an EPC contract).
An EPC contractor providing a technology wrap would typically guarantee a certain level of performance at and/or after taking-over depending upon the nature of the asset. Failure to meet guaranteed levels of performance would typically trigger liability for capped performance liquidated damages (LDs). A minimum level of performance may set the threshold for achieving taking-over, with capped delay LDs and, ultimately, rights of termination and potentially rejection accruing in the case of failure. There may be defined opportunities to make-good failure and claw-back performance LDs (in the case of improved performance) or avoid termination or rejection. With an EPC contractor's liabilities and performance securities sized by reference to a proportion of the construction contract price, it follows that a wrapped solution could offer better overall recourse for technology failures. The mix of rights and remedies is usually a matter of significant commercial negotiation, with financial caps and exclusions of the contractor's liability ultimately operating to fix the limits of its exposure.
A full wrap of technology risks would typically involve the EPC contactor taking all responsibility for delay in completion, shortfall in performance and correction of design and other defects both within the process technology and consequential on it.
A partial wrap of technology risks may involve the EPC contractor being responsible for the procurement and integration of technology, but only liable for failures attributable to the technology and related black-box design to the extent that it can recover from the licensor, i.e. on a 'back-to-back' basis. There is no 'one-size-fits-all' approach to a partial wrap, but, in principle, it is likely to involve the contractor being entitled to rely upon the adequacy and efficacy of the technology process and related design. The project client may aim for the contractor to have responsibility for overall design coordination (including between process design and other elements of facility design) and the burden of proof that failures stem from the technology and related design.
Whilst liability that mirrors performance LDs and indemnities for intellectual property infringement should be relatively straightforward to implement (albeit based on relatively lower caps contained in the technology pack), there can be more nuance to dealing with the consequences of delay to project completion or costs of redesign, modification or making-good (including to the wider facility) required as a consequence of technology failure and related design defects (before and after completion).
There are various well-developed ways of implementing a wrap between a willing licensor and EPC contractor. For example, a client that has procured the technology pack might create direct rights for the contractor (for example, pursuant to a collateral warranty or third-party rights where applicable) or arrange a tripartite agreement (giving the contractor access to certain remedies and jointly enforceable obligations under the technology pack for so long as and to the extent that the contractor has liability for delay, defects and performance shortfall). Other clients may encourage teaming-up between contractors and licensors in consortium arrangements, although it is the authors' experience that, for various reasons, many of them are unwilling to form consortia (at least on a genuinely joint and several liability basis).
Seeking a wrap can increase bid duration and contracting complexity. Strategically, where the client is intending to seek a technology wrap, this should be raised at an early stage in contracting processes. Inevitably, industry standard form contracts require adaptation to conform to the requirements of particular projects.
Challenges to securing a 'wrap' for new technology projects
Several factors can influence a project client's ability to secure a wrap as well as the extent of the wrap and its economic efficiency. With mature technology, previous relationships between the licensor and the contractor (and whether experiences were good or bad) can be influential. Nevertheless, for large or complex projects, contractors may be unwilling or unable to carry (or bond) a high degree of whole project risk transfer at an acceptable price or at all.
In the authors' experience, key factors will be the level of maturity of the technology and the extent of black-box information, i.e. how proven, 'knowable' or replicable is the technology and related design. The use of new technology involves material additional risk factors – including FOAK and potentially relatively significant development and capital expenditure – that could have a very high impact for the project client, licensor and potential EPC contractor. Coupled with this, as stated, suppliers of new technology may be reluctant to accept the same levels of obligations and liabilities as for mature technology.
These constraints may be a significant impediment to the creation of an economically efficient wrap on a meaningful basis. There may be challenging discussions around reliance upon black-box information, the degree of exposure to delay and performance shortfall risks, the size of related liabilities and the nature of remedies associated with failures to meet minimum viability requirements (including the duration and allocation of costs of make-good obligations due to failures in or attributable to the technology and related design).
A very significant sculpting of risks and responsibilities under an EPC contract, when coupled with potentially heavily negotiated limitations and exclusions of liability in the technology pack, could call into question the real nature and value of a wrapped solution. Risks that are not allocated to the contractor or the licensor will ultimately be borne by the project client.
Different approaches for new technology projects
A key issue for any project will be the readiness or ability of the supply chain to take on, at an acceptable price, time, outturn cost, quality and performance risks. Contracts, whilst often designed to protect the interests of the project client, need to recognise constraints affecting the contracting sector (including licensors and contractors) and allocate risks specifically and appropriately.
For various reasons, including those already discussed in this section, plus supply chain capability, capital cost, programme considerations and market conditions generally affecting risk appetite, new technology projects may require different approaches.
For example, unbundling responsibilities, and potentially more incentivised or collaborative contracting arrangements, may provide a more optimised route to completing a project on time, within budget and to required performance standards.
It is outside the scope of this chapter to pe into wider considerations for unbundling procurement; suffice to say, inevitably this involves separation of responsibilities and retained interface risk for a project client. However, there may be strategic gains. To give one example, some technology licensors may have the capability to prepare the FEED (including process design) for the whole project. All design and engineering responsibility could be kept under one roof if the licensor contractor is also engaged to develop design and engineering throughout project execution and provide a lead design function to ensure that all project design (including any contractor-design included in construction contracts) is coordinated. This could vest one entity with responsibility for ensuring that, as design and engineering matures, it is fully coordinated across the whole project. As the owner of black-box design and technology, the licensor is probably the only organisation that can really do this. The continued involvement of the technology licensor in maturing design (and monitoring the conformity of construction and installation with design) may provide some comfort to sponsors and any project lenders regarding FOAK risks.
Some clients may consider inviting arrangements for key delivery partners to participate in the equity for the project, such as the technology licensor or any EPC contractor. In theory, the interests of delivery partners taking an equity stake should be more structurally aligned with the interests of the project client, and they could be induced to take actions beneficial to the project. However, there is potential for conflicts of interest, and there are other considerations for clients looking at these arrangements.
All project participants will no doubt keep a keen eye on the development of the market for technology performance insurances. However, in the authors' experience, these may not provide solutions for new or less mature technologies where there is insufficient data necessary for risk assessment.
Implications for project finance
If a client desires to raise project finance, then lenders, just like the project client, will be concerned to ensure that the project is successfully completed on time, to budget and in line with performance requirements.
Lenders on new technology projects will particularly need to understand how sponsors will be able to withstand failure of design or unexpected performance of technology. Black-box information may need to be protected by escrow arrangements so that it can be accessed in the case of insolvency of the licensor or withdrawal from the market.
Ultimately, FOAK risks and reduced or unbundled levels of responsibility in the supply chain are likely to result in a greater focus on support from sponsors (possibly debt service and very likely contingent equity, which could impact equity return in a downside case).
The above sheds some light on the challenges that may be encountered when procuring new technology projects. The remainder of this chapter focuses on disputes that may subsequently arise.
3. Risks and Legal Challenges in New Technology Construction Claims and Disputes
The types of construction claims and disputes arising on new technology projects are fundamentally no different from those seen on more traditional construction projects. At their core, they are claims and disputes concerning delay/extensions of time, variations, breaches of contract, defective design and/or workmanship, force majeure and termination.
The unique risks presented by new technology projects lie in a combination of factors, such as the project delivery methods used, prevailing market conditions (in particular, supply chain constraints) and the technical challenges involved in delivering such projects, as set out in the previous section. Together, these risks give rise to notable legal and strategic challenges, some of which are explored further below.
Challenges in delay claims
As with traditional construction projects, delay is a common feature of construction disputes on new technology projects. Delays can arise due to a variety of factors, including late employer instructions or approvals, the provision of incorrect or incomplete design, unexpected construction challenges, scope changes and/or poor contract and supply chain management.
Establishing the cause(s) of delay and legal responsibility can be especially difficult on new technology projects. This is particularly true where the employer is responsible for providing certain items through a specialist contractor or the innovative or technically challenging nature of the project requires higher levels of coordination and collaboration between the parties, with complex internal and external interfaces to be managed. This, in turn, will inevitably increase the potential for parties to argue about the true cause of any project delay.
An employer's remedies for delay might also be limited. Where the project is procured on a disaggregated basis with no full technology wrap (as described above), the employer may later discover as the dispute evolves that there are material gaps in liability between relevant contract packages. Even where remedies are available, an employer's contractual remedies for delay will likely be limited to delay LDs, which will often be capped. Delay LDs may also not adequately compensate the employer for the actual financial consequences of delay, which may not have been possible to fully anticipate (and provide for) at the time of contracting.
In these circumstances, the employer might try to pursue the contractor for general damages to avoid any caps on delay LDs or the application of delay LDs altogether. However, a claim in general damages would involve proving loss through the dispute resolution mechanism in the contract, and so is not an immediate lever to alleviate pressure. Factual and legal causation may also be difficult to establish for the reasons stated above. If the contract includes a general cap on damages that has already been exhausted, or if delay LDs are stipulated as the sole and exclusive remedy for delay, these limitations may preclude a claim for general damages altogether.
Termination may be another option where there is excessive and unjustifiable delay. However, that is a high-risk option and, depending on the stage of completion of the project, exercising such a right could leave the employer to outlay significant sums to complete the work, subject to the resolution of any claim against the contractor for the additional completion costs.
Complexities of defects claims
Similar to delay, it can be difficult to establish the cause(s) of and responsibility for defects and other performance issues, which will also typically require specialist engineering expertise to determine. This is particularly the case where there is room for interpretation as to the acceptance and/or performance criteria for the asset once completed.
The issue of applicable standards can also be a source of contention, with material consequences depending on how a court/tribunal finds. The contract might not always assist, for example, where different requirements are specified in the conditions of contract and the technical specification. In general, absolute obligations, such as those requiring the works to be FFP (if that is achievable) or to have a certain design life, need to be expressed in clear terms and distinguished from those that are subject to RS&C. An FFP or design life requirement will not necessarily be overridden by the inclusion of other detailed technical specifications/standards in the contract.4
Again, similar to the position on remedies for delay, an employer's remedies for technology failures or related design defects can be limited where a defect is not capable of remedy (or timely remedy). Performance LDs, if provided in the relevant technology licence agreement, are almost invariably capped and potentially at a level that will not properly compensate the employer for loss of revenue (which is usually irrecoverable as general damages under English law except in limited circumstances). The employer's position may be more favourable where there is a full EPC wrap. However, as described above, the EPC contractor's liability may be stated to be no greater than that of the technology licensor, leading to a similar outcome.
In the case of serious or irreparable defects or non-conformities in an EPC solution, an employer's options are usually limited to taking-over or termination and, potentially, rejection. However, an employer would need to be mindful of the limitations to each option, including the following:
- Where an employer chooses to take over the project at a reduced contract price, in an English law context, it is debatable (although subject to the terms of a contractual right relied on) whether loss of revenue could be accounted for in any such reduction, particularly if recovery of loss of revenue is expressly excluded by the contract.
- Termination will inevitably lead to challenges in completing the works and possibly create further delays and issues. For example, the employer is unlikely to secure a new EPC/main contractor to complete the works on the same basis, including the provision of performance guarantees. There will likely be gaps in warranties, creating difficulties for future defects claims. If the employer is taking over existing subcontracts, it will have limited leverage (particularly against specialist subcontractors/suppliers) and may need to make historical payments and potentially agree less favourable terms, unless direct agreements are in place from the outset. There are also procedural challenges associated with termination, such as the potentially damaging consequences of failing to serve a proper termination notice.
- Rejection of the works and recovering the contract price may require the employer to abandon the project altogether, as it will be difficult to reject the plant and then use it to generate revenue. However, as discussed above, securing rights of rejection or full recovery may be challenging in the case of new technology.
Ultimately, all three options carry a greater risk of arbitration or litigation.
4. Strategic Considerations in Construction Disputes on New Technology Projects
Where claims evolve into arbitration or litigation, parties will need to be mindful of certain practical and strategic considerations that may be more pronounced on construction disputes involving new technology projects, as detailed below.
Expert evidence
Expert evidence is often critical to the outcome of construction disputes, and particularly in the case of those involving new technology projects. However, where novel technical issues are involved, there is usually a very limited pool of expert candidates with the required experience and expertise. It is also not unknown for parties to strategically instruct leading experts in the field as soon as a dispute is on the horizon to 'conflict out' potential candidates and prevent them from acting for the opposing side. Securing experts at the outset of the dispute can therefore be of paramount strategic importance.
For construction disputes involving FOAK technologies, expert firms offering professional dispute resolution services may not be able to offer any suitable candidates, requiring parties to search further afield, such as within academic institutions. There can be additional challenges in instructing experts who are unfamiliar with preparing expert reports and/or giving oral testimony in a manner that will be easily digestible by a court/tribunal. Helping an inexperienced expert navigate the dispute resolution process will fall to the legal team, who will need to ensure that the expert understands, first and foremost, their duties to the court/tribunal. Careful guidance may also be required to ensure that the expert takes ownership for the report and remains mindful of their duty to the court/tribunal.
Another difficulty that may arise is where, due to the novelty of the relevant technology, the only experts with the requisite qualifications and expertise are those who are or were historically affiliated with a party's organisation. Parties may be faced with a dilemma of having to risk instructing such inpiduals as experts or to appoint an expert who may have relevant skills and expertise but is not a 'genuine expert'. Neither situation is ideal.
The risk of SPV structures
A further strategic consideration relates to the project structures that are often used on new technology projects, particularly in the energy and infrastructure sectors. Due to their high risk and costly nature, energy and infrastructure projects supported by private and public investment are typically structured through special purpose vehicles (SPVs). These are the entities that procure and enter into construction contracts for the project.
However, SPVs typically have limited liquidity and, whilst they may have a single high-value asset in the form of the project, they tend to be heavily indebted with security being the project itself and with no means of income (aside from loans and/or cash injections from shareholders) until the asset is complete and generating a return. The investors in the SPV also tend to be the ultimate beneficiaries of any successful litigation/arbitration.
Where an SPV is the procuring party and, in turn, the party to a dispute, the opposing party may bring a strategic application for security for costs and/or claim, which can be difficult for the SPV to defend given the above features. One possible defence is that the SPV itself does not have the necessary funds to provide the security sought and an order for security would be prejudicial to an otherwise valid claim.
However, where it can be shown that the SPV's investors have sufficient funds, a court/tribunal may be inclined to order security against the SPV.5 Whilst the order would not directly be enforceable against the SPV's investors (not being a named party to the dispute), the investors will usually be incentivised to assist the SPV in complying with the order due to its commercial interest in the outcome of the dispute.
5. Concluding Remarks
The complexities of new technology projects require careful planning, contractual foresight, and robust dispute resolution strategies. Whilst the use of innovative technologies offers immense potential in addressing global challenges like the energy transition, these projects inherently present heightened risks in procurement, risk allocation, and overall delivery and performance. Tailored solutions, such as bespoke remedies and creative contractual frameworks, are crucial to navigating issues such as underperformance, delays, and defects. The challenges become further pronounced in the context of disputes, with hurdles ranging from fragmented risks and/or liability gaps arising from disaggregated procurement to the scarcity of qualified experts for novel technologies. Acknowledging these hurdles and adopting proactive and adaptive strategies will be essential for ensuring the successful delivery of new technology projects and effectively approaching any disputes in this rapidly evolving landscape.
Footnotes
1. In this chapter, the term 'new technology project' is used broadly to describe any construction project in which novel or innovative technologies are used or developed, or existing technologies are used in new or untested ways or in larger or more challenging operating environments.
2. This section uses the example of a facility incorporating licensed process technology.
3. For example, in Independent Broadcasting Authority v EMI Electronics Ltd [1980] 14 BLR 1 (HL), the English courts held that even though the design and construction of a cylindrical communications mast was 'both at and beyond the frontiers of professional knowledge at that time it was still incumbent on (the designer) to exercise a very high degree of care'.
4. See the landmark case of MT Højgaard A/S v E.On Climate & Renewables UK Robbin Rigg East Limited and another [2017] UKSC 59.
5. See, for example, the recent case of Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch) in which the English High Court granted an application for security of costs against an SPV in the context of a distressed project. Among other things, the court considered that '...it is appropriate to examine not just the financial resources that the Company itself has immediately at its disposal. Rather, it is appropriate to examine resources that others, such as the Funds, might be prepared to make available'. The court also confirmed that it '...looks critically at what could be regarded as self-serving assertions that a company's backers are unwilling to provide security'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
