One of the potentially important tools used in the private power sector is the engineering, procurement and construction (EPC) contract. These contracts are so important in projects where they are used because so much of the project rides on them. Under an EPC contract, a contractor is legally obligated to produce a power facility, complete and entire, at a guaranteed price by a specific date and according to specific specifications.
For contractors and developers in the private power sector, it is critical to carefully negotiate and abide by the terms of these agreements, since failure to do so can translate into monetary loss on either side. The losses associated with EPC contracts gone awry can be great, and this is demonstrated in a recent federal case between Duke Energy and Westinghouse Electric.
Westinghouse Electric had filed a lawsuit against Duke alleging that the power company owed $352 million after Duke cancelled an EPC contract for a nuclear power plant development project in Levy County, Florida. It was actually Progress Energy, a company acquired by Duke in 2012, which had entered into the contract and later cancelled that deal in 2014 on account of delays in obtaining a federal license for operation and construction. The delays were due to a Westinghouse design error and a change in Florida law impacting Progress’ ability to recover construction costs.
After the deal was cancelled, Westinghouse alleged that Progress owed a $30 million termination fee, as well as $352 million as its share of the cost of developing the nuclear power plant under the contract. Ultimately, the court ruled that Duke did owe the termination fee, plus interest costs, but sided with Duke on the issue of development costs. The decision was based on contractual technicalities that made the design defect issue contractually separate from the development issue.
In our next post, we’ll continue looking at this case, and the importance of working with an experienced attorney to negotiate and navigate EPC and other construction contracts.