Introduction 

At the forefront of Malaysia’s renewable energy revolution stands the adoption of solar power, and with it comes the need for versatile mechanisms of Solar Engineering, Procurement, and Construction (“EPC”) contracts (“Solar EPC Contract”). 

A Solar EPC Contract, commonly used in utility-scale solar facilities in the private sector, is essential for ensuring successful project execution and performance. It delineates the responsibilities, liabilities, and performance standards of all parties, serving as a blueprint for project progression.  

Among the numerous clauses embedded within these agreements, three key performance clauses stand out as crucial determinants of project performance and success: (a) liquidated damages, (b) performance guarantees, and (c) testing mechanisms. 

1. Liquidated Damages 

A liquidated damages clause is a contractual provision that specifies a predetermined sum of money to be paid as compensation for a particular breach or non-performance. This agreed-upon amount, set at the contract’s formation, aims to estimate potential damages arising from specific breaches, providing clarity and avoiding lengthy legal disputes over the amount of damages in case of a breach.  

In Solar EPC Contracts, two main types of liquidated damages are typically imposed: liquidated damages for performance (“LDP“) and liquidated damages for delay (“LDD“). Solar EPC Contracts typically include LDPs as achieving performance guarantees greatly influences a project’s overall success. Likewise, timely commencement of operations for the Solar PV plant is crucial due to the potential liability under other project agreements in the event of delays. Given the potential for substantial sums in liquidated damages, LDPs and LDDs serve as strong incentives for the Contractor to fulfil its contractual obligations in an effective and timely manner. 

It is crucial to ensure that liquidated damages clauses are reasonable and proportionate to the anticipated harm caused by the breach; otherwise, they may be deemed unenforceable. In the Federal Court case of Cubic Electronics Sdn. Bhd. (in liquidation) v Mars Telecommunications Sdn Bhd [2019] 6 MLJ 15, it was established that it is not necessary for the non-defaulting party to prove actual loss or damage in every case. However, parties seeking to enforce a damages or liquidated clause must: 

(a) prove there was a breach of contract; and  

(b) ensure that the contract contains a damages or liquidated clause which stipulates a sum to be paid in the case of a breach.  

Despite the precedent set by the Cubic Electronics case, where the burden lies on the defaulting party to prove the unreasonableness of specified compensation/damages, it remains crucial that the stated amount reflects a genuine pre-estimate of loss, to avoid being deemed unenforceable or a penalty.  

Therefore, when drafting a liquidated damages clause, it is advisable to separate the amounts for LDP and LDD to avoid any risk of unenforceability. For example, in cases of project delays, a combined LDP and LDD amount risks being challenged by the defaulting party because it may overcompensate the project company. 

2. Performance Guarantees 

Ensuring that a Solar PV plant operates optimally in terms of output, efficiency, and reliability is crucial for generating revenue for the project company. In a Solar EPC Contract, the performance guarantee clause outlines clear performance standards, obligations, and remedies, ensuring that the Solar PV plant achieves its intended performance goals. 

During the testing process, specific aspects of the Solar PV plant’s performance undergo evaluation. If the Solar PV plant fails to meet the specified performance guarantees, various methods are available to address the deficiency. Typically, Solar EPC Contracts grant the contractor an opportunity to rectify any issues to ensure compliance with the performance guarantees. 

However, if the contractor remains unable to meet the performance guarantees despite attempts to rectify the situation, the performance guarantee clause is often backed by an LDP, requiring the contractor to compensate the project company for any shortfall in performance. 

A performance guarantee clause, supported by LDPs, not only safeguards the project company’s revenue but also promotes accountability, quality assurance, and risk mitigation throughout the Solar PV plant’s lifecycle. 

3. Testing 

Testing clauses in Solar EPC Contracts play a crucial role in ensuring the quality, performance, and compliance of solar facilities. These clauses outline the specific testing procedures, performance metrics, and acceptance criteria that the Solar PV plant must meet before it can be considered operational and handed over to the client. 

The importance of testing clauses in Solar EPC Contracts can be highlighted in 3 key ways: 

(a) Quality Assurance: They set out clear standards and benchmarks for the quality of the Solar PV plant’s components, such as panels, inverters, and monitoring systems. Through rigorous testing, any defects or performance issues can be identified and rectified before the facility goes into operation, ensuring long-term reliability and efficiency. 

(b) Performance Verification: They also define the performance metrics that the Solar PV plant must achieve, such as minimum and guaranteed energy output, efficiency levels, and reliability standards. These tests verify that the facility meets its intended design specifications and performance guarantees, providing confidence to the project company regarding the Solar PV plant’s viability and expected returns. 

(c) Risk Mitigation: By conducting thorough testing and verification before commissioning the Solar PV plant, potential risks and performance uncertainties can be mitigated. This reduces the likelihood of unexpected failures, downtime, or underperformance post-commissioning, protecting the Solar PV plant’s financial investment and reputation. 

From a contractual drafting perspective, it is also crucial for the Solar EPC Contract to address the allocation of costs related to modification and retesting by the Contractor. Specifically, the Solar EPC Contract must define who bears the expenses for additional resources and consumables needed for retesting, though this would typically be borne by the Contractor since retesting only occurs if the performance guarantees are not initially met.  

Conclusion 

In conclusion, the three key performance clauses in Solar EPC Contracts, namely liquidated damages, performance guarantees, and testing protocols, play critical roles in ensuring the success and viability of solar projects and advancing environmental sustainability in Malaysia’s renewable energy landscape.