The offshore wind industry is continually expanding into new markets attracting a broader range of participants. This growth raises important questions about which legal frameworks should govern the major construction contracts, known as tier 1 contracts. Additionally, there is a shared interest among all parties in minimising the costs associated with drafting, negotiating and managing these contracts.
Efforts to standardise contracts within offshore wind are already underway. For instance, FIDIC’s Task Group 14 is developing a standard form of contract specifically designed for offshore wind projects (See FIDIC’s initiative)1, while BIMCO is creating a time charter party for vessels involved in transporting and installing offshore wind turbine generators (See BIMCO’s initiative)2. In addition to these standardisation efforts, the use of framework agreements and consistent selection of governing law can significantly reduce complexity and costs.
Choosing the right governing law is crucial for the parties to fully comprehend their mutual rights, obligations and liabilities. This law will guide courts or tribunals in interpreting the contracts and resolving any legal disputes that may arise. This article aims to assist contracting parties in selecting the most appropriate law to govern their contracts.
Choice of Law
Parties generally have the freedom to select the governing law in offshore wind contracts, particularly those involving cross-border transactions. However, it’s important to note that mandatory background laws applicable to the parties and the contract’s execution will also apply.
In most cases, the Employer will specify the governing law in the tender, and the supplier is likely to accept this choice, especially if the following have been addressed:
Law of the Country
It may seem intuitive to first consider the law of the country where the offshore site is located as the governing law. However, the selection of governing law is influenced by a wide range of factors beyond just the location.
Familiarity
The contracting parties should have a solid understanding and experience in the interpretation and application of the chosen laws in question. This familiarity ensures they are comfortable with the legal system and confident in their risk assessments.
When considering the governing law, it’s important to evaluate whether it might be too unfamiliar or “exotic,” and whether there a sufficient quantity of experts proficient in that law. As offshore wind projects are often expanding into emerging markets, parties may not yet have a local presence, and experienced local law firms capable of handling large-scale infrastructure projects may be scarce. Moreover, external advisors should be well-versed in offshore wind contracts and industry practices, which might not be the case with the laws of emerging markets or smaller countries.
Predictability
When drafting, negotiating, and executing the contract the parties should have a high degree of confidence in predicting the outcome of any potential disputes based on the facts and merits of a case.
It is essential that they can anticipate and understand how legal principles and regulations will be applied under the chosen governing law within its jurisdiction.
Neutrality
The parties sometimes consider agreeing on a “neutral” law, such as Swiss law, when they are based in different countries. This choice is often motivated by concerns that one party may be at a disadvantage if they agree to the other party’s home-country law. However, the real benefits of this approach should be carefully evaluated.
Opting for a neutral law may leave both parties less familiar with the legal framework, requiring them to rely more heavily on external legal advice and making it harder to predict the outcome of potential disputes. Additionally, this choice can complicate the appointment of qualified individuals to dispute resolution boards, such as mediators, adjudicators, and arbitrators.
Specific Interests of the Parties
The employer typically aims to ensure that the same governing law and dispute resolution procedure apply to all tier 1 contracts. This approach facilitates joinders and multi-party proceedings, reduces coordination efforts, and mitigates differences and interface risks. This is particularly critical in project finance and bankability contexts, as lenders view inconsistent governing law and dispute resolution procedures as unnecessary risks. Consequently, lenders often expect the developer to apply uniform standards across all tier 1 contracts.
Similarly, the contractor has a vested interest in applying consistent governing laws to its supply chain, particularly for major subcontracts. To support the contractor in this effort, it is advisable for the employer to establish firm, predictable and long-term standards for its choice of law and dispute resolution mechanisms. This allows suppliers to align their standards with those of the subcontractors, fostering a more cohesive and manageable contractual environment.
Overarching Interest in Standardisation
There is a strong interest in the market for standardisation, which includes the choice of governing law. Parties generally prefer to avoid applying multiple legal frameworks on a project-by-project basis. They might already have collaborated on previous projects, providing a foundation for consistency and allowing parties to leverage past experiences. For larger developers, the drafting and negotiation of tier 1 contracts are often managed from headquarters, regardless of the project’s location.
Flying teams to the project country to negotiate the contract under local law, with extensive support from external law firms, is neither sustainable nor cost-efficient. In the interest of standardisation, shorter negotiations, more efficient use of internal resources, and reduced external costs, it is practical to limit the choice of governing laws to a few that are widely accepted by key market players.
For example, in Europe, English, German, or Danish laws are commonly used in Europe, with English law prevailing in the UK and Ireland. On the east coast of the U.S., the laws of the State of New York are typically selected. In Continental Europe, codified civil laws are preferred, with German law being accepted for projects in Denmark and Poland without significant pushback from the supply chain. In the Asia-Pacific (APAC) region so far, English or Singaporean law is usually chosen, and this practice may extend to new markets in the region. However, the drive for standardisation may be challenged or overridden by specific circumstances, such as public tenders, local content requirements, or the involvement of new local investors or joint venture partners with a strong preference or mandate for applying local law.
Mandatory Background Law
Irrespective of the chosen governing law for the contract, the parties must carefully assess the impact of mandatory local law provisions and requirements in the country where the project is located, as well as in other countries where works are performed or where applicable laws govern the parties themselves. These mandatory provisions cannot be validly replaced or superseded by the parties’ selection of governing law.
Mandatory local laws can cover a wide range of issues, including but not limited to:
- property and insolvency law
- regulatory requirements, including those relating to safety, environmental protection, and to permits and consents for the project
- employment laws, including regulations on wages, working hours, and workplace safety
- taxation and customs clearance
- contract law, particularly limitation of liability
- construction law with specific emphasis on decennial liability
Understanding and complying with these mandatory provisions is essential to ensure the contract’s enforceability and the project’s overall success.
Further Considerations
When agreeing on the governing law, the parties may choose to exclude the application of certain parts of such law. For example, they might exclude specific sections related to construction, transportation, and maritime law, or in Germany, sections 305 to 310 of the German Civil Code (BGB) regarding unfair general terms and conditions.
Moreover, the parties can agree to exclude the application of private international law regarding the choice of law, the United Nations Convention on Contracts for the International Sales of Goods (CISG), or on the limitations of liability as per the Convention on the Limitation of Liability for Maritime Claims (LLMC).
Special and further consideration is required when the offshore site is located in the Exclusive Economic Zone (EEZ), which is usually true for an offshore wind project. In such instances, the law of the country that holds rights to the EEZ may not fully apply to the offshore site. This is particularly important if the site is located outside the EEZ and not within the state’s territorial waters, necessitating a thorough assessment to determine the applicable legal framework.
Summary
The explanations above illustrate that the law of the country where the offshore site is located does not always need to be the governing law for offshore wind contracts. For reasons of efficiency, time savings, cost reduction, and legal certainty, it can be advantageous to choose another governing law already used in the offshore wind industry. However, this does not mean that the law of the offshore site’s location should be automatically excluded. Employers can specify the applicable law in the invitation to tender, with a reasonable expectation that the contractor will accept it if the selection is made fairly and considers the factors discussed.
I hope these insights assist projects and contractual partners in choosing the appropriate governing law for their contracts.
I would like to hear your thoughts and experiences on this matter. Please share your comments or reach out if you have any questions or would like to exchange ideas.
Marc Loehner is the Country Managing Director for JUMBO Consulting Group Germany, a highly specialised advisory offering strategic services and project delivery consultancy for offshore wind, offshore transmission systems and energy island projects, covering the entire project lifecycle from early development, procurement, construction to O&M. Headquartered in Denmark, JUMBO Consulting Group’s services are founded on deep sector knowledge and delivery of contractual and commercial solutions within its core disciplines, development services, supply chain development, category-, procurement- and contract management and advisory.
- 1 FIDIC’s initiative https://fidic.org/node/41494
- 2 BIMCO’s initiative https://www.bimco.org/insights-and-information/contracts/20240625-windseacon