Lord Justice Phillips has handed down his judgement in a long running case in the High Court in the UK regarding a claim bought against the developer of the Gwynt-y-Môr offshore windfarm
The court case related to the failure of the export cables for the offshore windfarm.
Following construction by an innogy-led consortium, the assets which transmit the electricity onshore were sold by Gwynt-y-Môr Offshore Wind Farm to a separate company, Gwynt-y-Môr OFTO plc, a consortium of Balfour Beatty and Equitix, following a competitive tender run by Ofgem.
In 2015, two of the cables owned by the OFTO suffered failures in quick succession. Engineers concluded the failures were caused by manufacturing faults but the insurers of the cables refused to pay out.
The export cables were sold by the developers to the OFTO by means of a sale and purchase agreement dated 11 February 2015, with the sale completing six days later on 17 February 2015. The first export cable failed two weeks later on 2 March 2015 and the second failed on 25 September 2015.
In Lord Justice Philips’ ruling on 8 April 2020, the developer was not held liable for the repair costs of the two failed export cables.
The cables failed due to severe corrosion caused by damage to part of the polyethylene sheath during manufacture. This enabled seawater to penetrate the cables. This ultimately led to the failure of the export cables.
HFW partner Richard Booth said, “The OFTO sought to rely on an indemnity in the sale agreement, which was held to only apply to a six-day period between the date of the agreement and completion of the sale.
“The root cause of the corrosion, however, occurred during the cable manufacture and manifested itself over months and months.”
Mr Booth told OWJ, “The OFTO was left shouldering £15M of remedial costs to repair the export cables at Gwynt y Môr.
“Lord Justice Phillips held that the cables failed due to severe corrosion, dating back ’months or years.’
“The OFTO claimed the remedial costs from the developer on the basis of an indemnity contained in the sale agreement, which the OFTO said applied to remedial costs incurred in repairing cables that were destroyed or damaged prior to completion of the agreement.
“The developers said the prime concern the indemnity was intended to address was a cable being damaged by a ship’s anchor. They argued that this was an industry standard allocation of risk, and that the OFTO could have mitigated the risk through maintenance contracts, insurance and pre-contract due diligence.
“The court did not accept that the developers had established this was an industry allocation or risk, or market practice, but held on a textual interpretation of the indemnity that it only applied to losses suffered due to destruction or damage that became patent in the six-day period between the date of the agreement and completion of the sale.
“If the cable had failed during that six-day period, the developers would have been liable for the repair costs under the indemnity.
“The judge said it would be ’commercially absurd’ if the developers had been liable for a defect that had been developing for months or years prior to completion of the sale, where corrosion had been occurring before, during and after the 6-day period.
“He held that ’destroyed’ or ’damaged’ was intended to mean patent destruction or damage suffered ’during’ the six-day period, that is, for example, an anchor drag, or a cable failure in that period.
“Ofgem had previously rejected the OFTO’s claim for an income adjusting event for the cable failure on the basis that the failure of the cables was due to a latent defect which is the type of risk that is reasonably foreseeable to an OFTO, and that as with any transaction involving the purchase of assets, an OFTO should enter into the transaction with the awareness that it is assuming the risks arising from damage or defects that it has not been able to discover through its due diligence.”
However, Mr Booth said that because the judgement is a High Court judgment it may well be appealed to the Court of Appeal by the OFTO, given the significant amounts at stake, and the differing approaches to the construction of the indemnity and the meaning of ’damage.’
“Going forward," said Mr Booth, “OFTOs will be clear as to the risk allocation for similar latent defects. There can be no doubt that an OFTO would not expect to have this risk, particularly if it is unable to obtain suitable insurance cover for the potential liability.
“An OFTO would not expect to have the risk of the cost of repair in circumstances where the root cause of the failure was a default in the manufacture or installation, particularly if it is unable to obtain suitable insurance cover for the potential liability post transfer of the asset.
“This type of defect, that is, ongoing corrosion at particular points along the export cable, probably would not have been identified from the due diligence exercise undertaken by the OFTO, if recordings did not indicate an impending failure.
“If the cause of the defect was a problem during the cable manufacture, then arguably there is a case for imposing the requirement for an old fashioned resident engineer in the cable manufacture facility to oversee every aspect of the process.
“What is unclear from the judgment is whether the OFTO has a cause of action against the T&I EPC contractor or the cable manufacturer (NKT) – that is, whether the developer’s rights and obligations under the EPC contract for the installation contract have been ’novated’ to the OFTO. In which case, one would have expected the OFTO to have a claim for the repair costs against the EPC contractor.
“A recent investors relations presentation discloses that the OFTO’s current all-risks insurance policy has an exclusion for similar cable failures with a similar root cause as the two 2015 failures.
“The presentation very interestingly discloses a total repair cost of £24.3M and a settlement with NKT in November 2017, and an income adjusting event (IAE) from Ofgem for the second repair (after the OFTO successfully challenged the initial Ofgem refusal of an IAE), subject to the OFTO exhausting recoveries from other sources.
“The claim in the court judgment was for £15M, so presumably the settlement with NKT was for the difference between the total repair cost and the £15M claim against the developers. It also reveals that the OFTO has reserved its position to pursue the matter further through the insurance."