The Robins Economic Loss Rule Complicates Offshore Wind Project Contracting
Illustrative of the unusual results that can affect offshore wind energy projects under admiralty law is the Supreme Court’s venerable Robins Dry Dock decision, which may preclude or limit an offtaker’s ability to recover economic losses arising from a marine casualty causing a forced outage of a wind generation facility. Parties negotiating power purchase agreements, financing arrangements, EPC and O&M contracts should be aware of Robins principles and exceptions. As discussed below, there are also potentially effective strategies to contract around, allocate or manage the attendant risks.
Background
In Robins Dry Dock & Repair Co. v. Flint,1 decided in 1927, the charterer of a vessel sued the defendant dry dock for lost profits caused by the defendant’s negligence in repairing the vessel. Damage to the vessel caused by the dry dock resulted in a delay in completion of the repairs. Unavailability of the vessel caused the charterer to lose revenue, which it sought to recover against the dry dock owner. In siding with the defendant, the Supreme Court set forth the “general rule” concerning tort claims:
As a general rule, at least, a tort to the person or property of one man does not make the tort-feasor liable to another merely because the injured person was under contract with that other unknown to the doer of the wrong.
While this harsh result has been much criticized during the intervening nine decades, it is still the law of the land. As characterized in a more recent court of appeals decision: “[T]he prevailing rule [from Robins] denied a plaintiff recovery for economic loss resulting from physical damage
to property in which he had no proprietary interest.”2 The predictability of this rule has been deemed essential by the marine insurance industry and any significant attempt to amend its overarching principle by courts or Congress will be forcefully challenged. As stated by an oft-cited maritime treatise3:
In the modern world of insurance reimbursement for losses, open-ended liability would make the efficient administration of a system of third-party liability insurance virtually impossible. Reasonable limits on liability are necessary for the workability of the liability insurance system.
Though the Robins rule’s utility may be more understandable in the context of a mass tort such as an a vessel oil spill or that of the recent Deepwater Horizon oil rig casualty involving countless claimants both offshore and land-based, it may also sweep within its grasp more foreseeable injured parties such as an offtaker in wind projects.
Under the Robins principle, if an offshore wind project were put out of service by an anchor dragging over the submerged transmission cable to a shoreside interconnection, or if an offshore substation or collecting junction were damaged by an allision4 with a vessel, the owner of the offshore facilities may recover damages from the negligent vessel operator or its subcontractors,5 including repair costs and lost payments under its power purchase agreement (PPA) with an offtaker utility. However, the offtaker, not being the owner of the damaged assets (i.e., not having a “proprietary interest”), may not be able to recover for its losses, including the difference between PPA contract price and market price for the capacity, energy and renewable energy attribute values during the outage.
Courts have subsequently recognized a limited number of exceptions and limitations on this principle. First and foremost, legal title or ownership is not essential for recovery; if the plaintiff suffering the loss has a proprietary interest such as “actual possession or control, responsibility for repair and responsibility for maintenance” of the asset6 a “right to use” the asset7 or an obligation to contribute to cost of repairs if a third party causes damage,8 Robins may not bar recovery by the non-owning plaintiff.
Illustrative of this class of exceptions is the 1999 decision in In re Moran.9 In that instance, a barge operating in New York waters dropped its anchors on submerged transmission cables running between Connecticut and New York. Connecticut Light & Power (CL&P) and Long Island Lighting Co. (LILCO) each owned that part of the cables which were located in its respective state’s waters. The defendants moved for summary judgment against CL&P because it did not own the damaged portion of the cable lying in New York. Id. In denying summary judgment, the Moran court found material issues of fact existed because:
[1] CL&P and LILCO jointly contracted to have the cable built and installed; [2] shared the original costs of its construction; [3] maintain a single insurance policy; [4] are jointly liable for environmental harm that occurs anywhere along the cable; [5] and both assumed the responsibility of co-ownership by agreeing to share all cable related repair and maintenance expenses over the life of the cable [CL&P paid $11 million in repair costs for the damaged part of the cable].10
A related class of exceptions exists where the owner of the damaged asset and the nonowner plaintiff have a “common venture” so there is no “remoteness of interests” between the two entities,11 or where the two damaged parties’ assets constitute “integrated property.”12 The “common venture” exception exists in cases where the owners of cargo not damaged in a marine casualty damaging the vessel were required to contribute to a general average settlement;13 the courts conclude that the non-owner plaintiff’s losses were proximately-caused foreseeable consequences of the tortfeasor’s negligence. The “integrated property” exception may exist where, for example, the tortfeasor causes damage to a barge being operated as part of a tug-barge unit being offered to customers as a package to provide transportation services. Even though the two vessels could feasibly operate independently, if they were being operated together for a commercial purpose, the owner of the undamaged vessel that suffered lost revenues may recover.14 However, some courts have refused to extend the “integrated property” theory in the case of end-to-end assets such pipelines, finding that the owner of a damaged pipeline and the producer and marketer of hydrocarbons that had engaged the pipeline to transport its products could not use the integrated property theory even though the producer’s compressor stations were physically interconnected with the pipeline.15
A further exception exists where the defendant tortfeasor had actual knowledge of the non-owning plaintiff’s economic interests in the damaged asset.16 This exception flows directly from the original Robins decision, in which the decisive factor was that the defendant, dealing with the shipowner, lacked knowledge of the charterer or its interest in hire payments from its customers.
The Robins Threat in Offshore Wind Projects
The central danger presented by Robins is that in the event of damage to offshore wind energy assets, parties other than the title owner of the offshore assets (or those having a proprietary interest in the offshore assets), i.e., the turbines, towers, foundation, collector cables, offshore substation and shore delivery interconnection, as well as these parties’ underwriters, face obstacles to recovery of damages from tortfeasors. Consequential damages can be very severe, and may be many multiples of the direct repair and lost revenue damages the asset owner may recover. This would especially be true if the casualty involved destruction of an offshore substation or direct interconnection cable from the generating facility to the onshore transmission system that could take months to replace.
For example, under the common arrangement for a project development, in which the offshore assets are owned by the developer’s special-purpose entity with a utility or power marketer offtaker taking and paying for products under a long-term PPA, assume an allision with an offshore substation or negligent anchor drag results in a six-month complete outage. Assuming the tortfeasor is unable to limit liability, it or its underwriters must respond and pay the owner costs of repairs and replacements, and will be liable for the lost revenue stream from the offtaker under the PPA. However, the offtaker will lose the value of the capacity, energy and ancillary services products as well as the value of renewable energy attributes and RECs associated with the missed energy deliveries entirely, or at least will experience the economic loss of the difference between the value of such products at current market or contract prices and the cost of such products under the PPA. Depending upon the structure of the financing, the offtaker or its financiers may also lose the effective value of the Production Tax Credits (PTC) available under Section 45 of the Internal Revenue Code. The offtaker, not being the owner of, or having a proprietary interest in, the damaged asset will be unable to recover against the tortfeasor under the Robins principle, unless it can find a way to fit into one of its exceptions. Similarly, third parties such as an operations and maintenance contractor with an incentivized arrangement, or turbine or cable suppliers depending upon any performance incentives for their economic results could be penalized by a Robins-affected outcome.
The situation could be exacerbated if the PPA arrangement is one in which the offtaker pays a substantial fixed monthly capacity payment. Although various PPA arrangements may provide for the capacity payment to ratchet down over time during a force majeure outage, the offtaker may be required to continue fixed capital or capacity payments to the owner for an extended period of time when it is receiving no energy deliveries, and thus no associated renewable energy attributes. In such instance, the offtaker receives no energy or ancillary services value, and the capacity value under EFORd formulae may ratchet down more rapidly than the payments stream, especially if the payments stream has a time lag relative to the ISO capacity value formula.
The offtaker’s losses could be many multiples of those of the owner. If the outage occurs during the peak season, energy values would be substantial. Moreover, the loss of attributes or PTC could greatly exceed energy value losses. Depending upon the offtaker’s state’s RPS or AEPS program, the offtaker could be forced to purchase replacements at high prices.
Given the typical PPA relationship between an offtaker and project developer, there are at least plausible arguments for the offtaker’s case to fit into all of the exceptions to Robins mentioned above. However, the applicability of these theories to a PPA situation is untested, and there are potentially equally persuasive arguments that the offtaker does not fit the exceptions.
Typically an offtaker pays for products metered at an on-shore delivery point (possibly at a substation the offtaker itself does not own), does not have actual or constructive possession or control of a wind generator array, although possibly the offtaker’s right to sell capacity, dispatch the generator and schedule energy deliveries might fit that definition. The offtaker usually does not have any direct responsibility for repair or maintenance, or to contribute to repairs, although the offtaker and lenders might have step-in rights under the PPA if the developer defaults. The offtaker avoids any joint liability.17 The “common venture” theory is appealing, but might break down because the offtaker may only pay for delivered products and have no obligation to contribute to losses, unlike the ship-cargo general average analogy. The “integrated property” concept might also prevail, but the pipeline cases in which courts have held this exception does not apply appear too close to the PPA scenario for comfort. Additionally, the offtaker may have no physical interconnection with the damaged developer asset, and even if the offtaker’s transmission system is involved in receiving deliveries of energy from the developer, it would not likely be a situation where the transmission system is exclusively devoted to that purpose, like the tug and barge analogy.
Offtaker losses that might not be compensated by the tortfeasor or its insurers could of course be insured by the offtaker. However, these losses, arising from missed deliveries rather than physical damage, may tend to fall into the business interruption category of coverages, rather than tradition utility casualty protection and indemnity covers. Business interruption insurance is a separate risk pool with different participants and very different pricing and coverage limitations. The premium costs, as well as the exclusion periods of this class of insurance, and the difficulty of covering potentially large price instability of energy and environmental attributes, may be problematic for an offtaker or project lenders.
Strategies for Addressing Robins Issues
The notion of a marine casualty causing huge uncompensated offtaker losses is a classic “pinhole risk” in the business sense – highly unlikely to occur, but very painful if it happens. The Robins risk clearly does not rise to the level of restructuring the fundamentals of a transaction to avoid it; for example, it would not be worthwhile to an offtaker to give up the protections and benefits of an arm’s length PPA relationship to go into a joint venture with a developer just to be sure the offtaker will not be Robins’ next victim. An aggrieved offtaker cannot attempt to make a post-incident investment in the wind asset in an effort to circumvent the Robins rule as proprietary interest considerations are measured at the time of the collision/incident.18 However, there are clearly a number of steps an offtaker can take in arranging its relationships with the various parties in a development transaction that can mitigate Robins risk and enhance the likelihood the offtaker can fit itself into the array of exceptions to the principle.
1. Establish Notice to Likely Tortfeasors of Offtaker Presence and Interest. The likely tortfeasor in an incident leading to Robins issues is not a ship randomly crossing the sea plowing through a turbine array on a dirty night. As illustrated by the case law, the most common scenario is damage by a construction or repair contractor, or an operations and maintenance contractor, working on the offshore installations or cables. Another likely tortfeasor is a contractor working on a nearby asset covered by a contractual arrangement between the wind project owner and the other asset owner. For example, if the wind project cables cross any other undersea gas pipeline or cable, including telecommunications lines or energy rights-of-way, the two owners will enter a “crossing agreement” agreeing to indemnify each other against damages caused by their respective operations or contractors.
The offtaker may be able to negotiate a provision in the PPA obligating the developer to include a notice provision in: (i) any EPC contract, and require that the EPC contractor include similar provisions in its subcontracts, clearly stating that offtaker is the beneficial owner of the facility and products to be generated by the facility, and may suffer consequential damages if the facility is delayed or damaged; (ii) any O&M contract or other maintenance and repair agreements with marine contractors working on the facility, and (iii) any crossing agreement, obligating the counterparty to provide notice to its contractors regarding the offtaker’s economic interests. Owners and EPC contractors generally resist granting these clauses on the theory that their contractors and subcontractors will increase prices to cope with the increased risk (which to some extent demonstrates how the market values the Robins risk). However, if there are increased contract prices associated with obtaining these clauses, they should be compared with the costs of the offtaker covering such risks on its own marine insurance policies.
2. Incidents of Control. For purposes of limiting liability and avoiding management obligations, the offtaker will not likely care to have rights to control the offshore facility. However, short of exposing itself to these risks, various elements of control in the decision making process can be strengthened or at least highlighted in the PPA. These could include rights to schedule and dispatch the project, rights of prior approval over events such as scheduled maintenance outages, rights to direct the developer to retrofit turbines to take advantage of new technologies or to qualify for new forms of renewable attributes or tax credits, step-in rights in the event of developer failure to meet performance guarantees. Many of these features will already be included in PPAs for economic reasons.
3. Insurance Arrangements. Conduct a thorough review of insurance coverages and institute clauses in the developer’s all-risks marine policy. Extra care will be essential in assuring the risks are adequately covered, and that the underwriters do not have an attractive reason to commence a coverage dispute. Careful scrutiny of the provisions of the developers, offtaker’s and project EPC contractor’s policies is important. Business interruption coverage may be a viable hedge against Robins risks, although more costly.
1 275 U.S. 303 (1927).
2 2 Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019, 1020 (5th Cir. 1984) (en banc) (emphasis added).
3 Thomas J, Schoenbaum, Admiralty and Maritime Law, 2 Admiralty & Mar. Law § 14-7 (4th ed).
4 For the landlocked, an allision occurs when a moving object strikes a stationary object. See Trico Marine Assets Inc. v. Diamond B Marine Servs., 332 F.3d 779, 786 n.1 (5th Cir. 2003).
5 This recovery may also be subject to the shipowner’s ability under admiralty law to limit its liability to the value of the vessel and her pending charter hire after the incident, pursuant to the Limitation of Liability Act of 1851, 46 U.S.C.S. App. § 181 et seq., but that is the subject for another article.
6 IMTT-Gretna v. Robert E. Lee SS, 993 F.2d 1193, 1194 (5th Cir. 1993) (citing Texas Eastern Transmission Corp. v. McMoran Offshore Exploration Co., 877 F.2d 1214, 1225 (5th Cir. 1989)); Star Enter. v. M/V Solena, 791 F. Supp. 655, 657 (E.D. La. 1992). Some courts have said the right to use the damaged asset does not need to be exclusive, but others have implied exclusivity is necessary for recovery. Compare Vicksburg Towing Co. v. Miss. Marine Trans. Co., 609 F.2d 176, 177 (5th Cir. 1980) and Sekco Energy, Inc. v. M/V MARGARET CHOUEST, 820 F. Supp. 1008, 1012 (E.D. La. 1993), with Texas Eastern, 877 F.2d at 1225 & The Pillsbury Co. v. Midland Enter., Inc., 715 F. Supp. 738, 767 n.86 (E.D. La. 1989).
7 See Texas Eastern, 877 F.2d at 1225; Vicksburg Towing, 609 F.2d at 177 (finding the “right to use” the property is a “thing of value”); Secko Energy, 820 F. Supp. at 1012 (same, citing Vicksburg); The Pillsbury Co., 715 F. Supp. At 767 n.86 (the “exclusive right to use and control” property is the key consideration in lessee cases).
8 Louisville & N. R. Co. v. M/V Bayou Lacombe, 597 F.2d 469, 473 (5th Cir. 1979).
9 In re Moran Enter. Corp., 77 F. Supp. 2d 334 (E.D.N.Y. 1999).
10 77 F.Supp. 2d 341.
11 See Aktieselskabet Cuzco v. The Sucarseco (“The Toluma”), 294 U.S. 394 (1935); Amoco Transport Co. v. S/S Mason Lykes, 768 F.2d 659 (5th Cir. 1985).
12 Domar Ocean Trans., Ltd. v . M/V Andrew Martin, 754 F.2d 616 (5th Cir. 1985).
13 General average, another subject that may impact offshore wind development for yet another article, is a principle by which several parties in a maritime venture, such as the shipowner and cargo owner on voyage of a vessel, are deemed to participate in common risks, and thus undamaged parties must contribute to losses sustained by the damaged party arising from a casualty. See Foremost Ins. Co. v. Richardson, 457 U.S. 668 (1982)(citing G. Gilmore & C. Black, The Law of Admiralty 244-271 (2d ed. 1975)).
14 Domar at 754 F.2d 617-19.
15 Texas Eastern, supra, at 877 F.2d 1219.
16 IMTT at 993 F.2d 1194; see also Kaiser Aluminum & Chem. Corp. v. Marshall Dredging Co., 455 F.2d 957 (5th Cir. 1972) (summary judgment granted on the basis that a defendant that ruptured a gas pipeline did not have any knowledge of the existence of a contract between the pipeline owner and Kaiser, whose factory was idled by interruption of gas deliveries).
17 Courts will carefully review the contracts between parties to determine the rights and obligations in the event of maintenance and repair issue problems. For example, in Gas Natural SDG S.A. v. United States, 2008 AMC 2992 (2d Cir. 2008), the appellate court affirmed the dismissal of a supplier of LNG’s claim against the United States resulting from the collision of a vessel carrying the plaintiff’s LNG and the government vessel. In denying the claim, the court noted the plaintiff did not own the vessel and in the charter party between the owner and charterer (plaintiff), the plaintiff bore no responsibility for the maintenance or repair of the vessel. In fact, the plaintiff/charterer was entitled to reduce its payments to the shipowner in the event the owner did not maintain the ship properly.
18 See Gas Natural SDG, 2008 AMC 2992, opining that the district court properly rejected evidence of the plaintiff’s post-collision investment in the vessel carrying its LNG in an effort to affect the proprietary interest analysis under Robins because ownership interests at the time of collision was the key period.