Caught in the Crosswinds: Navigating the Surge in Wind Energy Disputes – Part IV: Joint Venture Disputes

The wind power industry has a key role to play in the future of energy. But it has experienced well-documented growing pains over the past few years.

Our article series “Caught in the Crosswinds: Navigating the Surge in Wind Energy Disputes” addresses common types of disputes on wind power projects in the current economic climate, and offers practical tips on how to avoid and manage them effectively.

This article addresses Joint Venture Disputes.

Previous articles in this series considered practical challenges of procuring and constructing wind projects. We explained how the nature of the industry, with its tight margins, constrained capacity, disaggregated procurement, and volatility made it prone to disputes. Now we look at a phenomenon exacerbated by these factors: joint venture disputes. 

Joint ventures are widely used to develop wind projects. They share risk, and the burden of contributing large amounts of capital required. They also permit participants offering different forms of contribution the ability to structure their collaboration effectively. Joint ventures between financial players, with access to substantial funding, and operational players, with experience of successful delivery of technology in particular markets, are common.

In theory, this should give rise to happy marriages, with each participant enjoying the fruits of investment in a sector in which the International Energy Agency (IEA) expects to see a doubling of global capacity to over 2000 gigawatts by 2030¹. 

How are joint ventures structured?

Parties adopt a variety of structures for joint ventures in the sector. But some form of incorporated vehicle – such as a limited liability company - is typical. Often there will be a holding company, in which the shareholders own shares, with a number of subsidiary companies sitting beneath that company. Each will have stakes in individual wind power projects. Shareholders will nominate directors to the board, or management body, of the holding company (and potentially the subsidiary companies). These arrangements will be regulated by a shareholders' agreement, or joint venture agreement (JVA), alongside the companies' constitutional documents. 

This is the top tier of agreements. But there are others which need to be consulted if a dispute arises. These include instruments recording the joint venture's financing arrangements, such as shareholder loan agreements, and loan notes, equity subscription agreements, and guarantees. Equally significant may be the agreements which address the operation of the joint venture, in the form of asset management or services agreements, and operation and maintenance agreements, quite often with an affiliate of one of the shareholders. 

Add to this legal principles which may be implied into a JVA under the applicable governing law, like a duty of good faith, honesty or disclosure, and you can see how legal issues underpinning wind joint ventures can be complex and multi-layered. We see disputes where issues cascade through the contracts, with operational disagreements escalating into JVA claims. 

Key dispute themes and their drivers 

Why do disputes happen? 

There are factors that are specific to the challenges that the wind sector faces. But much of the reason lies in the inherent instability of joint ventures, particularly those where one party contributes the finance, and another the "knowhow". Across industries and across joint venture structures, the same tensions arise again and again. One party wants the freedom to develop the venture as it sees fit; the other wants to tightly control decision-making and expenditure. One party's views on strategy diverge from the other's. Market and regulatory factors frustrate delivery of projects, a consistent feature of a sector regarding which the IEA says "wind power faces supply chain issues, rising costs and permitting delays"². Faced with these headwinds, joint venture relationships deteriorate.

Five disputes we see frequently

No wind joint venture dispute is the same as another. But five types come up regularly.

1. Blowing in different directions

Not every disagreement matures into a dispute. Far from it. A healthy joint venture should be able to accommodate differing views on strategy and delivery, enable the parties to reach a mutually acceptable resolution, and move on. But sometimes disagreements are so fundamental that they threaten the continuing operation of the venture. This may happen in a 50/50 joint venture, where there is nobody to provide a casting vote for a particular direction of travel. Equally, in a majority/minority joint venture, it may happen where a minority shareholder exercises a veto right, negotiated by it to protect it being forced down a path it objects to.

A well drafted JVA should contain a "deadlock" mechanism which prescribes what happens in this situation. There may be an escalation mechanism, with the shareholders' CEOs called upon to agree a way forward; or even a referral to a third party for this purpose. Ultimately, there is likely to be some form of path to exit from the joint venture, with one party acquiring the other's interest.

2. Money in, money out

Most disputes come down to money, one way or another. Funding a joint venture can be contentious, particularly if one party doubts the wisdom of what the funding is to be used for, or lacks the capital to contribute. If a shareholder fails to fund, the other shareholder will often have various options.

These may include making a loan to the joint venture company, repayable in preference to any repayments or distributions to the non-funding shareholder. The other shareholder may also be entitled to subscribe for additional shares in the joint venture company, effectively diluting the shareholding, and associated rights, of the non-funding shareholder. In any case, the non-funding shareholder is likely to suffer restrictions on its voting, and other rights, until any shortfall is made good.

3. Relationship troubles

Joint venture participants will often want to contribute more than mere funding. One or more may want to provide services, or equipment, to the venture. This raises the likelihood of a suite of related party agreements between shareholders' affiliates and the joint venture entities (either at holding company, or subsidiary, level, or both). The risk here is obvious. One shareholder will have an interest in obtaining the best terms available for its affiliate; part of the value of the venture to it will lie in the fee or price for services or goods provided. The other shareholder will be nervous that the terms will be unreasonable and will allow the first shareholder to extract excessive value from the venture.

A number of mechanisms exist to police this risk. First, directors of a joint venture company will almost certainly be subject to overarching duties to the joint venture company imposed by the law of the jurisdiction of incorporation. These duties apply irrespective of which shareholder appointed a director. More specifically the JVA should regulate the approval of related party contracts, and, crucially, the decision-making if a dispute arises under that contract.

4. Breach provisions with bite

Agreements contain obligations, and obligations are sometimes breached. In a straightforward commercial contract, a non-breaching party will usually bring a claim for damages or some other relief from a court or tribunal, if it sees the value in doing so. It will either win or lose; life will move on. The dynamic is different in a joint venture context, where the parties are shackled to each other through the joint venture structure.

JVAs usually contain a list of "defaults", the occurrence of which may trigger a compulsory transfer obligation on the breaching party. Disputes often arise over whether such obligation has been engaged, particularly if a catch-all term like "material breach" has been adopted as one of the triggers. Prudent parties will look to add some parameters around the concept of "material breach", reducing the scope to argue about whether one has occurred, or not.

5. Transfer tensions

Compulsory transfer following a breach is one thing. What happens if a party voluntarily wishes to exit the joint venture? The JVA (and sometimes the constitutional documents as well) will usually prescribe the circumstances in which a voluntary exit may occur. In some offshore wind JVAs, such rights are afforded at periodic "decision-gates" throughout the project lifecycle. In all cases, the JVA will afford the non-exiting shareholder certain rights.

Disputes may arise if one party wishes to exit early, outside of a decision-gate mechanism or in breach of a lock in provision, or to transfer its interest to an entity of whom the non-exiting shareholder does not approve. Other flashpoints include the operation of pre-emption rights (entitling a non-exiting shareholder to acquire the exiting shareholder's interest) and tag along and drag along rights. These, respectively, entitle a shareholder to insist it is included in any acquisition of the exiting shareholder's shares (tag), and entitle an exiting shareholder to require the other shareholder to sell out alongside it (drag).

Practical tips for avoiding and managing these disputes

How can parties position themselves to avoid, or mitigate the impact of, these disputes?

1. Forecasting the future

Much of what we say above may suggest that wind power disputes fall into neat categories, which play out on predictable lines. In reality, every joint venture has its particular characteristics, dynamic and sources of tension. The five disputes types outlined above may overlap if parties fall out. Disputes as to strategy may implicate issues of funding, related party transactions and exit mechanics, for example. Parties entering joint ventures with optimism and a sense of purpose may not be able to foresee exactly what may go wrong in the future, but there may be structural or market related features which indicate where a dispute may be more likely to arise. Taking the time to think about this in advance of entering into the joint venture, and thinking about how the scenario might play out in practice, may enable particular focus on certain aspects of the drafting to reduce uncertainty if a dispute arises.

2. Clarity on deadlocks

Deadlocks go to the heart of the joint venture relationship, so they often cause the most hard fought disputes. Parties should specifically seek to have clarity on (i) when a deadlock arises; and (ii) what happens if it does. The trigger for a deadlock could be one of a number of things, but the more subjective it is, the more likely that a party will contest the applicability of the deadlock machinery. One case revolved around a dispute over whether a deadlock had arisen over a "fundamental matter of strategic importance". There was ample scope for the parties to disagree over whether this threshold was met. Another case involved a party arguing that a contractual veto right (over a related party transaction), triggering a deadlock, could not be used for a "collateral purpose". Cue a lengthy dispute over whether any such qualification could be read into the drafting.

The mechanics for what happens when a deadlock arises can also be lacking. One popular method of resolving deadlock situations is a "Russian roulette" mechanic. A shareholder offers to buy the other shareholder's shares at a specified price; the second shareholder can either agree, or reverse the transaction and buy the first shareholder's shares at the same price. The scope for the transaction to "reverse" incentivises the first shareholder to make a reasonable offer. The mechanism works best if the parties are 50/50 (or nearly) shareholders. If not, complications applying the machinery arise. This is an area where adopting drafting from a precedent, without considering how it applies to the specific joint venture can lead to costly litigation.

3. Contract management

On one view, not needing to look at the joint venture documentation is a good sign. It suggests the joint venture is operating as intended, and neither party has to look back to what they originally agreed. But it increases the risk that things will happen that are inconsistent with the agreement. The parties then find themselves in an argument about whether joint venture terms have been waived, or continue to bind the parties. JVAs often contain "no waiver" provisions, but the drafting of these varies, and they don't always address circumstances where the parties have willingly proceeded down a path which the agreement doesn't envisage.

On one dispute, the agreement imposed a cap on the initial budget. Any disagreement on the content of the budget was referred to a non-legal expert. The majority shareholder proposed a budget of over double the capped figure. The expert endorsed this, reasoning that the parties' conduct clearly evidenced an acceptance that the initial budget was not sufficient. More rigorous contract management could have avoided this outcome for the minority shareholder. 

4. Exit mechanics

Exits, even of the voluntary kind, are ripe for disputes. Risks can be mitigated by ensuring that different documents are consistent, for instance, is the JVA aligned with the joint venture company's constitutional documents? Inconsistency is not unusual, especially if last minute changes or amendments to a JVA are not tracked through other documents. A "priority of agreements" clause may not completely remove the risk. Consider also what any exit might look like, and track through the permutations.

What happens if an exiting shareholder does some form of indirect exit – for instance via a sale of shares in a shareholder entity? Are pre-emption rights engaged? How do pre-emption rights interact with other rights applicable on an exit, such as tag and drag along provisions? These points are worth thinking through before the agreement is settled.

5. Beyond the contract

What is written on the pages of the contract is not always the whole story. This is where the underlying governing laws may be relevant. For example, a deadlock provision is only as effective as the underlying governing law allows it to be. Some jurisdictions may impose a requirement that any deadlock offer is made at a fair or good faith value. This protects a receiving party who receives an uncommercially low offer for its shares, but lacks the funds to "reverse" the offer and acquire the offeror's shares for the same amount. Decision-gate rights of exit may, under certain governing laws, be required to be exercised in good faith rather than at the unfettered discretion of the exiting party.

Similarly, provisions which entitle one party to acquire the other party's shares upon a material default, or similar formulation, may be challenged on the basis that they unenforceable, or should be adjusted, as punitive or forfeiture clauses. Parties sometimes try to draft around these features of the governing law – one contract stated that the non-defaulting party's options "shall remain unaffected and undisputed in their legal existence and validity even in case of altered circumstances and therefore not be subject to the clausula rebus sic stantibus"³. It would be a matter for the court or tribunal to decide whether this wording had any effect on the scope of their decision-making powers, or not. Understanding how particular legal systems treat particular drafting makes it easier to anticipate how a dispute may play out.

Ashurst has extensive experience advising on wind (and other renewable energy) disputes, including helping clients reach negotiated solutions as well as acting as advocates in formal proceedings. We work as a single cross-border team and alongside our transactional energy lawyers to provide a seamless and informed service to clients. Our experience and industry knowledge ensures we avoid, mitigate, manage and resolve our clients’ disputes in the most efficient, commercial and cost-effective manner possible. For more detail on our experience and global capabilities see our international arbitration page.

Want to know more?

For more content in this series visit the Caught in the Crosswinds page. 

Authors: Michael Weatherley, Partner; Peter Grayson, Partner and Tom Cummins, Senior Counsel.