LEGAL TRAPS IN ENERGY CONTRACTS, PERFORMANCE CONTRACTING AND NYC ENERGY CONSERVATION LAW for Association of Energy Engineers New York City Chapter

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presented by

Phyllis Kessler, Esq. and Peter Funk, Esq.

LEGAL TRAPS IN ENERGY CONTRACTS,

PERFORMANCE CONTRACTING

AND NYC ENERGY CONSERVATION LAW

for

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Overview

 Focus of Presentation: Contracts for implementation of ECMs, demand response, energy performance, cogen and NYC Energy Conservation Law compliance.

 Examples of key issues and potential traps for non-legal (and inexperienced legal) professionals.

 Working with lawyers on the project team – effective and timely communication/coordination among project professionals is a key to project success.

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Pitfalls and Issues -

“Boilerplate” and Standard

Form Contracts

 Misuse and lack of understanding of terms “boilerplate” and “standard form agreement.” Actual quotes:

 “Just put a standard form of agreement in front of these

schedules we just sent and we’re ready to go – we need to sign by COB tomorrow.”

 “Can’t you just push a button and print out some

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Pitfalls and Issues – “Boilerplate” & Standard

Form Contracts

 Misuse and lack of understanding of terms “boilerplate” and “standard form agreement.” Actual quotes: (continued)

 “I cut some unnecessary parts out of the agreement to

get them to sign.” (termination provisions of

performance contract; successors and assigns).

 Why can’t we just use an AIA Form 107?

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Pitfalls and Issues – Path to Inconsistency

Between Body of Agreement and Schedules

 Turf wars: Engineers and technical “own”

schedules/attachments and lawyers “own” body of contract.

 Engineers/technical only worked extensively on schedules but only glanced at main contract. (DSM cogen permitted run hours not consistent)  “Oops” – Inconsistent guarantee terms carried

forward from engineer’s precedent schedules.

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Pitfalls and Issues – Path to Inconsistency

 Not all these schedules were finalized but we all

understood what was to be done. (Client describing pile of “Contractual Documents” prior to arbitration).  Did anyone run an example through the formula

before we signed? (Characterization of guarantee

formula in contract body different than actual formula.)  “It shouldn’t make any difference, since these are

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Pitfalls and Issues – Path to Inconsistency

 Owner: “I’m not going to pay you

(engineers/consultants/lawyers) to review

(agreements/schedules) prepared by (lawyers/ consultants/engineers).”

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Pitfalls and Issues – Why Can’t I Have A

One Page (i.e. very short) Agreement?

 Quote from owner of proposed 5 MW solar installation site upon reviewing an a legal checklist and EPC

agreement – “But I wanted a 1-page agreement like a certificate of deposit.”

 In a dispute, terms not appearing in a “one page

agreement” may be added by court or arbitrator and may not favor the party who wanted short contract.

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Pitfalls and Issues – Why Can’t I Have A

One Page Agreement?

 Negotiating a reasonable agreement obliges the parties to negotiate terms prior to the project – it is

key to seek to resolve likely project issues before they arise.

 No financier would accept an assignment (for

financing purposes) of a one page energy agreement as sufficient collateral for project financing –

insufficient to properly address obligations and

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Pitfalls and Issues – Inclusion of Standard Form

Agreement Language in RFPS (Private)

 Advantages: If tailored for project, enables “apples

to apples” contract review; reduces negotiation time and imparts efficiency to process.

 Trap: Often dumped into proposal based upon precedent and not conformed to current project; owner and engineer may not perceive the need for legal involvement; as a result, more legal services needed down the road.

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Pitfalls and Issues – Selected Key Legal

Provisions of Which to Be Aware

 Financing and assignment provisions

(No project is performed without funding)  Assignment of obligations to successor

(Issues with energy services, maintenance and performance agreements – that are specific to provider)

 Incentive related clauses

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Pitfalls and Issues – Selected Key Legal

Provisions of Which to Be Aware

 Termination payment provisions  Scheduling clauses

 Commissioning

 Warranties and representations; integration; no waiver; indemnification; dispute resolution

Note: The above list is meant to be illustrative and not comprehensive

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Pitfalls and Issues –

On-Site Power Generation

Types of Agreements (Black box, installation, O&M)  Regulatory context

 Commodity-related and pricing provisions  Identification of performance parameters

 Tariff issues and relationship to federal, state and local regulations

 Insufficient understanding by owner of host facility characteristics and energy usage.

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Performance Contracting Agreements:

The Good, The Bad and The Ugly

 Well-conceived and drafted guarantee and baseline provisions are the key to a successful project.

 Guarantees should specify the measuring and

monitoring protocol to be used and fix [or bracket] the commodity costs to be used.

 Restrictive provisions applicable to the installed ECMs and covenants as to the use of the building or facility must be used.

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Performance Contracting Agreements: The

Good, The Bad and The Ugly

Pitfalls

 At host’s request, requiring the host to perform a

portion of the task (installing an EMS or steam traps) without providing for remedies if the host does not do so.

 Not clearly delineating what each party is required to perform.

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State Public Performance Contracting

Agreements: The Good, The Bad and The Ugly

Pitfalls (continued)

 Having a “kitchen sink” project that maximizes the scope and minimizes the safety margin throughout.  Having performance time schedules that do not

except for the performance of third parties such as utilities or governmental entities.

 State university, school district, PHA, etc. using

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Working With A Lawyer On An Energy Project

A lawyer will:

 Ask basic questions that may appear elementary and miss the point of your vision.

 Reduce project to specifics such as ownership of Property, public/private, timing, parties, findings of audit (existing facility), utility tariffs, incentives & taxes.

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Working With A Lawyer On An Energy Project

Why? The lawyer needs:

 To know the basics in order to understand your project vision.

 To organize legally significant facts to prepare & revise contract documents.

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Working With A Lawyer On An Energy Project

The lawyer’s thought process:

 Parties

 Nature and structure of the project  What contracts will be needed

 Regulatory compliance  Tax issues

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Working With A Lawyer On An Energy Project

The lawyer’s thought process: (continued)

 Financing of project

 Qualifying for needed incentives and tax benefits  Does the project make legal sense

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Working With A Lawyer On An Energy Project

Transforming Concepts into Legal Obligations

Information you will need to provide:  Description of the project.

 Nature of the building.

 Main players on all sides.  Negotiations to date.

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Working With A Lawyer On An Energy Project

Transforming Concepts into Legal Obligations

Information you will need to provide: (continued)

 Responsibilities of each party.

 Identification of legal and other impediments is an important legal job.

Note: This list, unfortunately, is not meant to be comprehensive

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Working With A Lawyer On An Energy Project

When the lawyer sends draft contracts to you:

 Ask to have key provisions identified.

 Review entire contracts – it is worth your time.

 Check to make sure requirements in the contract coordinate with the schedules and attachments.  Ex.: Are written requirements for energy savings

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Working With A Lawyer On An Energy Project

Lawyer’s Role as Project Team Member

The lawyer will help to identify project objects and issues:  What should be reflected in the documents?

 What “negative” topics have been avoided but need to be discussed?

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Working With A Lawyer On An Energy Project

Lawyer’s Role as Project Team Member

The lawyer will help to identify project objects and issues:

(continued)

 Identify provisions needed to finance project.

 Facilitate negotiations among parties – even though representing one party.

 Focus on creating reasonable contract motivating parties to advance project & cooperate.

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NYC Energy Conservation Code

The four new laws that constitute the NYC Energy Conservation Code (“Code”) address:

 Local Law 84: Benchmarking energy and water efficiency of buildings.

 Local Law 85: Established a NYC energy code.  Local Law 87: Requires energy audits and

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NYC Energy Conservation Code

The four new laws that constitute the Code include:

(continued)

 Local Law 88: Requires upgrading of lighting systems and the installation of sub-meters in certain buildings. Unlike many previous laws, the Code applies going

forward as well as to existing buildings and does not grandfather existing buildings.

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NYC Energy Conservation Code

 Code overview:

 Adds immediately to existing NYC Department of

Buildings permitting requirements.

 Adds new requirements in the energy audit,

retro-commissioning, benchmarking, lighting and submetering.

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NYC Energy Conservation Code

 Code overview: (continued)

 Imposes earlier and more extensive requirements upon

NYC buildings.

 Seeks to take a broad survey of energy use and

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NYC Energy Conservation Code

Provides Roles For Professionals

 Specific requirements/opportunities for design and engineering professionals and consultants are set forth or contemplated in Code, including:

 Permitting certifications

 Audits

 Certification of work performed

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NYC Energy Conservation Code – Overview of

Needed Legal, Engineering Consulting Services

 Participating with owners, managers, (owner occupied buildings – coop/condo boards “coops”), engineers

and others in the development of compliance plans for buildings.

 Working on revised requirements for renovation that require permits.

 Helping to develop revised record retention requirements.

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NYC Energy Conservation Code – Overview of

 Revisions to agreements/schedules and new agreements/schedules involving professionals, contractors, auditors, maintenance contractors.  Developing of documents for annual information

gathering for benchmarking and for tenant participation.

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Needed Legal, Engineering Consulting Services

 Developing longer term lighting/submetering related agreements/schedules and agreements/schedules relating to incentives.

 Preparation of checklists and checking to determine if a building is covered since there are different criteria for determining whether specific buildings are subject to the Code depending upon the applicable Code

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 Participating in risk analysis relating to building transactions and insurance coverages.

 Revisions to building purchase and sale documents.  Revisions to leases and proprietary leases and

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NYC Energy Conservation Code – Overview of

 Revisions to financing documents, mortgages and related financing papers.

 Revisions to bank commitment and title insurance documents.

 Services services relating to DOB penalty proceedings and Code interpretation.

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Needed Legal, Engineering Consulting Services

 Preparation of forms of energy conservation

certifications regarding building sales and leases.

Sellers and lessors will have to be careful not to make incorrect assertions regarding code compliance and there is likely to be litigation in the future relating to claimed misrepresentations.

 Preparation of revised agreements/schedules for full services energy services companies.

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QUESTIONS AND ANSWERS

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Phyllis Kessler, Esquire

 Phone: +1 212 471 4713

 E-mail: [email protected] Duane Morris LLP

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Peter V. Funk, Esquire

 Phone: +1 212 692 1075  E-mail: [email protected] Duane Morris LLP 1540 Broadway New York, NY 10036-4086

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