Going Nuclear – managing claims and disputes during the construction of new build NPPs
13 min read
In recent years, nuclear energy has been undergoing a renaissance. By way of example, the International Atomic Energy Agency ("IAEA") estimates there are currently 56 nuclear reactors under construction across 18 countries.1 Moreover, according to the World Nuclear Association, there are around 100 reactors on order or planned and over 300 more have been proposed.2 Similarly, new Small Modular Reactors ("SMRs"), i.e. reactors with a power capacity up to 300 MW, are gaining the attention of governments, power providers and those in energy-intensive industries because of the optionality they offer. According to the IAEA, there are currently more than 70 different SMR designs and concepts under development3 – a significant jump from just a couple of years ago – and five under construction in Argentina, Canada, China and Russia.4
This new wave of enthusiasm has been driven by increased awareness of the impact of carbon emissions and renewed apprehensions around energy security. Indeed, the COP 26 World Nuclear Performance Report described nuclear energy as "the only energy source that can produce low-carbon electricity and low-carbon heat" and thus "it can be a game changer for the deep decarbonization of the entire global economy".5
Despite the growing recognition of the benefits of nuclear power, many – not unreasonably – remain concerned about recent examples of Nuclear Power Plant ("NPP") projects that have run significantly over time and budget. Although much has been written about the impact on time and cost of the regulatory environment and design and construction issues, less attention has been given to the ability of the parties to either mitigate or exacerbate delay and additional costs through the management, or mismanagement, of claims and disputes.
1.1 Unique Characteristics of NPP Construction Claims and Disputes
Claims and disputes are often viewed negatively by those involved in major infrastructure projects. However, claims form a natural part of the contractual process and are essential to the commercial viability of projects. To a significant extent, valid claims reflect the occurrence of a risk that the parties agreed at the outset would not be priced and included through a contingency in the original contractual price. The operation of claim and dispute resolution mechanisms are therefore an essential part of the risk allocation and compensation function of a construction contract.
Unfortunately, however, too often the claim management and dispute resolution procedures provided for in contracts relating to the construction of NPPs are not suitable and/or the parties (and their legal representatives) misuse them. As a result, rather than facilitating the execution of the works through the timely adjustment to compensation and schedule or the determination of solutions to technical issues that the parties disagree over, such procedures can instead become a significant distraction of resource from the project works, can stall cash flow and cause a deterioration in the parties’ relationship. This can actually exacerbate delay and cost overruns on the project.
In order to design and implement effective claim management and dispute resolution procedures it is important to understand the nature and characteristics of NPP projects and the claims and disputes that often arise during their construction. Some of the relevant characteristics of NPP projects include:
- Lengthy project schedule: For traditional 1000+ MW Units, the planned detailed design, licensing, construction and commissioning schedule for a single Unit can be in the region of six years, and an additional delay of several more years is not uncommon. Although it is hoped that the equivalent planned time schedule for SMRs can be reduced to two to four years, many SMR projects anticipate installing several units, which together will still require a long overall project schedule. Managing claims and resolving disputes over such a lengthy build schedule gives rise to many challenges.
- Complex and specialised engineering: An NPP brings together an incredible array of complex systems, including the primary and secondary circuits and the multitude of safety systems, the digital Instrumentation & Control ("I&C") together with any hardwire backup systems, the steam turbine and electrical generation system, and certain physical protection systems. As a result, the engineering process on these projects is highly sophisticated, and requires the use of large design databases and 3D modelling software. Thus, the process generates an enormous amount of data and documents. Resolving claims relating to such complex engineering requires bespoke approaches to data processing, evidence gathering and presentation, and can also require the input from numerous fields of technical expertise.
- Regulatory and licensing framework: The nuclear sector is one of the most heavily regulated industries in the world, with every stage of the design, construction and commissioning of an NPP being subject to strict licensing and regulatory approval requirements. Reflecting this in a traditional Engineering, Procurement and Construction ("EPC") contract requires careful planning and the disputes that can arise from this process may benefit from a bespoke claims management/dispute resolution process.
- Size and complexity: NPP projects are physically large and technically complex, owing to the numerous structures they encompass, the size and specifications of primary components, the rigorous safety requirements and the large generating capacity. Additionally, with respect to SMR projects, whilst typically smaller in size, installing several units raises similarly technically complex issues. This necessitates a large number of subcontractors, sub-suppliers and on-site workforce. These factors place significant demands on the management of the works and can lead to very significant cost overruns and, in turn, delay and disruption claims, starting from relatively early in the project. Managing such large claims and disputes over the lengthy build schedule gives rise to significant obstacles.
- Changing procurement structures: Although in recent decades, many new build NPPs have been procured on EPC contracts, this trend has been changing as some contractors are insisting on either alternative pricing or split package contracting arrangements. These different approaches to contracting give rise to new and different challenges in managing claims and resolving disputes that are likely to arise.
In this environment, common forms of construction claims, such as delay and disruption, can become incredibly complicated and parties may need to consider less common forms of analysis, including statistical/probability sampling and more complex forms of delay and disruption analysis and modelling. Successfully managing such claims and disputes requires carefully considered and bespoke procedures.
2. Claims Management Procedures
Good claims management procedures should facilitate the early detection, mitigation and resolution of potential issues on NPP projects. For this reason, it is important to consider the claims management and dispute resolution procedures in conjunction with the wider project controls and reporting requirements.
Project controls and reporting: Project controls and reporting are crucial to help manage risks and thereby reduce the delays and costs to a capital-intensive and lengthy NPP project. Project controls will often include detailed time scheduling requirements (including structure, content and updating), as-planned and actual quantities and manpower reporting, change control and configuration management procedures, risk registers and detailed reporting obligations. When parties are developing the project control procedures, they should also take account of the information they will require when substantiating and assessing claims. If the information is not collected contemporaneously with the occurrence of the claim event, it will be more difficult to assess the cause and impact of such events retrospectively. Disputes are far more likely to arise where the causation and quantification elements of a claim have not been fully substantiated – the better the project record, the more likely parties will be able to resolve claims efficiently and without the need for a formal dispute.
Early notification requirements: Given the lengthy time schedules for NPPs and the large number of interfaces between different disciplines and subcontractors/sub-suppliers, it is key that there is early notification of potential issues that may adversely affect the performance of the works, increase the contract price or cause delay. Early detection of potential issues not only allow the parties to take steps to mitigate the risks, but also allows parties to ensure steps are taken to capture data relating to the impact of the event in a way that will facilitate the claims process.
Detailed claims processes: A detailed claims procedure is vital on nuclear projects; the process should be rigorous and include fixed but realistic time limits within which the claiming party must issue its notice of claim and its fully detailed claim. Non-compliance with these time limits (for both the initial claim notice and the fully detailed claim) may result in the invalidation of these notices, and, in effect, possibly bar any remedy for the claim. The fully detailed claim must also include adequate supporting particulars. It is, therefore, important to clearly set out obligations to substantiate a claim, and prescribe the information required within a set time limit. For example, in relation to additional time and cost claims, this might include a critical path analysis using the contemporaneous project schedule.
3. Tiered Dispute Resolution Procedures
Most construction contracts for major infrastructure projects, including NPPs, include tiered dispute resolution clauses, which require the parties to participate in certain interim dispute resolution procedures before referring a dispute to arbitration/litigation for final resolution. The purpose of such clauses is to encourage the parties to resolve disputes quickly and cost effectively, or at least to obtain interim decisions that allow the works to continue whilst the parties might still pursue final resolution through arbitration/litigation in parallel to or at the end of the works. Such interim procedures commonly include formal inter-party negotiations via senior management meetings and senior management boards followed by expert evaluation/determination or a dispute board.
A well-designed tiered dispute resolution procedure can bring real value to a project. However, a poorly conceived procedure will have the opposite effect and can add significant additional costs and prolong the resolution of disputes.
3.1 Senior Management Meetings and Joint Senior Management Boards
The purpose of these meetings is to elevate the issue above the project-level technical teams between whom the dispute has arisen, allowing more senior representatives to take a fresh and potentially more commercial/big-picture view to resolve the dispute. Key points to consider include:
- Participants: Whilst it is important to ensure these meetings are led by sufficiently senior representatives with the authority to make decisions on settlement, such people may need to be supported by technical representatives who understand the technical issues and the options for their resolution.
- Procedure: There should be a relatively short period in which the meetings must take place (between 14 and 28 days), subject to the parties’ agreement to extend. The meetings should be confidential and without prejudice to encourage an open and frank discussion.
An alternative approach to senior management meetings is to provide for a joint senior management board to be established at the outset and to which disputes can be referred for resolution and/or recommendations. The concept of the board is that it would comprise of members from the owner and contractor who should act in a semi-independent manner, with the interests of the project as its priority.
3.2 Expert Determination and Dispute Boards
Expert evaluation/determination: This process involves the appointment of an independent third-party "expert" who will preside over a short form procedure that will usually involve the exchange of short submissions with documentary evidence only (as opposed to witness evidence). This expert will render a non-binding evaluation or a binding but not final determination within a relatively short prescribed period (e.g. 28 days). Usually this is a person with experience in the relevant industry or technical discipline and who may also have some legal training. Expert evaluation/determination can be a useful approach to resolving highly technical disputes, which are common on NPP projects. However, a common limitation is that disputes relating to technical subjects often also involve complex arguments relating to contractual and/or regulatory interpretation, and potentially delay analysis and cost quantification issues, which a technical expert may not be suited to dealing with.
Dispute boards: There are broadly two different types of dispute boards: standing and ad hoc. A standing dispute board is usually comprised of three independent and neutral persons (adjudicators) who are appointed by the parties. They are appointed at the commencement of the project, before any disputes arise, and often review monthly or quarterly reports and undertake regular visits to the site throughout the project. This ensures that the standing adjudicators are familiar with the complex intricacies of the NPP project and can quickly react to claims referred to them. In contrast, ad hoc dispute boards are created when a dispute arises. Whilst this means the cost is lower, ad hoc dispute boards can result in delays due to the time it can take to appoint a new board for every dispute. Parties may also wish to include an appointing authority in the event they cannot agree on an appropriate board of adjudicators.
There can also be variations on these approaches. For example, given the technical complexities and sheer scale of an NPP project, parties may wish to select a permanent chair and a panel of potential board members with differing expertise, ensuring suitable co-board members are always available and can be selected to suit specific disputes as they arise.
Although dispute boards can provide a number of benefits, dispute boards and expert determinations are not without limitations. It is difficult to remove unsatisfactory members of standing dispute boards and they may have a limited ability to address complex legal issues. Crucially, dispute boards and expert determinations are expedited procedures and may not be suitable for some of the large and complex disputes that often arise on NPP projects. A possible concern is that these interim dispute resolution procedures can still incur a significant amount of time and money, distract senior management and witnesses, and create an adversarial relationship between parties. This issue is exacerbated if the dispute is of such significance that neither party is likely to accept an adverse outcome that is not final, meaning the dispute would need to be referred to arbitration in any event. Accordingly, when parties are considering the use of an expert determination or dispute board in their contracts, they may wish to consider whether referral thereto should be a prerequisite to arbitration for all or only certain disputes.
4. Final Dispute Resolution through International Arbitration
When it comes to large infrastructure projects, international arbitration offers numerous advantages over domestic litigation. For example, arbitration allows for the selection of specialist tribunal members with the requisite expertise of the complex nuclear industry. The confidential nature of arbitration also lends itself to the nuclear industry, where employers and contractors are already subject to intense governmental and public scrutiny, and disputes can often relate to issues that are subject to strict confidentiality requirements. As NPP projects require government support and are subject to governmental control via strict regulations, non-government parties and international suppliers may also be uncomfortable in domestic courts.
Furthermore, international arbitration allows for a high degree of procedural flexibility and can be tailored to the needs of a particular project or dispute in order to improve the quality and efficiency of the dispute resolution process. However, that flexibility needs to be taken advantage of, which necessitates anticipating at the outset the types of issues that may arise during the course of the arbitration, having regard to the unique characteristics of nuclear power projects and the disputes that arise thereon (as discussed above).
A well-designed dispute resolution process and, where necessary, arbitration procedure, can actually have a positive impact on the project by facilitating the timely resolution of the claims and disputes that will inevitably arise. However, a failure to manage the claim and dispute resolution process properly can lead to delay in the resolution of technical issues, reduced cash flow to the supply chain, distraction of key resources from the project works and a breakdown in the parties’ relationship. This can, in fact, exacerbate overall delay and cost overruns on the project.
1 Power Reactor Information System (PRIS) of the International Atomic Energy Agency (IAEA), accessed January 2023.
2 World Nuclear Association (WNA), "Plans for new reactors Worldwide", accessed January 2023.
3 IAEA, "What are Small Modular Reactors (SMRs)?", accessed January 2023.
4 IAEA, Small modular reactors, accessed January 2023. See also: Ontario Breaks Ground on World-Leading Small Modular Reactor, accessed January 2023.
5 World Nuclear Performance Report 2022, accessed January 2023, p. 63 [p. 61].
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