301 Moved Permanently

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So what happens when a defective solar panel causes your roof to burn down, or you obtain only 50% power output during the second year of an expected 25-year service life? What if the panel manufacturer is out of business or denies the claim?

There are newspaper reports of a significant number of panel failures. While the extent of the problem is not fully known, even a small percentage of defective panels may create a significant problem in a utility-scale installation. Moreover, the sheer number of panel installations has risen exponentially in recent years.

Like other mass-produced manufacturing processes, problems can arise in design and manufacture. Many manufacturers are located overseas. Some have become global successes, while others have filed for bankruptcy.

There are suggestions that the high number of failures results from competitive pressure to cut costs. As the industry matures, however, participants are grappling to solve problems with quality controls, third-party testing, performance guarantees and evolving insurance products. If these efforts are not enough, a disappointed party can seek legal relief.

 

Structure of ownership

The starting point in the analysis is understanding the structure of the ownership and procurement of the panels. This structure will be quite different for a homeowner who owns or leases solar panels, distributed solar generation on commercial building rooftops or a utility-scale solar energy facility. However, all projects share the same starting point in requiring collection and review of the underlying agreements.

Thus, a homeowner should gather the solar equipment purchase or lease agreement, while the owner of a distributed or utility-scale system should gather the power purchase agreement; site lease agreement; engineering, procurement and construction (EPC) agreement; and operations and maintenance (O&M) agreement. Of course, it is important to seek and review the procurement agreement for the panels, the panel manufacturer warranty, the output guarantees and the insurance policies.

In many cases, the relevant documents may provide clear guidance on who is responsible for defective panels. In more complex structures, it may be difficult to discern who bears ultimate legal responsibility, or there may be overlapping responsibility.

More importantly, the various agreements may define who is not responsible for defective panels. In many cases, there are limitations of liability, waivers of consequential damages, liquidated damages or other contractual risk-shifting provisions. These are important because they may limit legal responsibility for replacement of the panel but not for the costs of installing the replacement. In such cases, good lawyering may cause another party to step in or insurance to pay for the installation or downtime costs.

In some cases, ultimate responsibility may not fall on the panel manufacturer because it is out of business or otherwise judgment-proof. In these situations, careful scrutiny of the underlying agreements is required because there may be other legally responsible parties, indemnity rights or insurance to fill the void.

 

Watch the warranty

A warranty is essentially a guarantee to repair or replace a defective product. In some cases, the owner must be a party to a contract with the manufacturer or a third-party beneficiary to avail itself of the warranty. In other cases, the warranty may pass through to the ultimate owner, depending on its terms.

There are significant differences between manufacturer warranties. For example, some panels are warranted against defects for only one year, while others may have their output warranted for up to 25 years, with an allowance for performance degradation over time. Nearly all warranties exclude defects caused by failing to properly maintain the panels or by acts of God. Some manufacturers give themselves absolute discretion to determine whether their own product is defective. Others allow an appeal to a third-party testing organization.

In most cases, the panel manufacturer limits liability for consequential damages. As mentioned above, such a warranty may cover the cost of replacement of the panel itself but not for the inconvenience and cost of reinstalling the panels or the lost power generation during downtime for repairs.

Thus, just because a manufacturer performs its warranty obligations does not mean that the owner will be made whole. In such cases, the owner should look beyond the warranty to evaluate the likelihood of being made whole.

Some warranties contain choice of law or forum clauses suggesting they are governed by the laws of the overseas country where the product was manufactured. If there is a warranty dispute involving such a clause, the claimant may have significant trouble obtaining relief in the distant forum.

Likewise, a claimant may have trouble enforcing a domestic judgment against a defunct or overseas manufacturer. This may be less of a concern where a creditworthy overseas manufacturer has a domestic presence and, therefore, has domestic assets subject to enforcement of judgment.

 

Guarantees and insurance

Guarantees of panel output may be found in the panel manufacturer warranty or in the EPC contract. Close scrutiny of the various agreements is required to determine whether there are representations, warranties, or guarantees on the performance or output of the panels. Such promises may form the basis for breach of contract, misrepresentation or warranty claims.

Even if there are performance assurances, such promises often have their limits. For example, a performance guarantee from the EPC contractor may provide assurances that the system, as designed, will perform as intended. Such terms may not ensure the electrical output of the solar panels themselves.

Also, there may be disagreement with the manufacturer over whether a warranty exclusion applies, such as a failure to properly maintain the equipment. In such cases, the owner may look to the O&M contractor for failing to maintain the panels.

If the EPC contractor who procured the panels is the same entity as the O&M contractor, this may be of less concern because one party is responsible for design, procurement, installation and maintenance.

Like the manufacturer’s warranty discussed above, performance guarantees are only as good as the credit of the EPC contractor standing behind them. Thus, the track record and financial strength of the EPC contractor are important factors to consider early on in the selection process.

As the solar market expanded, various insurance products evolved to address the needs of the participants to limit their financial exposure to panel failures. Insurance may be available to reduce or eliminate risk but oftentimes with significant added cost. Unlike typical insurance, these products are essentially warranties or performance guarantees offered by third parties.

For example, one insurer is willing to give a 25-year guarantee that panels will perform to 90% capacity in the first 10 years, and 80% for the remaining 15 years. However, this guarantee is also only available with respect to panels made by a limited set of manufacturers approved by the insurer, reinforcing the importance of vendor selection for key components.

By contrast, the typical installation, property and liability insurance policies will not provide warranty coverage. However, such policies are likely to provide coverage for property damage or personal injury caused by defective panels. In many cases, it may be desirous to have the insurer pay the claim and let it bring subrogation claims against responsible parties.

 

Damage and loss

When there is more than just pure economic loss involved, such as damage to property or personal injury, strict liability and negligence claims may afford alternative remedies. If the manufacturer or a third-party testing organization certified the output of the panels, there may be misrepresentation claims where performance statements were false but were relied upon.

If the panels are procured directly by the owner, certain remedies for the sale of goods under the Uniform Commercial Code may apply. There may also be implied warranty claims, depending on whether the panel manufacturer effectively disclaimed such rights.

When causation for the defective panel is not clear, experts may be required to determine the cause of the failure. In such cases, there may be multiple responsible parties or claims for a defectively designed and constructed system. In such cases, performance or surety bonds and professional liability insurance may come into play.

Many of the problems associated with potentially defective solar panels can be avoided or mitigated by addressing the risk early on in the project development lifecycle. As it matures, the industry is likely to shake out poor manufacturers in favor of those that can deliver quality panels.

If a problem does arise, a claimant is well-advised to seek good legal counsel to assist in determining who may be legally responsible. It is particularly important to get counsel involved early on when a problem is first discovered because there may be notice requirements and short time periods to assert claims. S

 

Roger C. Haerr is a partner and the real estate litigation division leader at McKenna, Long & Aldridge LLP. He can be reached at rogerhaerr@mckennalong.com or (619) 699-2564.