German solar power company awarded R856m in damages after kingdom reneged on deal. From Moneyweb.
Here’s a lesson in what can happen when governments renege on contracts.
In this case, solar power company Frazer Solar GmbH was awarded €50 million (R856 million) in damages by a South African court after the Lesotho government reneged on a contract, which was to be funded by the German government, as part of a wider programme to turn Lesotho into a net exporter of electricity.
A binding agreement was sealed in 2018 between Frazer Solar and Lesotho for the provision of up to 40 000 solar water heating systems, 20MW of solar photovoltaic capacity, one million LED lights and 350 000 solar lanterns nationwide.
In a statement issued by Withers Worldwide, the lawyers acting for Frazer Solar, it seems the project stalled in October 2018 when Lesotho’s Ministry of Finance refused to finalise and execute the project’s financial agreements. “Following this breach, Frazer Solar commenced arbitration proceedings in South Africa. No explanation for this refusal [to execute the agreements] has been provided to Frazer Solar by the government of Lesotho, but the resulting legal action concluded that a competing project had been prioritised.”
In March this year, Frazer Solar had completed a similar project in Eswatini, delivering hot water to every single government health clinic.
‘The Government of Lesotho was given an outstanding opportunity to transform access to clean, renewable energy and to eradicate the use of damaging, polluting alternatives nationwide,” says Hussein Haeri, partner and co-head of International Arbitration at Withers LLP.
“Instead, it prevented the project from proceeding, contravened its legal obligations and left Frazer Solar with no alternative than to bring legal proceedings.”
The Lesotho government might want to read up on what can happen when international agreements are flouted.
Assets seized from other countries
In 2012, the Argentine Navy ship Libertad was seized by a court in Ghana after hedge fund NML Capital filed a suit in an Accra court as the ship docked for resupply. NML Capital owned $1 billion in debt that Argentina had refused to pay.
The judge granted the injunction to seize the ship until Argentina posted $20 million to the court in partial settlement of the debt owed to NML Capital. In 2001, Argentina defaulted on $100 billion in debt, but settled 93% of that debt over the ensuing years, but NML formed part of the remaining 7% that had not been paid.
The Libertad was eventually released after Argentina argued that war ships, under a UN convention, are immune from civil claims in foreign ports.
Meanwhile, the US government seized a Manhattan skyscraper worth more than $1 billion belonging to Iran over disputes going back to 1979 and the Islamic revolution when US citizens were taken hostage in the US embassy in Tehran.
‘Liquidated damages’ clause
In a statement issued this week by Withers Worldwide, Frazer Solar “contends that the Government of Lesotho failed to fulfil its contractual obligations under the supply agreement, and in July 2019 gave notice to [the government of Lesotho] concerning the commencement of arbitration proceedings, in line with the dispute resolution mechanism agreed by both parties”.
It adds: “As a deterrent for breaches of the contract, both parties agreed to a ‘liquidated damages’ clause in the supply agreement, which allocated a pre-agreed and capped sum to be paid in the event that either party did not fulfil its contractual obligations.
“The independent arbitrator directed the government of Lesotho to pay Frazer Solar damages of €50 million, in addition to pre-award interest of €754 273, and post-award interest of 1.7% per annum.”
Timeline of events:
- In November 2017, Frazer Solar submitted a proposal to officials in the Government of Lesotho (GOL) seeking approval for the installation of up to 40 000 solar water heating systems and up to one million LED lights in all government buildings and homes of public servants over a period of four years. The project was funded by KFW IPEX-Bank GmbH, a German export credit agency, with a loan to the value of €100 million repayable over a period of 10 years.
- On November 21, 2017, Frazer Solar and Lesotho signed a non-binding Memorandum of Understanding for the project.
- In August 2018, Frazer Solar met with Tom Thabane, then prime minister of Lesotho, and minister in the Office of the Prime Minister Temeki Phoenix Tsolo, to discuss a detailed presentation of the project, setting out the benefits, energy and cost savings it would bring about.
- In September 2018, following negotiations, a written supply agreement was concluded, signed by Robert Frazer on behalf of Frazer Solar, and Tsolo on behalf of the Kingdom of Lesotho. The financing agreement with KFW would be finalised by the minister of finance.
- In October 2018, Frazer Solar wrote to the Ministry of Finance to establish the reasons for a delay in finalising the finance agreements. Frazer Solar was told by the ministry that the project required cabinet support and leadership from the Ministry of Energy. However, this support had already been confirmed by the Office of the Prime Minister, which could not explain the ministry’s refusal to execute the financial agreement.
- In March 2019, lawyers representing Frazer Solar addressed a letter of demand to the office of the Prime Minister calling on the government to remedy a series of breaches of the supply agreement within 60 days. No answer was received.
- In July 2019, Frazer Solar declared an arbitration dispute between the parties and implemented arbitration proceedings.
Moneyweb reached out to Withers LLP, which said it had no further statement to make on the matter.
A request for comment was also submitted to the Office of the Prime Minister in Lesotho. No reply had been received at the time of publication.
This story will be updated once a reply is received.