REC and China Sunergy in legal spat over take-or-pay contract

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The fall-out from rapid price declines for polysilicon and wafers due to weak demand and increasing overcapacity in materials and production has taken a new twist with legal action being touted by both REC and China Sunergy over a long-term (2009-2015) take-or-pay mono-wafer supply contract. Many poly and wafer suppliers have been forced to lower contract prices and adjust shipment quantities as spot prices fall below contract prices, disadvantaging cell producers that are tied to take-or-pay contracts compared to those without such contracts.

Initially, REC announced on September 9, 2009 that it had terminated the contract with China Sunergy has it had failed to renew the US$50 million bank guarantees which are required on an annual basis, nor agreed on revised terms of the supply deal that many customers are attempting to do. REC said that they had now called upon the bank guarantee to cover some of China Sunergy’s payment obligations.

China Sunergy has now responded (September 11, 2009), with legal proceedings of its own. The solar cell manufacturer said that courts in both China and Norway have made rulings suspending payment of the bank guarantees.

The solar cell manufacturer claimed that both parties were negotiating the remaining few key terms to the contract when REC ‘suddenly and unilaterally terminated the agreement.’

The payment suspension was claimed from the legal standpoint that REC SITECH had been the original beneficiary of the bank guarantees but was legally dissolved in January, 2009, while the terms of the bank guarantees do not allow transfer.

According to China Sunergy, REC has not made any shipments of wafers to China Sunergy under the disputed agreement.

REC said in a statement that it intended to continue negotiations with China Sunergy but would be considering further legal actions to cover potential losses.

Long-term take-or-pay contracts were introduced several years ago due to the insufficient supply of polysilicon and rising prices. Major cell producers were encouraged to sign these agreements to secure sufficient polysilicon and wafers, while obtaining prices well below spot. However spot prices topped US$450 per kg in mid-2008 but massive overcapacity has sparked spot prices to fall so approximately US$60-US$65 per kg currently, well below contracted pricing levels.

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