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Aman Kahlon represents owners, general contractors, and subcontractors. His experience ranges over a wide variety of disputes. He advises clients on delay, interference, defective design, and negligence claims. View articles by Aman

Florida Court Finds Arbitration Clause Expanding Authority of Courts to Vacate/Modify Arbitration Awards UnenforceableThe Florida Arbitration Code addresses the confirmation, vacation, modification or correction, and appeal of arbitration awards in Florida. In September, a Florida District Court of Appeal addressed whether parties may expand the scope of judicial review provided under the Florida Arbitration Code. In National Millwork, Inc. v. ANF Group, Inc., a subcontractor sought to void the arbitration clause in its subcontract by arguing that the provision impermissibly expanded the scope of judicial review to include a determination as to whether the arbitrator properly applied Florida law.

The Florida Arbitration Code limits the authority of Florida courts to vacate and/or modify arbitration awards to circumstances when an award is procured by corruption, fraud, or other undue means or when there is evident partiality, corruption or misconduct by the arbitrator. The Florida Arbitration Code also prohibits parties from varying the grounds for vacating or modifying an award.

The appellate court in National Millwork concluded that the subcontract arbitration provision allowing for appellate review of the arbitrator’s application of Florida law fell outside the scope of judicial review allowed under the Florida Arbitration Code. The court relied on the parallel analysis of the U.S. Supreme Court when addressing comparable considerations under the Federal Arbitration Act. As a result, the court reversed the lower court’s order compelling arbitration and remanded for consideration as to whether the portion of the arbitration clause that inappropriately expanded judicial review rendered the entire clause void or whether that portion could be severed from the rest of the clause.

The Florida appellate court’s decision clarifies the scope of permissible judicial review of arbitration awards under Florida law. Many states’ arbitration statutes mirror the Florida statute at issue in this case, and caution should be exercised when drafting contractual arbitration provisions that run counter to a state’s applicable arbitration statutes.

While the inclusion of a “severability clause” into a contract may help avoid rendering the entire arbitration clause unenforceable, that result is not guaranteed. If a court finds that the offending portion of an arbitration clause is integral to the agreement to arbitrate, it may void the entire clause. In such circumstances, a party may unexpectedly find itself litigating an action in state court and unable to take advantage of the arbitration provision duly negotiated by the parties at the start of the project. If you have questions about reviewing arbitration clauses or other contract provisions, please contact Aman Kahlon for more information.

Oregon Anti-Indemnity Statute Voids Sub-sub’s Duty to Indemnify Sub for the Sub’s Own NegligenceThe Ninth Circuit Court of Appeals recently upheld the application of Oregon’s anti-indemnity statute to a contractual indemnity provision requiring a sub-subcontractor’s insurer to indemnify the subcontractor for the subcontractor’s own negligence. In First Mercury Insurance Company v. Westchester Surplus Lines Insurance Company, Multnomah County contracted with a general contractor for the renovation of a bridge. The general contractor hired a subcontractor to furnish materials including reinforced decking. The subcontractor, in turn, contracted with a sub-subcontractor to manufacture the decking material. The sub-subcontract required the sub-subcontractor to indemnify the subcontractor for the subcontractor’s own negligence in causing damage to a third party—in this instance, the County.

After the project was completed, several defects in the bridge were discovered, including cracks in the decking. When the County sued, the subcontractor was found to have been negligent and partially liable for the defects and resulting damage to the County. The subcontractor claimed indemnity from the sub-subcontractor per the terms of the sub-subcontract, but the trial court refused to enforce the indemnity provision because it was void under Or. Rev. Stat. § 30.140(1). The relevant portion of the statute provides that any provision in a construction agreement that requires a company or its insurer/surety to indemnify another against liability for damage to property caused in whole or in part by the negligence of the indemnitee is void. Citing the plain language of the statute, the Ninth Circuit affirmed the trial court’s judgment denying indemnity.

The Ninth Circuit opinion serves as an important reminder of the variety of anti-indemnity provisions across the nation. Many states take Oregon’s approach and restrict the scope of indemnity provisions to cover only the negligence of the indemnitor and not the negligence of the indemnitee. Other states have more lenient anti-indemnity statutes or no anti-indemnity provision at all. Still others take a harsher approach than Oregon and impose stricter limitations in their anti-indemnity laws and may even have different laws for different industries.

When negotiating agreements for work outside your company’s traditional footprint, consider whether the state where the project is located has an anti-indemnity statute and how it is applied. Indemnity provisions in construction contracts can be exceptionally consequential in terms of allocating risk between parties, so it is essential to understand how such provisions will be applied and enforced in any particular state before executing an agreement and moving forward with a project in that state.

If you have questions about anti-indemnity laws or negotiating indemnity provisions, please contact Aman Kahlon for more information.

Declaration of Independence: Prior Material Breach Does Not Excuse North Carolina Solar Developer of Performance of Independent Promises under AgreementIn Recurrent Energy Development Holdings, LLC v. SunEnergy1, LLC, a North Carolina Superior Court addressed a dispute between two solar developers arising out of a letter of intent/exclusivity agreement. Under the agreement, Recurrent agreed to make cash payments in return for the exclusive rights to purchase certain projects being developed by SunEnergy1 and to negotiate in good faith regarding a tax equity investment in a separate project under development by SunEnergy1.

Upon SunEnergy1’s failure to meet certain target milestone dates on any project subject to an exclusivity payment, the agreement permitted Recurrent to demand the right to purchase a replacement project or, if none was available, seek a partial refund of the corresponding exclusivity payment. The parties’ relationship soured when unanticipated environmental issues arose on some of the projects and planned power sale agreements failed to materialize. When SunEnergy1 failed to meet the milestone dates on one project, Recurrent requested a replacement project and then, promptly, demanded a refund when no replacement was forthcoming. SunEnergy1 did not provide a refund.

However, prior to the partial refund dispute, the parties’ tax equity investment deal also fell apart. Both parties alleged breaches under the agreement relating to their respective obligations in the tax equity transaction. SunEnergy1, specifically, alleged that Recurrent did not comply with its express contractual obligation to negotiate in good faith, in part, because Recurrent’s pricing of the project for the transaction was well-below market value. SunEnergy1 also alleged that its obligation to issue a partial refund of the exclusivity payment was excused by Recurrent’s prior material breach of this duty of good faith (note: the doctrine of prior material breach provides that if either party to a contract commits a material breach of the contract, the other party may be relieved from the obligation to perform further). The North Carolina court addressed these and other arguments on cross-motions for summary judgment by both parties.

With respect to the partial refund, the court found that Recurrent’s alleged prior material breach did not circumscribe SunEnergy1’s obligation to refund a portion of the exclusivity payment. The court reasoned that a contract may have multiple covenants, some of which are dependent and some of which are independent of one another. In this case, the contract did not connect or link the refund of the exclusivity payment with any obligation of good faith associated with the tax equity investment, so the doctrine of prior material breach did not excuse SunEnergy1 from issuing the refund.

Solar development deals commonly involve the sale or construction of multiple projects at one time to take advantage of certain financing and tax considerations. Agreements memorializing these deals may be hashed out quickly or developed in phases as the relevant projects reach certain financial, permitting, design or other milestones. This North Carolina opinion highlights the need for careful drafting of development agreements to allocate parties’ respective rights and obligations clearly regardless of the complex, fluid, and fast-paced nature of these transactions.