Contract Interpretation

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.

A recent Georgia appellate court decision serves as a stark reminder to contractors on government projects that sovereign immunity, though frequently disclaimed in the contract, may limit a contractor’s ability to recover. In Fulton County v. SOCO Contracting Co., the contractor (SOCO) entered into a contract with Fulton County (the “County”) for the construction of a local cultural center.  The contract specified that the schedule could be extended and the scope of work could be altered by following the contract’s procedure for change orders, which required a written, bilateral agreement as to such changes.

After delays to the project, the County ordered changes to SOCO’s scope of work, but there was no evidence that such changes were executed through bilateral, written agreements as required by the procedure. SOCO even admitted that the County never issued a written change order extending the contract time or altering the scope. SOCO ultimately brought an action against the County for breach of contract and bad faith performance of the contract. The County asserted that any claims arising from unwritten change orders were barred by the doctrine of sovereign immunity.

In Georgia, the doctrine of sovereign immunity has constitutional status and may be waived only by an act of the General Assembly or the Constitution itself. Sovereign immunity is a threshold issue that must be addressed before the court may reach the merits of a case; the party seeking the benefit of the waiver of sovereign immunity bears the burden of proving such waiver, and whether it has been waived under undisputed facts such as these is a question of law.

The court asserted that although the County did waive sovereign immunity for breach of the written contract, it did not waive sovereign immunity for claims arising from modifications to the written contract that failed to follow the written change order policy outlined in the contract. The court concluded that SOCO provided no evidence that the change order procedure requiring a written change order was followed. The court determined that sovereign immunity could not be waived by the County for actions outside the written contract. Further, the court was unable to create an exception to the rules regarding waiver of sovereign immunity based on any reliance that SOCO may have placed on the County’s request for changes, upon the parties’ course of conduct, or upon facts that were deemed admitted. As a result, the court determined that there was a question of fact as to whether the County waived sovereign immunity and remanded the case for further consideration of whether the parties strictly complied with the contract’s procedure regarding written change orders.

The case highlights the fine distinction between compliance with a written contract and the breach of the terms of a written contract. It further serves as a stark reminder to contractors that the contract terms must be followed strictly to ensure the validity of an argument that the government waived sovereign immunity for breach of contract.

Fla. Stat. § 725.06 limits the scope of indemnification provisions in construction contracts.  Specifically, the statute limits the ability of an indemnitee (e.g., owner) to require an indemnitor (e.g., contractor) to indemnify the indemnitee for damages arising from the indemnitee’s own actions, omissions, or defaults. The statute sets forth the types of construction contracts for which the limitation is applicable as follows:

Any portion of any agreement or contract for or in connection with, or any guarantee of or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith…wherein any party referred to herein promises to indemnify or hold harmless the other party to the agreement, contract, or guarantee for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable…(emphasis added).

In January, a Florida appellate court took a closer look at the applicability of § 725.06 to certain construction contracts in the Blok Builders LLC v. Katryniok decision. In that case, the court analyzed whether the statute applied to an excavation subcontract as part of a construction project to “perform all work necessary to provide access to underground [telecommunication] lines” as part of a telecommunications improvement project. The subcontractor was to perform all excavation necessary for access to the utility lines that were to be repaired and updated. After the subcontractor performed some excavation work near a residence, the driveway on the property collapsed while the resident was walking on it. The resident sued the subcontractor, the contractor, and the owner of the project for negligence.

In the lawsuit, the contractor claimed the subcontractor owed the contractor indemnity based on a provision in the subcontract that required the subcontractor to indemnify the contractor for any liability arising out of an injury to a third party whether such injury was caused in part, or in whole, by any act, omission, default, or negligence by the contractor. The subcontractor alleged that its excavation subcontract fell within the scope of the prohibition on such indemnity provisions contained in § 725.06, which made the indemnity provision in the subcontract void and unenforceable.

The court disagreed and ruled that the indemnity provision was valid. The subcontractor argued that excavation services were explicitly referenced in § 725.06 making the provision applicable to its subcontract. However, the court reasoned that the utility line improvement project did not involve the construction of any “building, structure, appurtenance or appliance,” so any excavation work performed on that project did not qualify as a covered construction agreement under § 725.06.  The court enforced the indemnity provision allowing the contractor to recover all damages incurred, plus attorneys’ fees and costs.

Statutes like § 725.06 exist in other states besides Florida, and it can be difficult to keep up with all the competing requirements and limitations under various states’ indemnification regimes. The Blok Builders case is a useful reminder of the importance of (1) keeping track of indemnity limitations in whatever state you’re working in and (2) paying attention to the scope of your indemnity obligations when negotiating any contract. While the contractor here was able to escape the nullification of its indemnity provision based on the type of construction services performed, slightly different statutory language or a contrary interpretation by the court could have resulted in the contractor being exposed to substantial liability and associated costs due to the resident’s injury. Since third-party injuries are never planned for on a project, understanding the scope of your indemnity obligations before executing any agreement is important.