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 Lesson on Good Faith and Fair Dealing in Solar ConstructionLate last year, a federal trial court in New York awarded a solar development company $11.6 million in damages against Suffolk County arising out of a dispute on a multi-site carport solar construction project. The basis for this substantial award? The County failed to satisfy its obligation to cooperate with the developer on permitting issues under the parties’ lease agreement. After an extensive dive into the facts of the dispute, the court concluded that the County’s deliberate efforts to stall and frustrate the permitting process violated the lease agreement’s requirement that the County “fully cooperate with the developer in the conduct of its operations and the exercise of its rights.”

In 2010, the developer, EDF Renewable Development, contracted with Suffolk County under a series of lease agreements to supply 20 MW of solar power on seven different carport solar installations throughout the county. As part of the permitting process under certain of the lease agreements, the County required the developer to supply a parking replacement or parking mitigation plan. The court found that the parties’ course of dealing on the permitting process on each of the first six carport sites involved a collaborative approach and the use of conditional permitting to expedite construction.

Because of global supply shortages, the developer elected to procure all solar panels for the seven carport sites along with frame steel in advance of construction. Based on the evidence presented, the court noted that had the developer awaited permit approval prior to ordering panels and frames for each site, the developer would not have been able to complete construction of each site on time. With the exception of the final site, the parties’ collaborative conduct allowed construction of each of the other six solar installations to proceed smoothly and without issue.

In January 2012, the County experienced turnover in its leadership, and the new leadership was approached by a retail developer who opposed the remaining carport solar installation. The new County administration agreed that it would not support completion of the remaining solar installation. The County did not inform the solar developer of this agreement and, instead, for the next three months, the County intentionally stalled and delayed all activity relating to the remaining carport site.

Unaware of the County’s intent, the solar developer continued to finalize conditional permitting and started construction as it had done with each of the six previous carport sites. As time progressed, the County representatives became more and more uncooperative and unwilling to communicate with the developer in any meaningful way in regards to permitting the project, including developing a plan for replacement parking. Finally, in March 2012, the County, for the first time, communicated to the developer that it “preferred” not to proceed with the remaining carport installation and requested that the parties look for an alternative site for the installation. The developer participated in such discussions, but no mutually agreeable alternative site was located.

During these discussions, the County never complained about the lack of a parking replacement plan as being the basis for not proceeding with the carport installation. The trial court concluded that the County’s sole motivation in rejecting and halting the final carport installation was to accommodate the retail developer’s request that the carport installation at the final site not go forward. The court further determined that the County failed to comply with its good faith contractual duty to cooperate with the solar developer in securing permitting and a replacement parking plan for the final carport site, which constituted a material breach of the parties’ lease agreement.

With respect to damages, the court found that the developer’s decision to purchase the solar panels in advance of construction of each site was supportable given the evidence of a global shortage at the time of contracting in 2010 and  that the developer properly mitigated its damages by re-selling the panels and steel material at reasonable rates. Thus, the court awarded the developer its remaining out-of-pocket costs incurred for procurement and project preparation costs, as well as prejudgment interest, for a total award of $11.6 million.

As the court noted, although the County was not required to issue a building permit or to relax the permitting requirements under the lease agreement, those facts did not allow the County to actively and deliberately frustrate the permitting process. By ignoring its good faith obligations under the lease agreement, the County’s efforts to sabotage the final carport solar installation backfired tremendously. The principle of good faith and fair dealing is well-recognized and, often, an express duty in many commercial contracts such as the one in this case. Here, the court demonstrated that a party’s intentional efforts to abuse certain contract provisions to avoid performance is a breach of that duty of good faith and can result in substantial financial award against the non-performing party.

solar panels

As solar technology continues to become more efficient, construction of solar plants is expanding rapidly around the world, including in colder environments that, in the past, may have lacked the irradiance necessary to make solar feasible.  Installation of solar panels north of the frost line creates some additional risks that solar developers, owners and contractors should consider. We have recapped some of those concerns below.

  • Who carries the subsurface risk and what does that risk extend to?
    • Post-driving in northern climates requires attention to the “heave,” or the impact of frost expansion of soils during winter months on the driven piles that support the panels. Frost expansion can cause uplift and sinking of piles that create serious warranty issues after a plant is operational, and, because the cause of the warranty issue occurs underground, it may be difficult to ascertain or assign responsibility after-the-fact.  Parties can and should work together to define and assign this risk during contract negotiations to avoid unnecessary and potentially expensive disputes during a project and after completion.
  • Who is responsible for weather impacts and how will weather delays be addressed?
    • In many construction contracts, the notice to proceed date is left to the discretion of the owner/developer once the contract price and scope have been negotiated. Contractors and subcontractors should be wary of an open-ended NTP date or any kind of protracted negotiation after the award of a bid in regions that suffer from early-onset, harsh and lengthy winters.
    • Solar contractors, in particular, focus on creating efficiencies and managing a compressed schedule to make the work profitable. The manufacturing-like process of solar farm construction demands that contractors maintain a high level of productivity to achieve project goals.  If a contractor allows owner-financing or material availability concerns to push its NTP date into late summer or fall in a colder climate, the contractor may be vulnerable to winter weather impacts that could cripple its productivity, spelling disaster for a project.
    • For example, frost penetration can make malleable soil take on rock-like qualities and seriously hamper pile-driving operations. Similarly, installation of racking and panels in sub-freezing temperature may require additional equipment/materials to keep laborers warm and may require more skilled or expensive labor to work productively in such harsh environments.  Even where construction is completed before winter sets in, a contractor should consider potential impacts weather may have on testing requirements.  For instance, a contractor may have difficulty demonstrating required performance standards if panels are covered with snow for prolonged periods.
    • To account for winter weather impacts, a savvy contractor will look for additional protection beyond the standard force majeure language that may appear in many contract forms. Force majeure provisions do not always cover weather impacts that are ordinary or expected for a particular climate even if such conditions are typically harsh or difficult.  Instead, a contractor should look for additional protection by addressing winter weather impacts and delays separately and clearly assigning responsibility for associated costs to the appropriate party.
    • The contractor, to the extent it will rely on subcontractors for any of the work, must clearly understand what that entity believes is “winter work,” before agreeing to definitions or relief with the owner/developer.

There are obviously other considerations that solar industry participants should evaluate when pursuing work in cold weather climates.  But the above examples may encourage you to think more deliberately about the various unforeseen issues that might arise.  And, indeed, regardless of where you are pursuing new work, it is always a valuable exercise to consider potential environmental impacts, especially in a marketplace with a fast-expanding footprint like solar energy.