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.

Electricity Generation Plants Images SetThe CPV St. Charles Energy Center, a new 725 MW combined-cycle gas power plant in Maryland, went online earlier this month. The U.S. Supreme Court analyzed federal preemption with respect to state regulation of power generation in interstate markets administered under the Federal Energy Regulatory Commission (FERC) in a ruling affecting the CPV plant’s rate structure. As the Court recounted, Maryland attempted to evade the “clearing price” set by the interstate market for power by ordering local power utilities to enter into a 20-year “contract for differences” with CPV for capacity generated by the new gas power plant. Under the terms prescribed by Maryland, if the clearing price set by the interstate market was less than the rate under the contract for differences, the power utilities would make up the difference, and, if the reverse were true, CPV would owe the power utilities for the difference.

Maryland’s aim was to encourage and subsidize local production of clean and renewable sources of electrical power generation, but the Court found that Maryland’s efforts at price fixing in the interstate market were preempted by the existing regulation of that market by FERC. However, the Court also left open the door for future efforts by states to incentivize local electrical production so long as such efforts avoided interference in interstate markets:

We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC. We therefore need not and do not address the permissibility of various other measures States might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector. Nothing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures “untethered to a generator’s wholesale market participation.” … So long as a State does not condition payment of funds on capacity clearing the auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.

President Trump has promised to “identify and eliminate unnecessary regulations that kill jobs and bloat government” and to allow states more freedom from federal restrictions, although it is too early to determine if he will encourage renewables, in light of his promise to lift restrictions on coal, oil, natural gas, and shale. While FERC is unlikely to be affected, states will likely seek ways to persuade developers and contractors to the state’s backyard. As more states pursue markets for renewable and other forms of electrical generation, they are likely to implement incentive programs to try to attract developers and contractors to produce capacity locally.  Power generation developers and contractors must consider the potential enforceability of any regulatory or rate-setting scheme that is used to entice them into a new market. If a state overreaches in the development of its incentive program and a court strikes the program down after a project is under way, that action might substantially impact the profitability and viability of any power plant.