Expensive Lessons Learned after 8th Circuit Rules Against Wind Developer in Its $400 Million Suit Against a Minnesota Utility

A large wind developer, enXco Development Corp. (“enXco”), learned a hard lesson about the importance of negotiating flexibility in contracts to deal with unforeseen regulatory hang-ups, when the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s ruling to dismiss enXco’s $400 million suit against Northern States Power Co. (“NSP”), a division of Xcel Energy Inc., over its decision to pull out of a 150 MW North Dakota wind deal. A copy of the opinion is available here.

The facts of the case are interesting and bear repeating. NSP originally entered into two contracts with enXco to acquire the wind farm enXco was developing. The first contract was a $15 million purchase and sales agreement for the turbines and real property, and the second contract was a $355 million engineering and construction agreement to construct the project. The purchase and sales agreement contained a number of express conditions precedent, including among other things, that if North Dakota Public Service Commission (“NDPSC”) approvals were not received by a date certain (the “Long-Stop Date”), NSP could terminate its obligations under both contracts. One of the required NDPSC permits was a Certificate of Site Compatibility addressing the project’s effect on endangered migratory birds. However, enXco did not submit this permit application for nearly two years leaving it less than six months to obtain the permit before the Long-Stop Date. Unfortunately, for enXco, a snow storm delayed the permit’s hearing date, and after the hearing was eventually held, NDPSC realized that it had taken place in the wrong county! A new hearing was quickly scheduled, but the 20-day notice requirement meant that it could not take place prior to the Long-Stop Date. NDPSC would not entertain enXco’s request to waive the notice requirement.

NSP brought the hammer down the very next day exercising its contract termination rights because, as the 8th Circuit explains, from the 2008 execution date of the contracts until they were terminated in 2011, the profit margin for wind-energy generation declined to the point that NSP stood to lose significant amounts of money if it chose to proceed with the wind project. enXco sued for breach of contract and NSP moved for summary judgment arguing that its performance under the contract was excused because enXco did not fulfill the purchase and sales agreement conditions precedent. enXco countered that the doctrines of temporary impracticability and disproportionate forfeiture apply to prevent strict enforcement of an “immaterial” condition precedent.

The Circuit Court affirmed the lower court’s decision leaving the parties to their bargain. The doctrine of temporary impracticability did not apply because enXco sat on the NDPSC permit application for approximately two years before submitting it and could have contracted for a more flexible Long-Stop Date. The doctrine of disproportionate forfeiture did not apply because the Long-Stop Date termination clause was express and negotiated among sophisticated parties and enXco retained ownership of the project assets and real estate. NSP walked away with nothing.

The Circuit Court’s opinion was clear and convincing and one wonders why enXco chose to continue to litigate such a weak case in the first place. True NSP’s decision to terminate the contracts was based on a calculated and arguably cynical business decision but had it not walked away its losses would have been pushed down to its ratepayers. enXco on the other hand suffered significant lost profits as compared to actual losses.

The case provides some valuable lessons to EPC contractors and project developers. Anyone reading this decision will be reminded of the importance of consulting regulatory council to review transaction documents prior to closing for potential pitfalls and “gotcha” type termination rights that arise out of unforeseen or uncontrolled events. This case also underscores the need to utilize regulatory council to expeditiously secure all regulatory approvals because when contract terms are clear and unambiguous, the government’s failure to issue a permit in a timely matter will be no excuse in court.