Wind and Solar Energy Projects: Structuring EPC AgreementsUnique Issues in Wind and Solar PV Construction Contracts, including Guarantees and Warranties

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Jamie Jackson Hansen, Attorney, Holland & Knight, Denver

Stephen J. Humes, Partner, Holland & Knight, New York

Wind and Solar Energy Projects - Structuring EPC Agreements

November 20, 2019

Supplemental Presentation Materials

Slide 10 - enXco Development Corp v Northern States Power Co, 758 F.3d 940 (2014) ....2

Slide 11 - Petroleum Company of Trinidad and Tobago Ltd v Samsung Engineering

Trinidad Co Ltd [2017] EWHC 3055 (TCC) (30 November 2017) ......................................9

Slide 13 - Treasury Department, IRS Issue Proposed Rules on Tax Impact of Transition from

LIBOR (October 2019) ..........................................................................................................23

Slide 36 - Allied Materials And Equipment Co Inc. v. U.S., 569 F.2d 562 (1978) ...............28

Slide 40 - 26 U.S.C. § 45, Electricity produced from certain renewable resources etc .........33

Slide 40 - 26 U.S.C. § 48, Energy credit ................................................................................49

Slide 44 - AUI Const. Group LLC v. Vaessen, 2016 IL App (2d) 160009 ...........................58

enXco Development Corp. v. Northern States Power Co., 758 F.3d 940 (2014)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

758 F.3d 940United States Court of Appeals,

Eighth Circuit.

ENXCO DEVELOPMENTCORPORATION, Plaintiff–Appellant

v.NORTHERN STATES POWER

COMPANY, Defendant–Appellee.

No. 13–1918.|

Submitted: Feb. 13, 2014.|

Filed: July 10, 2014.

SynopsisBackground: Wind-energy project developer brought abreach of contract action against an electric and gas utility,after the developer failed to satisfy a condition precedent bytimely obtaining a required permit and the utility terminatedthe contract to construct a wind-energy-generation project.The United States District Court for the District of Minnesota,Michael J. Davis, Chief Judge, 2013 WL 1364242, grantedsummary judgment for the utility. The developer appealed.

Holdings: The Court of Appeals, Smith, Circuit Judge, heldthat:

[1] the doctrine of temporary impracticability did not excusethe developer's failure to timely obtain a permit, and

[2] the developer did not suffer disproportionate forfeitureafter the contract was terminated.

Affirmed.

Beam, Circuit Judge, filed a specially concurring opinion.

West Headnotes (4)

[1] ElectricityGenerating facilities in general

Assuming that the doctrine of temporaryimpracticability applied under Minnesota lawto conditions precedent for use as a breach-of-contract sword, the doctrine did not excuse thefailure of a wind-energy project developer totimely obtain a certificate of site compatibility(CSC) as required by a contract with an electricand gas utility, despite the developer's contentionthat the delay was the result of a snowstorm,a hearing location error, and state law noticerequirements, where the developer waited almosttwo years to apply for a CSC, the variousdelays were foreseeable and manageable underthe contract's timeframe, and parties assignedthe risk that the developer would not be able toobtain the CSC to the developer.

[2] ContractsPerformance prevented by other party or

third person

Under Minnesota law, a promise which cannotbe performed without the consent or cooperationof a third party is not excused because of thepromisor's inability to obtain such cooperation.

[3] ElectricityGenerating facilities in general

Assuming that the doctrine of disproportionateforfeiture applied under Minnesota law to thenon-occurrence of conditions precedent and foruse as a breach-of-contract sword, a wind-energy project developer did not suffer adisproportionate forfeiture when an electric andgas utility terminated its contract with thedeveloper after the developer failed to timelyobtain a certificate of site compatibility (CSC),where the developer maintained possession andownership of the project assets and real estate,the utility did not obtain ownership of anyproperty as a result of termination, and bothparties were sophisticated and represented bycounsel during contract negotiations.

2 Cases that cite this headnote

[4] Contracts

enXco Development Corp. v. Northern States Power Co., 758 F.3d 940 (2014)

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Application to Contracts in General

Minnesota courts are more likely to enforceexpress terms in a contract where counselrepresented sophisticated parties in the draftingof the contract at issue.

1 Cases that cite this headnote

Attorneys and Law Firms

*941 Leonard J. Feldman, argued (James Will Eidson, onthe brief), Seattle, WA (Joel A. Mullin, on the brief, Portland,OR), for Plaintiff–Appellant.

Charles F. Webber, argued (Deborah Ann Ellingboe, AaronDaniel Van Oort, on the brief), Minneapolis, MN, forDefendant–Appellee.

Before SMITH, BEAM, and BENTON, Circuit Judges.

Opinion

SMITH, Circuit Judge.

enXco Development Corp. (“enXco”) and Northern StatesPower Co. (NSP) contracted for the construction of a wind-energy project in North Dakota. enXco did not obtain a permitby a date certain, thus failing to satisfy a condition precedentto the contract. NSP then terminated the contract. enXcosuffered several million dollars in losses.

enXco sued NSP for breach of contract. The district court 1

granted NSP's motion for summary judgment. On appeal,enXco contends that the district court erred in grantingNSP's motion for summary judgment because the doctrinesof temporary impracticability and disproportionate forfeitureprevent the district court from strictly enforcing the relevantcondition precedent. We affirm.

1 The Honorable Michael J. Davis, Chief Judge, UnitedStates District Court for the District of Minnesota.

I. Background

enXco develops renewable energy projects throughout theUnited States, especially solar and wind projects. NSP is anelectric and gas company that provides energy to customersthroughout Minnesota and the Dakotas.

enXco and NSP entered into two contracts in October 2008.The contracts involved *942 a wind-energy-generationproject in North Dakota known as the Merricourt Project(“Project”). The parties termed the first contract theDeveloped Wind Project Purchase and Sale Agreement(PSA). Under the PSA, enXco agreed to develop the Projectsite, which included obtaining the requisite permits. Duringthis initial phase of the Project, enXco owned the Project'sreal estate and assets. Upon closing of the PSA, NSP wouldessentially purchase the Project's real estate and assets for $15million.

The second, much larger contract was the Engineering,Procurement, and Construction Agreement (EPCA). Pursuantto the EPCA, NSP agreed to pay enXco over $350 millionfor engineering, procurement of infrastructure, construction,commissioning, start-up, and testing of the Project. Theparties agree that one of the principal benefits of this two-contract structure was that neither party had an obligationto proceed with the EPCA until the parties closed thePSA, which would not occur unless the Project developedaccording to their expectations.

The PSA included various conditions precedent that eachparty had to satisfy prior to the “Long–Stop Date” set forMarch 31, 2011. According to enXco, the Long–Stop Datewas not a point of contention during contract negotiations.In fact, enXco selected the actual date without argumentfrom NSP. enXco contends that “[t]he purpose of a long-stop date is to serve as a milestone against which to measurewhether a project is ‘buildable’ ... and such dates are regularlyextended.” In fact, in two of the parties' previous wind-farm projects, the parties agreed to modify their contracts topostpone the applicable long-stop date.

The PSA also provided that “[t]he obligation of [NSP] toconsummate the transactions contemplated by this [PSA]shall be subject to fulfillment at or prior to the Closing ofeach of the following conditions.” One condition precedentrequired enXco to obtain a Certificate of Site Compatibility(CSC). The CSC is a permit that the North Dakota PublicService Commission (NDPSC) issues that must be obtainedbefore the parties could begin construction on the Project.See N.D. Cent.Code § 49–22–02. The PSA also included aprovision that stated “that in no event shall the Closing occurlater than the Long–Stop Date.” It also included the followingtermination clause:

enXco Development Corp. v. Northern States Power Co., 758 F.3d 940 (2014)

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This Agreement may be terminatedprior to the Closing: (i) by either[NSP], on the one side, or [enXco], onthe other side, upon written notice tothe other Party of such termination, inthe event the Closing has not occurredor the conditions precedent to Closingin favor of the terminating Party havenot been fulfilled or waived on orbefore the Long–Stop Date....

It also provided that termination could occur without anyliability accruing to the terminating party. Finally, the EPCAprovided that the parties could terminate the EPCA shouldthey fail to close the PSA.

enXco had approximately 29 months after the execution ofthe contracts until the Long–Stop Date to obtain the CSC.Under North Dakota law, a party must submit a letter tothe NDPSC, stating that it intends to construct an energyconversion facility. See N.D. Admin. Code 69–06–03–01.After an applicant like NSP submits this letter, it must waitone year before submitting its CSC application. See N.D.Admin. Code 69–06–03–01 (2011) (amended in 2013 to omitthe one-year wait period). enXco requested and received fromthe NDPSC a waiver of the one-year requirement in January2009; thus, enXco could have submitted its application asearly as January 2009.

*943 A CSC application must demonstrate that the projectwould have a limited impact on endangered species. See N.D.Cent.Code § 49–22–09(10). Unfortunately for enXco, theUnited States Fish and Wildlife Service (USFWS) warnedenXco that the Project could have a deleterious effect on twospecies of birds because of the proposed physical locationsof the wind turbines. Chris Sternhagen, enXco's ProjectDevelopment Manager, testified that this problem delayed itssubmission of the CSC application. He would later testify,however, that the turbine layout actually “played very littleimpact as to the schedule.”

In any event, almost two years expired before enXcosubmitted the CSC application in October 2010. Thus, enXcohad less than six months to obtain the CSC by the Long–Stop Date. North Dakota law, however, allowed the NDPSCto consider the completed CSC application for up to six

months after its receipt. See N.D. Cent.Code § 49–22–08(5).Nonetheless, Sternhagen testified that a NDPSC staff memberinformed him that a decision would be reached in two-to-fourmonths.

The NDPSC scheduled a statutorily mandated public hearingon the permit for December 21, 2010. Unfortunately, thehearing was postponed due to a snowstorm. The NDPSCconducted the hearing on February 10, 2011, but on March17, 2011, the NDPSC discovered that the hearing occurredin the wrong county contrary to North Dakota law. See N.D.Cent.Code § 49–22–13(1). As a result, a new hearing had tobe scheduled, but North Dakota law also required a 20–daypublic notice. See N.D. Cent.Code § 49–22–13(4). Thus, thehearing was not rescheduled to occur until after the Long–Stop Date. enXco petitioned the NDPSC to waive the 20–day notice requirement. In support of this petition, Sternhageninformed the NDPSC that, unless the NDPSC waived the 20–day requirement, “NSP can terminate the [PSA] between theparties, effectively terminating this Project.” At the resultingNDPSC meeting on the petition, enXco's counsel informedthe NDPSC that “NSP would have the contractual ability toterminate April 1 and there's nothing that we can do as enXcoto prevent that” if enXco did not obtain the CSC prior to theLong–Stop Date. The NDPSC denied the petition. On April1, 2011, NSP terminated the PSA and thus the EPCA as wellafter the Long–Stop Date passed. enXco nonetheless obtainedthe CSC on June 8, 2011.

From execution of the contracts in October 2008 until theirtermination in April 2011, wind-energy-generation profitprospects declined such that NSP stood to lose significantamounts of money should it proceed with the Project.Apparently the market for wind turbines dried up significantlyduring this time. As a result, NSP had the economic incentiveto avoid the contract—a fact that enXco emphasizes. Becausethe particular wind turbines that enXco purchased werealready outdated, enXco could not resell them on thesecondary market. Therefore, enXco redeployed them for usein a different project in Texas.

enXco purchased the turbines for $216 million. Expertstestified that the turbines' post-termination value was between$83.3 million and $123 million, minus the $10 millioncost enXco incurred to relocate them. Thus, the turbinesdiminished in value between $93 million and $141 million.enXco's valuation expert determined that the value of theProject's assets like real estate and permits totaled $0 becauseof the lack of market for the Project and the $15 million cost

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in maintaining the assets. However, enXco representativestestified that enXco still hoped the Project site wouldeventually be profitable.

*944 enXco sued NSP on May 4, 2011, in response toa declaratory judgment action that NSP filed based on itstermination of the contracts. The district court consolidatedthe cases, staying NSP's declaratory-judgment action pendingthe resolution of enXco's suit. enXco sued for declaratoryrelief and damages for breach of contract. The parties agreed,and the district court concluded, that Minnesota law appliedto their contracts.

enXco argued that the doctrines of temporary impracticabilityand disproportionate forfeiture should apply to prevent strictenforcement of the condition precedent. The district courtgranted NSP's motion for summary judgment. The districtcourt determined that NSP did not breach the contracts. Thedistrict court concluded that the conditions precedent andtermination clause expressly permitted NSP to terminate thecontracts if enXco failed to satisfy any condition precedent.Furthermore, the district court found that the parties weresophisticated and reached agreement after substantial arms-length negotiation. Thus, according to the district court,enXco should have appreciated the risk that it assumed inthe event that it failed to obtain the required permit. Thedistrict court declined to apply the doctrine of temporaryimpracticability to a condition precedent. Additionally, itfound that enXco could not demonstrate that it suffered adisproportionate forfeiture because it kept all of the real estateand assets associated with the project and bestowed nothingto NSP. Finally, the district court determined that it need notconsider the materiality of conditions precedent as it wouldtypical contract terms. enXco appeals, seeking reversal of thedistrict court's grant of summary judgment to NSP.

II. Discussion

A district court “shall grant summary judgment if the movantshows that there is no genuine dispute as to any materialfact and the movant is entitled to judgment as a matter oflaw.” Fed.R.Civ.P. 56(a). “We review the grant of summaryjudgment de novo, viewing the record most favorably to thenonmoving party and drawing all reasonable inferences inits favor.” Lackey v. Wells Fargo Bank, N.A., 747 F.3d 1033,1036–37 (8th Cir.2014) (quotation and citation omitted).

enXco concedes that it failed to obtain the CSC prior tothe Long–Stop Date. Furthermore, enXco does not disputethat in so doing it failed to satisfy a condition precedentrather than an ordinary contract term. enXco agrees that if westrictly construe the condition precedent, then NSP had thecontractual right to terminate the contracts. However, enXcocontends that we should excuse its failure to obtain the CSCby the Long–Stop Date based upon the legal doctrines oftemporary impracticability and disproportionate forfeiture.

A. Temporary Impracticability

[1] enXco contends that the doctrine of temporaryimpracticability should excuse its failure to satisfy thecondition precedent that it obtain the CSC by the Long–Stop Date. More specifically, enXco argues that it wasimpracticable for it to obtain the CSC by the Long–StopDate because of delays from a snowstorm, a hearing locationerror, and state law notice requirements. enXco contends that“inclement weather and regulatory error,” which delayed theNDPSC's processing of enXco's CSC application for fivemonths, made it “impracticable to obtain the CSC.” As aresult of this alleged impracticability, enXco was excusedfrom fulfilling the condition precedent, rendering NSP'stermination of the PSA and EPCA a breach of contract.Additionally, enXco argues that Minnesota law recognizesthe doctrine of temporary impracticability as applied toconditions *945 precedent in a contract. Finally, enXcoargues that Minnesota law allows plaintiffs to use the doctrineof temporary impracticability as a sword or offensive legalmechanism to pursue breach-of-contract claims in addition todefendants' use of the doctrine as a shield or defense againstsuch actions.

The doctrine of impracticability applies

[w]here, after a contract is made,a party's performance is madeimpracticable without his fault bythe occurrence of an event the non-occurrence of which was a basicassumption on which the contractwas made, his duty to render thatperformance is discharged, unless the

enXco Development Corp. v. Northern States Power Co., 758 F.3d 940 (2014)

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language or the circumstances indicatethe contrary.

Restatement (Second) of Contracts § 261. The Restatementalso recognizes that impracticability may sometimes be onlytemporary:

Impracticability of performance orfrustration of purpose that is onlytemporary suspends the obligor's dutyto perform while the impracticabilityor frustration exists but does notdischarge his duty or prevent it fromarising unless his performance afterthe cessation of the impracticability orfrustration would be materially moreburdensome than had there been noimpracticability or frustration.

Restatement (Second) of Contracts § 269. The Restatementfurther provides for application of the doctrine of temporaryimpracticability to situations where a promisor violates acondition precedent, stating, “Impracticability excuses thenon-occurrence of a condition if the occurrence of thecondition is not a material part of the agreed exchange andforfeiture would otherwise result.” Restatement (Second) ofContracts § 271.

Assuming, without deciding, that Minnesota courts wouldapply the doctrine of temporary impracticability to conditionsprecedent for use as a sword, we conclude that the doctrine hasno application on these facts. enXco argues that the severaldelays in holding a proper public hearing produced temporaryimpracticability. However, enXco waited approximately twoyears before applying for the CSC. enXco could haveapplied as early as January 2009, yet it waited until October2010. enXco submitted its application less than six monthsbefore the Long–Stop Date, and North Dakota law expresslyauthorizes the NDPSC to consider the application for up tosix months. See N.D. Cent.Code § 49–22–08(5). The PSA'stime table contemplated and assumed that the NDPSC processcould be lengthy and not entirely predictable.

The various sources of delay were all foreseeableand manageable in the time frame agreed to in thecontracts. Although problems surfaced related to endangered

birds, enXco likely could have pursued some type ofaccommodation with the USFWS or NDPSC in order toensure a timely submission of its application. Or, it couldhave insisted on a later Long–Stop Date, especially since theactual date was not a point of contention between the parties.enXco could have also negotiated for a more flexible Long–Stop Date (e.g., “The Long–Stop Date shall be no earlier thanone year after enXco submits its application for a CSC.”).See Vill. Of Minn. v. Fairbanks, Morse & Co., 226 Minn.1, 31 N.W.2d 920, 926 (1948) (“A man may contract todo what is impossible, as well as what is difficult, and beliable for failure to perform.”). In sum, enXco, by exercise ofappropriate diligence within the terms of the agreement, couldlikely have avoided the circumstances that caused it to fail acondition precedent.

[2] Furthermore, Minnesota courts have expresslyacknowledged that “ ‘[i]t is well settled that a promisewhich cannot *946 be performed without the consent orcooperation of a third party is not excused because of thepromisor's inability to obtain such cooperation.’ ” D.H.Blattner & Sons, Inc. v. Firemen's Ins. Co. of Newark,N.J., 535 N.W.2d 671, 675 (Minn.Ct.App.1995) (quoting St.Paul Dredging Co. v. State, 259 Minn. 398, 107 N.W.2d

717, 723–24 (1961)) 2 Finally, in discussing the doctrinesof impossibility and impracticability, Minnesota courts havestated that

2 Persuasive authorities confirm this sentiment. See, e.g.,6 Corbin on Contracts § 1347 (Perillo rev. ed.2010)(“[W]hen one contracts to render a performance forwhich a government license or permit is required, itis his duty to get the license or permit so that he canperform.”). Other courts have explicitly recognized thatthe obtainment of a government permit is foreseeable,and thus the risk of failing to obtain it can beproperly allocated to a certain party. See Harvey v.Lake Buena Vista Resort, LLC, 306 Fed.Appx. 471, 473(11th Cir.2009) (per curiam) (slow processing of roadpermit due to several hurricanes was foreseeable); 1700Rinehart, LLC v. Advance Am., 51 So.3d 535, 538–39 (Fla.Dist.Ct.App.2010); Mortenson v. Scheer, 957P.2d 1302, 1306 (Wyo.1998) (“The obligor is expectedto provide in the contract for contingencies that areforeseeable. This is particularly true in an instancein which performance of the contract depends uponobtaining a governmental license or permit which isrequired.” (citations omitted)).

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the problem becomes one of allocating between the partiesthe burden of unreasonably excessive risks which theparties have encountered but which they did not, at thetime the contract was made, foresee or provide for and byreason of which a greatly increased burden is placed uponthe promisor at the time of performance.Powers v. Siats, 244 Minn. 515, 70 N.W.2d 344, 349(1955).

Here, the parties specifically contemplated what would occurin the event that the CSC was not obtained by the Long–StopDate: NSP could terminate the contract. The PSA languageregarding the satisfaction of conditions precedent and thetermination clause expressly say so. The parties foresaw therisk of regulatory and weather delays and accounted for them.Although they could not foresee the specific circumstancesthat led to the non-occurrence of the condition, it is clear thatthe parties anticipated that the CSC might not be obtained intime. Furthermore, the doctrine of temporary impracticabilitydoes not apply when the government fails to issue a permitin a timely manner, especially where the parties recognizedthis possibility. See D.H. Blattner, 535 N.W.2d at 675.Consequently, the district court correctly declined to apply thedoctrine of temporary impracticability.

B. Disproportionate Forfeiture

[3] enXco argues that it suffered a disproportionateforfeiture. enXco experienced an approximately $100 milliondiminution in value of its properties. On the other hand,NSP suffered no meaningful harm from enXco's tardy CSC.enXco further argues that Minnesota courts recognize thatthe doctrine of disproportionate forfeiture applies to the non-fulfillment of a condition precedent as well as for use as asword rather than a shield. The district court determined thatenXco did not suffer a disproportionate forfeiture because itretained title to all of the real estate and assets involved in theProject. enXco never transferred any of this property to NSP.

Assuming, without deciding, that Minnesota courts wouldapply the doctrine of disproportionate forfeiture to the non-occurrence of conditions precedent and for use as a breach-of-contract sword, we conclude that enXco has not suffered adisproportionate forfeiture. We reach this conclusion despitethe alleged materiality of the condition precedent at issue. TheRestatement notes that a “forfeiture” *947 “refer[s] to thedenial of compensation that results when the obligee loses hisright to the agreed exchange after he has relied substantially,

as by preparation or performance on the expectation of thatexchange.” Restatement (Second) of Contracts § 229 cmt. b.The Restatement further states:

In determining whether the forfeitureis “disproportionate,” a court mustweigh the extent of the forfeiture bythe obligee against the importance tothe obligor of the risk from which hesought to be protected and the degreeto which that protection will be lostif the non-occurrence of the conditionis excused to the extent required toprevent forfeiture.

Id. Weighing these competing interests as the Restatementsuggests can be difficult.

[4] Nevertheless, we have recognized that forfeitures maybe appropriate where they are “consonant with notions offairness and justice under the law.” Klipsch, Inc. v. WWRTech., Inc., 127 F.3d 729, 737 (8th Cir.1997) (quotation andcitation omitted) (applying Indiana law). This court in Klipschnoted that forfeiture may be fair and just where able counselrepresented sophisticated parties. Id. Also, forfeitures arelegitimate when the parties included an express terminationclause in the contract. Id. Additionally, no forfeiture occurswhere the breaching party maintained ownership of the assetscomprising the contract. Id. at 738. Minnesota courts aremore likely to enforce express terms in a contract wherecounsel represented sophisticated parties in the drafting ofthe contract at issue. See Metro. Sports Facilities Com'n v.Gen. Mills, Inc., 470 N.W.2d 118, 125 (Minn.1991) (en banc)(“These sophisticated parties, presumably with the assistanceof experienced and able counsel, exercised their liberty ofcontract and now are accountable for the product of their

negotiations.”) 3

3 See also Harleysville Ins. Co. v. Physical DistributionServs., Inc., 716 F.3d 451, 462 (8th Cir.2013) (applyingMinnesota law) (“Both [parties] were sophisticatedparties—each was in the business of providing productsand services in exchange for fees according to terms setby contract. In this context, common sense weighs mostheavily in favor of giving the parties the benefits—andmisfortunes—of the clear terms of their bargain.”); 13Williston on Contracts § 38:12 (4th ed.2014) ( “Although

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the court may regret the harshness of an expresscondition, as it may regret the harshness of a promise, itmust nevertheless generally enforce the will of the partiesunless to do so will violate public policy.” (footnoteomitted)).

Here, enXco parted with nothing. It still maintainedpossession and ownership of the Project assets and realestate. enXco transferred the Project's physical capital foruse in other projects, and it hopes to employ the realproperty associated with the Project in the future. NSPdid not obtain ownership of any property as a result oftermination. NSP therefore did not receive something forlittle or nothing. Cf. Hideaway, Inc. v. Gambit Invs. Inc.,386 N.W.2d 822, 824 (Minn.Ct.App.1986) (disproportionate-forfeiture doctrine applied where contract allowed non-breaching party to retain a business worth $13,000 afterpaying only $500). Notably, both enXco and NSP aresophisticated parties who have developed similar projectsin the past. They were both represented by counsel duringcontract negotiations, which took place over the course ofseveral months. In conclusion, we leave the parties to theirbargain and do not apply the doctrine of disproportionateforfeiture.

III. Conclusion

We affirm the judgment of the district court.

*948 BEAM, Circuit Judge, concurring specially.I concur in Parts I, II, IIA and III. The issues arising from thecontracts at work in this dispute are continuing evidence ofthe country's unforeseen and unfortunate economic turndowncommencing in or about 2006 or 2007. There has been, as aresult, a clearly disproportionate forfeiture suffered by enXco,possibly aided and abetted by NSP as it saw an obvious needto abandon this unneeded project. In my view, however, sucha consequence is insufficient to allow enXco to overcome theforce and effect of the “condition precedent” in dispute ascontractually agreed upon by the parties.

All Citations

758 F.3d 940

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Case No: HT-2017-000235

Neutral Citation Number: [2017] EWHC 3055 (TCC)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice

Rolls Building, Fetter Lane, London, EC4A 1NL

Date: 30 November 2017

Before:

THE HON MR JUSTICE COULSON

- - - - - - - - - - - - - - - - - - - - -

Between:

Petroleum Company

of Trinidad and Tobago Limited

Claimant /

Respondent in

Arbitration

- and -

Samsung Engineering Trinidad Co. Limited

Defendant /

Claimant in

Arbitration

- - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - -

Mr Ricky Diwan QC and Mr Riaz Hussain QC

(instructed by AFA Law) for the Claimant

Mr Jonathan Acton Davis QC and Ms Felicity Dynes

(instructed by DLA Piper UK LLP) for the Defendant

Hearing date: 22 November 2017

- - - - - - - - - - - - - - - - - - - - -

Judgment

The Hon. Mr Justice Coulson :

1. INTRODUCTION

1. Pursuant to a Claim Form issued on 21 August 2017, the claimant (“Petrotrin”) seeks

to set aside and/or vary the Partial Award dated 24 July 2017. That Award was issued

in an arbitration brought by the defendant (“Samsung”) against Petrotrin for an

extension of time, damages and sums due pursuant to the Onshore Agreement

between the parties. Petrotrin’s challenge is brought pursuant to s.67 of the

Arbitration Act 1996.

2. The Onshore Agreement was one of three written Agreements signed by Petrotrin on

15 December 2006 relating to the same works. There was also an Offshore

Agreement (between Petrotrin and a different Samsung company, SECL) and a

Linkage Agreement (signed by all three parties). All three Agreements related to the

procurement, construction and commissioning of a CCR Platformer Complex and a

new 66kV/12kV Substation at Petrotrin’s Pointe-a-Pierre refinery in Trinidad. It

appears that the works were only split between the Onshore and the Offshore

Agreements because that was tax efficient for Samsung and SECL. The purpose of

the Linkage Agreement was to ensure that the splitting of the works in this way did

not cause disadvantage to Petrotrin.

3. Samsung commenced the arbitration proceedings against Petrotrin under the Onshore

Agreement. Petrotrin counterclaimed for liquidated damages. An issue arose as to

whether their counterclaim for liquidated damages was the subject of a 10% cap based

on the value of the Onshore Agreement, or whether the applicable cap was 10% of the

total value of the Onshore and the Offshore Agreements, by reference to a provision

in the Linkage Agreement. The Arbitral Tribunal decided that the operative cap was

10% of the value of the Onshore Agreement.

4. This finding is said to matter because the Tribunal found that Samsung was liable to

Petrotrin for liquidated damages for a delay of 129 days. Applying the lower of the

two caps, the Tribunal valued the counterclaim at US$9,337,009.60. If they had

applied the higher cap, the sum awarded to Petrotrin would have been US$11,610,

000. Because of the application of the lower cap, Samsung was the overall winner in

the arbitration, in the sum of US$1,115,482.39. If the higher figure for the cap had

been taken, Petrotrin would have been the overall winner, in the sum of

US$1,157,508.19.

5. I deal with the s.67 challenge in this way. In Section 2, I set out the relevant terms of

the three Agreements. In Section 3, I address the Arbitral Tribunal’s Terms of

Reference. In Section 4, I set out the parties’ pleadings and submissions in the

arbitration. In Section 5, I set out the relevant terms of the Partial Award of 24 July

2017. Then at Section 6, I ask whether the challenge made by the claimant is a matter

concerning the Tribunal’s “substantive jurisdiction” in accordance with s.67. At

Section 7, on the assumption that the s.67 challenge was validly brought, I consider

whether the Tribunal’s jurisdiction in respect of liquidated damages was limited to the

lower cap in the Onshore Agreement. There is a short summary of my conclusions in

Section 8. I am very grateful to leading counsel on both sides for their helpful written

and oral submissions.

2. THE THREE AGREEMENTS

2.1 The Onshore Agreement

6. The contracting parties were Petrotrin and Samsung. Amongst the relevant

definitions, ‘CONTRACT’ was defined as “the present instrument”; ‘CONTRACT

PRICE’ was the price defined in Article 6.1 and any adjustments “in accordance with

the “CONTRACT”; and ‘UNIT OF WORK’ was defined as meaning each of the CCR

Platformer Complex and the Substation.

7. Article 3.1 of the Onshore Agreement identified the completion date for the CCR

Platformer Complex as 5 November 2008, and the completion date for the Substation

as 5 April 2008.

8. The relevant term as to liquidated damages was Article 3.6:

“(a) CONTRACTOR acknowledges that a delay in

completion of the WORK will cause damage to

COMPANY, the amount of such damage being difficult

to calculate with great precision. Therefore if any

UNIT OF WORK has not achieved MECHANICAL

COMPLETION on or before the relevant

COMPLETION DATES, and may be extended pursuant

to Article 3.5 CONTRACTOR shall pay COMPANY

liquidated damages for each full calendar day of delay

from 30 calendar days after the COMPLETION DATE

until MECHANICAL COMPLETION in respect of

each UNIT OF WORK is actually achieved, in the

following per diem amounts:

UNIT OF WORK PER DIEM AMOUNT

CCR Platformer Complex US$ 90,000

New 66kV/12kV Substation US$ 15,000

(b) Any such liquidated damages may be recovered by

COMPANY against the irrevocable performance bank

guarantee provided by CONTRACTOR in accordance

with Article 7.4 hereof or by taking credit against

payments otherwise due to CONTRACTOR, or by

some other method mutually agreed.

(c) In the event that CONTRACTOR does not attain the

COMPLETION DATE set for each UNIT OF WORK

then as the remedy for late completion COMPANY

shall recover liquidated damages from CONTRACTOR

at the applicable per diem amounts for each day until

completion is attained as evidenced by MECHANICAL

COMPLETION for each UNIT OF WORK, up to a

maximum liability of ten percent (10%) of the

CONTRACT PRICE.”

9. Article 33 set out the provisions relating to dispute resolution in the following terms:

“33.1 The Parties shall use their best efforts to settle amicably

any dispute, controversy or claim arising out of related

to the CONTRACT, or the breach, termination or

invalidity of the said CONTRACT.

33.2 Any dispute, controversy or claim arising out of or

related to the CONTRACT, or the breach, termination

or invalidity of the said CONTRACT that cannot be

settled amicably between the Parties shall be referred to

mediation.

33.3 The mediator shall be appointed and approved by both

Parties. The costs of mediation shall be borne by both

Parties equally or as determined by the said mediator

except that each Party will be responsible for its own

expenses. The mediator shall determine the structure of

the mediation process. Any opinion expressed by the

mediator will be strictly advisory and will not be

binding on the Parties. Any disputes not otherwise

settled shall be referred to arbitration.

33.4 Disputes resolved by arbitration shall be binding and

each Party irrevocably waives any right to trial by jury

with respect to any such dispute. Arbitration shall be

conducted in New York, USA in accordance with the

rules of the International Chamber of Commerce.”

2.2 The Offshore Agreement

10. The contracting parties were Petrotrin and SECL. Article 3.1 of the Offshore

Agreement contained precisely the same completion dates as set out in paragraph 7

above. Article 3.6, relating to liquidated damages, was also in the same terms as the

equivalent clause in the Onshore Agreement; so too was the Article dealing with

mediation and arbitration.

2.3 The Linkage Agreement

11. The relevant terms of the Linkage Agreement provided as follows:

“1. Notwithstanding the dual contract approach to the

Contracts, the operations of both the Onshore

Contractor and the Offshore Contractor must be

closely integrated for ensuring the success of the

Complete Works. It is understood and agreed that if any

aspect of the Complete Works has been omitted and is

not clearly described as a result of the creation of the

dual contract system, the Offshore Contractor shall

assume responsibility for that portion of the Complete

Works that is affected.

2. That the dual contract approach shall not result in any

additional cost to PETROTRIN nor result in any

scheduling changes. It is understood and agreed that the

cost and schedule for the Complete Works shall be

strictly maintained in spite of implementation under the

Contracts. It is understood and agreed that all additional

responsibilities and liabilities with respect to

PETROTRIN, the Offshore Contractor and the

Onshore Contractor contained in either the Offshore

Contract or the Onshore Contract shall be construed as

if it were one agreement for the Complete Works

instead of dual agreements.

3. That any errors, omissions, negligence, or delays in

performance by either the Onshore Contractor or

Offshore Contractor shall be mutually attributable and

shall not constitute grounds for schedule or price relief

under the Onshore Contract or Offshore Contract.

4. The Parties’ Rights And Obligations Under The

Contracts

4.1 That notwithstanding the separation of the

Onshore Contract and the Offshore Contract, it

is recognized and agreed, for the purpose of

determining the respective obligations and

entitlement of PETROTRIN and Contractors

that, the Onshore Contract and Offshore

Contract shall be administered and interpreted as

though they were one and notices received or

issued under the Offshore Contract shall be valid

under the Onshore Contract.

4.2 Where one or both of the Contractors is required

to perform the same obligations under one or

both of the Contracts and the performance of

that obligation by any one Contractor under one

Contract is capable of being the performance of

that obligation under the other Contact, then the

performance of that obligation by that

Contractor in accordance with the relevant

Contract shall mean that the other Contractor

shall not have to perform the same obligation

under the other Contact.

4.3 Where PETROTRIN is required to perform the

same obligation under both Contacts and the

performance of that obligation under one

Contract is capable of being the performance of

that obligation under the other Contract, then the

performance of that obligation by

PETROTRIN under one Contract shall mean

that PETROTRIN shall not have to perform the

same obligation under the other Contract.

5. Liquidated Damages

5.1 Each Contractor shall be liable to pay liquidated

damages under Article 3.6(a) of its respective

Contract, provided that, if one of Contractors

has paid liquidated damages in accordance with

Article 3.6(a) of its respective Contract, the

other Contractor, notwithstanding Article 3.6(a)

of the other Contract, shall not be liable to pay

the same liquidated damages in accordance with

Article 3.6(a) of that Contract.

5.2 The maximum liquidated damages under each

Contract and this Agreement shall be an amount

equal to ten percent (10%) of the Total

Agreement Amount.

5.3 For the purposes of this Clauses 5 and 6, ‘Total

Agreement Amount’ shall mean the aggregate of

the Contract Price payable under the Onshore

Contract and the Contract Price payable under

the Offshore Contract as each may be adjusted

from time to time in accordance with the terms

of the Contracts.

…

10. The Parties agree that if there is any dispute as to the

interpretation of this Agreement, the Onshore Contract

and/or the Offshore Contract, this Agreement shall take

precedence over such Contracts.

11. This Agreement shall be governed by and construed in

accordance with the laws of England and Wales. Any

dispute or controversies pertaining to this Agreement or

any breach thereof, which cannot be settled by amicable

discussion by the Parties shall be finally submitted and

settled by arbitration in New York, USA in accordance

with the Rules of the International Chamber of

Commerce.”

3. THE TERMS OF REFERENCE

12. In common with all ICC arbitrations, there were agreed Terms of Reference, signed

by the parties and the Arbitral Tribunal.1 This was produced following Samsung’s

Request for Arbitration and Petrotrin’s Answer, and included passages drafted by the

parties themselves.

13. The Request for Arbitration is undated. It made it clear that Samsung was seeking

arbitration pursuant to Article 33.4 of the Onshore Agreement (paragraph 3).

Paragraph 6 of the Request referred to all three Agreements, and paragraph 7 then

expressly stated that the Request for Arbitration was made pursuant to the Onshore

Agreement only.

14. Petrotrin’s Answer was dated 13 August 2014. Much of it was concerned with a

complaint that, contrary to Article 33, mediation had not taken place. There was no

challenge to or debate about Samsung’s Request having being made under the

Onshore Agreement only. Moreover, Petrotrin’s counterclaim was described in the

following terms:

“If and insofar as the Request is valid (which is denied), the

Respondent will counterclaim inter alia for damages for the

Claimant’s failure to complete the Works by the Completion

Date and also damages for any identified defects in the Works.”

‘The Claimant’ was of course a reference to Samsung, who were party to the Onshore

Agreement. ‘The Completion Date’ was a term defined in the Onshore Agreement.

There was no reference to SECL, or to the Offshore Agreement or to the Linkage

Agreement.

15. The Terms of Reference were drafted by the Tribunal and then amended by the parties

before being signed off. They expressly identified the relevant arbitration agreement

between the parties as being the one in Article 33 of the Onshore Agreement. No

other arbitration agreement was identified.

16. In the section of the Terms of Reference summarising the various claims and the relief

sought (paragraphs 13-16), the Terms of Reference stated that “the dispute the subject

of this arbitration has arisen under a contract… (the Onshore Agreement)…”

(paragraph 13). At paragraph 14, the Terms said: “The following summaries of the

claims of the Parties, and of the relief sought by each Party, are not intended to be

exhaustive but are intended to satisfy the requirements of Article 23(1) of the ICC

Rules and are subject to Article 23(4). The parties’ respective cases will be set out in

appropriate detail in such pleadings or memorials as may be provided for by

agreement of the parties or by order of the Arbitral Tribunal.”

17. The Terms of Reference went on to summarise Samsung’s claim in the arbitration

(paragraph 15) and Petrotrin’s response (paragraph 16). At the end of that paragraph,

in a passage added by Petrotrin, the Terms of Reference stated:

“In so far as may be relevant [Petrotrin] reserves the right to

contend that it is entitled to rely upon the provisions of the

1 In my experience, these ICC Terms of Reference are time-consuming and expensive to produce, and often beg

more questions than they answer.

Linkage Agreement made between the Claimant, the

Respondent and [SECL] on 15 December 2006 and/or the

Offshore Agreement made between the Respondent and

[SECL] on 15 December 2006.”

No other information was given as to what this reservation of position might go to, or

how or why either of the other Agreements might be relevant.

4. THE PARTIES’ PLEADINGS

18. Samsung’s Statement of Case set out its claim for an extension of time and damages

by reference to the Onshore Agreement only. Petrotrin’s Statement of Case and

Counterclaim defended that claim and brought a counterclaim for liquidated damages.

Again, there was no reference in that pleading to either the Offshore Agreement or the

Linkage Agreement. On the contrary, paragraph 15.1 of the counterclaim referred to

“a cap at 10% of the Contract Price”. The Contract Price was a defined term in the

Onshore Agreement. It was not a term set out in the Linkage Agreement, which

instead referred to “the Total Agreement Amount”.

19. Samsung’s Reply and Defence to Counterclaim (“RADTCC”) expressly set out the

operation of the cap on liquidated damages by reference to the value of the Onshore

Contract. In Petrotrin’s Reply to Defence to Counterclaim (“RTDTCC”), at

paragraph 94, Petrotrin asserted that it was “untenable” for Samsung to assert that the

claim for liquidated damages was capped at 10% of the Onshore Agreement Contract

Price, alleging that that was “incorrect and obviously so in light of the express

wording of the Linkage Agreement at Article 5.2”. There was no suggestion of any

claim under the Linkage Agreement, and there is no reference at all to the Offshore

Agreement. I return to this important pleading at various paragraphs below.

5. THE PARTIAL AWARD

20. The relevant part of the Partial Award with which this application is concerned is

section 18. That sets out the cap at Article 3.6(c) of the Onshore Agreement. At

paragraph 18.6, the Partial Award refers to Petrotrin’s argument that the cap was at a

higher amount, “being 10% of the aggregate price payable under both the Onshore

and the Offshore Contracts.” The Partial Award at paragraphs 18.7-18.10 then

records some of the Articles of the Linkage Agreement, set out above, on which the

claimant relied.

21. Paragraphs 18.11 and 18.12 of the Partial Award set out the parties’ respective cases

on the cap. For reasons which will become apparent below, it is appropriate to set out

those summaries in full:

“The Claimant’s case on the cap

18.11 The Claimant deals with this issue in its Reply and

Defence to Counterclaim at paragraphs 188-192, in

Section 13 of its Closing Submissions, and in Section

13 of its Responsive Closing Submissions. It argues that

the provisions of Article 5.2-5.3 of the Linkage

Agreement can be effective only where a claim is made

for liquidated damages and is referred to arbitration in

respect of both Contracts, between the parties to both

Contracts, and under the Linkage Agreement between

the parties to the Linkage Agreement. However the

present dispute and this arbitration arise only under the

provisions of the Onshore Agreement, and concern only

the parties to the Onshore Agreement. The provisions of

the Onshore Agreement apply exclusively. Hence, the

limit on the liquidated damages is defined in Article

3.6(c) of the Onshore Contract, and is 10% of the

Contract Price of that Onshore Agreement. Petrotrin

construes Article 5.2 of the Linkage Agreement in a

manner which contradicts the provisions of both the

Onshore and Offshore Contracts instead of in a manner

which is consistent with them.

The Respondent’s case on the cap

18.12 Petrotrin deals with the cap on liquidated damages In its

Counterclaim at paragraph 15.1, in its Reply to Defence

to Counterclaim at paragraph 94, and in its Closing

Submissions at Section 13. It says that, given the way in

which the agreements were set up, it should not be a

matter of surprise that there is a contradiction to be

resolved by reliance on Article 10 of the Linkage

Agreement. It characterizes the Claimant’s argument as

relying only on a jurisdictional point, namely, that the

matter referred to arbitration by the Claimant is

purportedly brought pursuant to the Onshore Contract

alone. However, Petrotrin has validly brought its

counterclaim under all three agreements: Onshore,

Offshore and Linkage: see paragraph 16 of the Terms of

Reference, paragraph 2.1 of the Respondent’s Statement

of Case and Counterclaim and paragraph 94 of the

Reply to the Defence to Counterclaim. Moreover, even

if Petrotrin were jurisdictionally confined to a

counterclaim under the Onshore Contract, Articles 2

and 3 of the Linkage Agreement require the Tribunal to

treat the Onshore and Offshore Contracts as a single

contract, and the Linkage Agreement at Article 5.2

overrides and amends the cap. As to practicalities, the

Respondent observes that the On and Offshore

Contracts both have the same Mechanical Completion

date and in reality the counterclaim spans both the On

and Offshore Contracts in that the work which was late

was carried out under both Contracts.”

22. The Tribunal’s decision on the cap was set out at paragraphs 18.13-18.18 of the

Partial Award in the following terms:

“The Tribunal’s decision on the cap

18.13 The Tribunal’s understanding of the Claimant’s position

differs from the Respondent’s submission. The Tribunal

understands the Claimant to rely on both a construction

argument and a jurisdiction argument.

18.14 As regards jurisdiction, while it is right to say that in

paragraph 16 of the Terms of Reference the Respondent

reserved the right to contend that it was entitled to rely

upon provisions of the Linkage Agreement, in

paragraph 17 of the Terms of Reference the relevant

Arbitration Agreement was identified as being

contained in Article 33 of the Onshore Agreement. This

reflects paragraph 3 of the Request for Arbitration

which states:

Although there is a network of inert-related [sic,

means ‘inter related’] agreements which have a

bearing on the disputes which the Claimant

required to be referred to arbitration under the

International Chamber of Commerce (ICC) Rules

for Arbitration, 2012 edition, this Request for

Arbitration is made pursuant to Article 33.4 of the

On-shore Agreement … …

18.15 Moreover, paragraph 2.1 of the Respondent’s Statement

of Case and Counterclaim and paragraph 94 of the

Reply to the Defence to Counterclaim do not show that

Petrotrin has brought its counterclaim under any

agreement other than the Onshore Agreement.

18.16 In the Tribunal’s view it is plain that its jurisdiction in

the present arbitration arises from Article 33.4 of the

Onshore Agreement, and is limited thereby.

Accordingly it is the provisions of the Onshore

Agreement that govern the position.

18.17 As regards the question of construction, we accept the

Claimant’s submission that a construction which

interprets the three agreements as consistent with one

another is to be preferred to a construction which

regards them as being in conflict. The conflict relied on

by the Respondent, which the Respondent resolves by

reliance on the precedence of the

Linkage Agreement over the other two Contracts, only

arises from reading clause 5.2 of the Linkage

Agreement in the way that the Respondent proposes.

Clause 5.2 does not in our view require to be read as

being in conflict with clause 3.6(c) of the Onshore

Agreement; it can be read as a long-stop limit for the

aggregate of liquidated damages under all three

agreements, which sits above the lower cap applicable

under a single agreement. We acknowledge the

Respondent’s argument that as a matter of practicality it

could never apply, but, even if that were so, this would

not change our view, since there is nothing unusual in

provisions being inserted in contracts out of an

abundance of caution.

18.18 Accordingly, we determine that the cap on liquidated

damages is 10% of the Contract Price under the

Onshore Contract.”

6. IS THIS A CHALLENGE CONCERNING THE TRIBUNAL’S “SUBSTANTIVE

JURISDICTION”?

23. Section 67 of the Arbitration Act 1996 (“the 1996 Act”) is in the following terms:

“67. - Challenging the award: substantive jurisdiction.

(1) A party to arbitral proceedings may (upon notice

to the other parties and to the tribunal) apply to

the court—

(a) challenging any award of the arbitral

tribunal as to its substantive jurisdiction; or

(b) for an order declaring an award made by

the tribunal on the merits to be of no

effect, in whole or in part, because the

tribunal did not have substantive

jurisdiction.

A party may lose the right to object (see section 73) and

the right to apply is subject to the restrictions in section

70(2) and (3).

(2) The arbitral tribunal may continue the arbitral

proceedings and make a further award while an

application to the court under this section is

pending in relation to an award as to

jurisdiction.

(3) On an application under this section challenging

an award of the arbitral tribunal as to its

substantive jurisdiction, the court may by

order—

(a) confirm the award,

(b) vary the award, or

(c) set aside the award in whole or in part.

(4) The leave of the court is required for any appeal

from a decision of the court under this section.”

24. This follows on from sections 30 and 31 of the 1996 Act which are concerned with

matters of substantive jurisdiction, such as whether there is a valid arbitration

agreement, whether the tribunal is properly constituted, and what matters have been

submitted to arbitration in accordance with the arbitration agreement.

25. I am not persuaded that the issue now raised by Petrotrin is a matter of substantive

jurisdiction. The point raised by this challenge does not go to whether there is a valid

arbitration agreement or whether the Arbitral Tribunal was properly constituted. Nor

is there any dispute that the particular matter with which this challenge is concerned,

namely the counterclaim for liquidated damages, was properly submitted to

arbitration and fell within the Tribunal’s jurisdiction.

26. All that happened was that the Tribunal found that the relevant cap on liquidated

damages was 10% of the Contract Price of the Onshore Agreement, and not 10% of

the Total Agreement Amount. They did so on the basis of a mixture of construction

points, findings of fact, and a consideration of one argument about their jurisdiction.

The dispute as to which cap was the appropriate one was agreed by both parties to be

in issue before the Tribunal and the Tribunal dealt with it accordingly. Neither party

can therefore complain that the Tribunal dealt with it. Petrotrin may complain about

the Tribunal’s answer to the question, but that is an entirely different matter.

27. Looked at in the round, therefore, I find it impossible to say that the Tribunal’s

decision about the applicable cap was a matter that went to their substantive

jurisdiction. The fact that the claimant made (or intimated that it might make)

applications under section 57 of the 1996 Act (correcting an error) and section 68

(serious irregularity) in connection with the dispute about the appropriate cap only

confirms my view that Petrotrin’s essential complaint is about the result, and it has

been uncomfortably shoehorned into a jurisdictional challenge when, on a proper

analysis, it is no such thing.

28. Another way of approaching the question as to whether the debate about the

applicable cap is a matter of substantive jurisdiction is to look at how the point was

dealt with in the arbitration itself. At paragraph 18.17 of the Partial Award, the

Tribunal found that the lower cap applied on the basis of the true construction of the

Onshore Agreement and the Linkage Agreement. The Tribunal found, contrary to

Petrotrin’s submissions, that they had no freestanding right to claim under Article 5.2

of the Linkage Agreement. Of course, the Tribunal’s rejection of Petrotrin’s case as a

matter of construction is a finding which cannot be interfered with on this application.

That, therefore, is the end of the challenge.

29. What is more, Mr Acton Davis demonstrated to my satisfaction that the question of

which cap was applicable was always regarded, by both parties, as primarily a point

of construction. This can be seen from the following:

(a) Paragraphs 188-190 of Samsung’s RADTCC set out its case as to why, as a

matter of construction, the cap was limited to 10% of the Contract Price as

defined in the Onshore Agreement.

(b) In Petrotrin’s RTDTCC, they summarised this argument as Samsung averring

that the cap was 10% of the Onshore Contract Price “and not 10% of the

combined Onshore and Offshore Contract Price which is termed as the “Total

Agreement Amount’ under Article 5 of the Linkage Agreement”. Although

that is not in fact what Samsung had said (it made no mention of either of the

other two Agreements), it is clear that Petrotrin saw this as a question of

construction. Indeed, they expressly call it “a matter of contractual

interpretation”.

(c) Petrotrin then sought to make good their case on construction at paragraphs

19.1.2 and 94 of the RTDTCC, which said that Samsung’s reliance on the

lower cap “is incorrect and obviously so in light of the express wording of the

Linkage Agreement at Article 5.2”. Again it was Petrotrin who expressly

identified this issue as one of contract interpretation.

(d) In the arbitration itself, Petrotrin’s written opening at paragraphs 2.2.6 and 6.1

again confirmed that this was a matter of construction. That was repeated

during Petrotrin’s oral opening (see pages 760-761 and 763 of the transcript).

In constantly reiterating that this was a question of contract interpretation,

leading counsel then instructed by Petrotrin was only echoing what Mr Acton

Davis (who appeared for Samsung then and now) also said to the Tribunal in

his oral opening (see page 717 of the transcript).

(e) In the claimant’s written closing in the arbitration, paragraphs 13.4 and 13.16

repeat the construction argument.

30. Accordingly, I find that the question of which cap was applicable was (and was

treated by the parties as) primarily a question of construction. The Tribunal decided

that question of construction against Petrotrin. That result cannot be impeached by

this challenge.

31. Mr Diwan made two attempts to get round this difficulty. First, he said that paragraph

18.17 of the Partial Award (the paragraph that deals with construction) was linked to,

or could somehow only be read together with, the earlier finding on jurisdiction. I

disagree. There is nothing in paragraph 18.17 that makes that connection; indeed, it is

quite clear that the Tribunal was dealing separately with the arguments of construction

and jurisdiction. That is clear from paragraph 18.13 of the Partial Award. I agree

with Mr Acton Davis that a feature of Petrotrin’s application under s.67 has been to

elide construction and jurisdiction in precisely the same way as they did in the

arbitration, which attracted the Tribunal’s comment at paragraph 18.13 of the Partial

Award.

32. Secondly, in his reply, Mr Diwan suggested that, even if paragraph 18.17 was right, it

did not necessarily preclude Petrotrin from making a claim for the Total Agreement

Amount. But that is a different point which ignores how the construction argument

was put by Petrotrin during the arbitration. Petrotrin argued that, as a matter of

construction, the cap was not the lower of the two potential caps. The Tribunal

rejected that submission. What the claimant might hypothetically have done about

any other claims they might have had under other contracts is irrelevant to that

question of construction.

33. Although it follows from the foregoing that I reject the s.67 application on the basis

that it is not a substantive challenge to the Tribunal’s jurisdiction, it is appropriate for

me to go on and deal with the jurisdictional issue, in case I am wrong and the

application does raise a proper challenge to the Tribunal’s substantive jurisdiction.

7. WAS THE TRIBUNAL’S JURISDICTION IN RESPECT OF LIQUIDATED

DAMAGES LIMITED TO THE CAP IN THE ONSHORE AGREEMENT?

7.1 Summary

34. For a variety of reasons, set out below, I am in no doubt that the Tribunal’s

jurisdiction in respect of liquidated damages was limited to the cap in the Onshore

Agreement. I should note at the outset that the first and only time that the jurisdiction

point was raised at all by Petrotrin in the arbitration was at paragraph 13.15 of their

written closing submissions, and even there they persisted in calling it a “matter of

construction”.

7.2 The Terms of Reference

35. I have set out the Terms of Reference in paragraphs 12-17 above, which were agreed

by both parties and the Arbitral Tribunal. They make clear that the disputes in this

case arose under the Onshore Agreement only, and no other Agreement. Although

paragraph 14 of the Terms of Reference indicated that the claims of the parties were

summarised in the Terms of Reference, and were not intended to be exhaustive, it

may be an open question as to whether the jurisdiction of the Tribunal was intended to

be extended in any significant way by further pleadings. However, it is Petrotrin’s

case that it was, and for present purposes I am prepared to assume that, as a matter of

construction of the Terms of Reference, that submission is right. The next question is

whether jurisdiction was so extended.

36. Petrotrin’s counterclaim at paragraph 15.1 (paragraph 18 above) was, on any view, a

counterclaim brought under the Onshore Agreement only. The only pleaded reference

to the party responsible for the delay was to “Samsung”, the defendant in these

proceedings and the party to the Onshore Agreement. There was no reference to

SECL, the party to the Offshore Agreement. The reference to the “Contract Price” is

also a reference to the Onshore Agreement; if it had been a reference to the larger of

the two caps it would have been to “the Total Agreement Amount”, as defined in the

Linkage Agreement.

37. Mr Ali’s witness statement makes that last point graphically, by referring to the 10%

of the Contract Price and then asking himself, rather forlornly, “(under the Linkage

Agreement?)” The answer to Mr Ali’s question was plainly No; ‘the Contract Price’ is

not a phrase used in the Linkage Agreement. Unsurprisingly, therefore, Mr Diwan

accepted in the course of his submissions that the original counterclaim was made

only under the Onshore Agreement. However, he said that Petrotrin’s RTDTCC

fundamentally changed the nature of the counterclaim because of its reference to

Article 5.2.

38. I reject that submission. As I have indicated at paragraph 19 above, all the RTDTCC

did was to argue, as a matter of construction, that the liquidated damages were capped

at 10% of the Total Agreement Amount. The pleading did not suggest that this was

anything other than a point of construction. There was no indication that this

argument went to, let alone extended, the Tribunal’s jurisdiction. It was not suggested

that the Terms of Reference needed to be amended or even clarified. Most important

of all, it was not suggested that Petrotrin’s counterclaim arose under anything other

than the Onshore Agreement.

39. Accordingly, I find that the Tribunal’s Terms of Reference, which were based on the

disputes arising under the Onshore Agreement only, did not vary and were not

subsequently extended. Neither party sought to amend or extend those Terms of

Reference, either expressly or by implication. On that basis, the Tribunal had no

jurisdiction to consider any claims arising under any other Agreement.

7.3 The Absence of Any Other Claims

40. The Tribunal found at paragraph 18.15 of the Partial Award that the pleadings “do not

show that Petrotrin has brought its counterclaim under any agreement other than the

Onshore Agreement.” That is a finding of fact. It cannot be reviewed on this s.67

application.

41. But in any event, I confirm that this finding of fact was palpably correct. It was

common ground that there had never been at any time a claim under the Offshore

Agreement. I have found at paragraphs 29(b) and (c) above that the references to the

Linkage Agreement in the RTDTCC were expressly designed to assist Petrotrin’s

argument as to construction. They did not amount to the making of a separate claim

under the Linkage Agreement.

42. What is more, confirmation of this can be found in the RTDTCC itself. At paragraph

14 of that pleading, when dealing with the Linkage Agreement, the claimant said:

“The effects of clause 4.1 inter alia for the purposes of Article

10 of the ICC rules of arbitration, is that in the event of

Petrotrin having to issue a Request for Arbitration against

SECL, all of the claims in that arbitration will be made under

the same arbitration agreement as the instant arbitration.

Further and in the alternative if (it is denied) the claims in the

arbitrations are made under more than one arbitration

agreement, the arbitrations are between the same parties, the

disputes in the arbitrations arise in connection with the same

legal relationship and the arbitration agreements compatible.

Such arbitrations will be consolidated.” (Emphasis supplied)

43. That passage is important for two reasons. First, it makes plain that Petrotrin had not

issued a Request for Arbitration against SECL: what is set out are the consequences if

that ever happened. It never did. Secondly, the paragraph demonstrates that, in

Petrotrin’s view, there would have been few, if any, practical difficulties if a Request

for Arbitration had been made under the Offshore Agreement and the claims against

Samsung and SECL were dealt with together. I agree with that. I cannot speculate as

to why this course was not taken.

44. Accordingly, as to jurisdiction:

a) the Tribunal found (correctly) that they had been appointed under the Onshore

Agreement only;

b) the Tribunal’s Terms of Reference referred to the Onshore Agreement only;

c) the Tribunal found (correctly) that there had been no other claims under either the

Offshore Agreement or the Linkage Agreement; and

d) accordingly, the Tribunal found (correctly) that their jurisdiction was limited to the

cap in the Onshore Agreement.

It might be thought that, with respect, this was hardly a surprising result.

7.4 The Construction of Article 33

45. A part of Mr Diwan’s submissions relied on the general principles relating to the

desirability of avoiding multiple arbitrations between the same parties on related

disputes2. He relied on the summary of those principles by Sue Carr J in C v D1 and

Others [2015] EWHC 2126 (Comm) at paragraph 104:

“104. Drawing this line of authorities together, the following

relevant principles can be derived:

a) the exercise of determining whether a dispute

falls within an arbitration clause is one of

interpretation requiring a careful and

commercially-minded construction. It is a

question of determining objectively the intention

of the parties as revealed by the agreement or

agreements;

b) in construing an arbitration clause, a broad and

purposive construction should be followed;

c) in general, parties to an arbitration agreement do

not intend that disputes under that agreement

should be determined by different tribunals (“the

Fiona Trust presumption”). This presumption

may apply where there are multiple related

agreements between the parties. If there are

inconsistent arbitration agreements, it may be

necessary to identify where the centre of gravity

lies and which agreement lies at the commercial

centre of the transaction (or is closer to the

claim), or under which series of agreements the

dispute essentially arises. It is the arbitration

agreement in that agreement that will cover all

issues. Fragmentation may of course occur if, on

2 This was not a point that had ever arisen in the arbitration. Because the s.67 challenge is a rehearing, not a

review, it was an argument which was open to Petrotrin. But the fact that it was completely new explains why

there was no hint of it in the Partial Award.

its true construction, the clear wording and

inherent scheme leads to that conclusion;

d) the Fiona Trust presumption may not apply

where there are two or more agreements with

separate and distinct arbitration clauses

addressing parallel but different aspects of the

overall continuing relationship between the

parties. A dispute rising under one contract

would not be intended to be caught by an

arbitration clause in another contract. But I do

not accept C's broader submission that the Fiona

Trust presumption does not apply where the

overall contractual arrangements between two

parties contain two or more differently

expressed choices of jurisdiction in respect of

different agreements. The position is more

subtle, as a proper reading of AmTrust reveals;

and

e) where there is an agreement subsequently

entered into by the parties for the purpose of

terminating the commercial relationship created

by an earlier agreement, the Fiona Trust

presumption may apply with particular

potency.”

46. In similar vein, there are the transactional set-off cases, such as Norscot Rig

Management PVT Ltd v Essar Oilfields Services Ltd [2010] EWHC 195 (Comm),

where Burton J held that, if there was a sufficient connection between a claim under

an earlier contract and a dispute under a later one for the former to amount to a

defence of transaction set-off, then it was likely, if not inevitable, that it was caught

by an arbitration clause covering disputes “relating to” the contract. But, on the face

of it, that principle does require the same parties; ordinarily, A cannot set off as a

defence to a claim made by B under a transaction between A and B, a claim which A

has against C under a completely different transaction.

47. In most of these cases, the essential argument is whether the Tribunal could consider a

claim or cross-claim which arose under a different (but potentially related)

commercial agreement to that under which the original arbitration had commenced.

The usual answer to that question is in the affirmative. Accordingly, as Mr Acton

Davis acknowledged, if (for example) Petrotrin had issued a Request for Arbitration

against SECL under the Offshore Agreement and/or sought to have two arbitrations

consolidated, in an attempt to trigger the larger cap on liquidated damages identified

in the Linkage Agreement, it might have been difficult to say that they were not

entitled to do so.

48. But that simply did not happen. In contrast to the reported cases, where the issue was

whether or not two claims or cross-claims between the same two parties under two

different contracts could be dealt with in the same arbitration proceedings, that

situation never arose here. As noted above, Petrotrin never at any time indicated a

possible claim under the Offshore Agreement. In my view, that was the least that was

required, particularly given that (unlike the reported cases) SECL was a separate

company to Samsung. There being no such claim (or any intimation of a claim) as a

matter of fact, the question of whether, theoretically, the arbitration clause in the

Onshore Agreement would have been wide enough to cover both claims is redundant.

49. In essence, Petrotrin’s case now is that, notwithstanding the Terms of Reference and

its repeated references to the Onshore Agreement as the only basis of the claim and

cross-claim; notwithstanding the absence of any claim or intimated claim for

liquidated damages under either of the other Agreements; and notwithstanding the

fact that Samsung and SECL were separate companies, the fact that the Linkage

Agreement had been referred to generally in the fourth and final pleading, coupled

with the Fiona Trust principles, was enough to give the Tribunal the necessary

jurisdiction to reach a decision on the cap that was outside the Onshore Agreement.

For the reasons that I have given, I reject that case. There is no authority which

comes close to supporting such a submission.

50. I make one final point. Throughout Mr Diwan’s submissions, there were complaints

that some of the points raised by Samsung were new, and were raised now in

contravention of s.73 of the 1996 Act (the loss of the right to object). I reject that

submission unequivocally: the points taken were either the same as or a refinement of

the arguments made by Samsung in the arbitration. Any confusion has arisen from

Petrotrin’s failure to take the so-called jurisdictional point in the arbitration until well

beyond the eleventh hour; their decision to run a completely new case at the hearing

before me, coupled with their reluctance to allow Samsung a proper opportunity to

respond to it; and the fact that, as set out in Section 6 above, this was not a challenge

to substantive jurisdiction at all.

8. CONCLUSIONS

51. For the reasons set out in Section 6 above, I do not consider that this application

properly arises under s.67 of the Arbitration Act 1996. The primary issue between the

parties was not one relating to the Tribunal’s substantive jurisdiction. It was and

remains primarily a dispute of construction. In those circumstances, the s.67

application must fail.

52. If I am wrong about that, for the reasons set out in Section 7 above, I conclude that

the Tribunal was right to decide that, in the alternative to the construction argument,

its jurisdiction in respect of liquidated damages was limited to the cap in the Onshore

Contract. That was the effect of their Terms of Reference and the pleadings; and that

was the consequence of there being – as a matter of fact - no claim or intimated claim

under either the Offshore Agreement or the Linkage Agreement.

53. Accordingly, this application is refused. I will deal with all consequential matters at

the handing down of this Judgment.

Treasury Department, IRS Issue Proposed Rules on Tax Impact ofTransition from LiborOctober 28, 2019Holland & Knight AlertDouglas I. Youngman  |  Christopher Fiore Marotta

Highlights

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have jointly issued proposedregulations to address concerns and reduce uncertainty regarding the tax impact of the anticipated discontinuationof Libor (the London Interbank Offered Rate) at the end of 2021.

The proposed rules, which provide specific guidance and relief with respect to the transition from Libor (and otherinterbank offered rates) to other identified reference rates in both debt instruments and non-debt contracts (includingderivatives), are open for public comment until Nov. 25, 2019.

The Treasury Department and the IRS have focused on specific areas where adverse tax consequences may resultfrom amending debt instruments and other contracts to adapt to the cessation of Libor. The proposed rules aregenerally taxpayer-friendly and are intended to provide certainty and flexibility.

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have jointly issued proposed regulations(Proposed Regulations) to address concerns and reduce uncertainty regarding the tax impact of the anticipateddiscontinuation of Libor (the London Interbank Offered Rate) at the end of 2021. The Proposed Regulations modify a

number of provisions of the Income Tax Regulations1 issued under the Internal Revenue Code2, providing specificguidance and relief with respect to the transition from Libor (and other interbank offered rates) to other identifiedreference rates in both debt instruments and non-debt contracts (including derivatives). The Proposed Regulations areopen for public comment until Nov. 25, 2019.

BackgroundLibor, one of the most widely used interest rate benchmarks in the world, underlies an estimated $350 trillion ofoutstanding contracts in maturities ranging from overnight to more than 30 years. In 2013, against a backdrop ofscandals regarding manipulation of Libor and decreased liquidity in interbank lending, the Financial Stability Board(FSB), a global body that monitors the world's financial systems, established the Official Sector Steering Group(OSSG), consisting of senior officials from central banks and regulatory authorities, to coordinate the review andreform of global interest rate benchmarks. In 2016, the OSSG launched a new initiative, focusing on the improvementof contract robustness to address concerns regarding discontinuation of certain key interest rate benchmarks. TheOSSG invited the International Swaps and Derivatives Association Inc. (ISDA) to lead the initiative with respect todiscontinuation and fallbacks in the derivatives market.

In 2014, the Federal Reserve System and the Federal Reserve Bank of New York jointly created the AlternativeReference Rates Committee (ARRC), consisting of a wide variety of market participants, trade organizations and exofficio regulators. One of the ARRC's initial objectives was to identify a "risk-free alternative" rate for U.S. Dollar (USD)Libor and to develop a plan to implement the voluntary adoption of the alternative rate. In 2017, the ARRC identifiedthe Secured Overnight Financing Rate (SOFR) as the replacement for USD Libor. SOFR, published daily and

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administered by the Federal Reserve Bank of New York, is based on more than $700 billion in overnight repurchasetransactions secured by U.S. treasuries. ISDA subsequently agreed that SOFR would be the "risk-free" alternative toUSD Libor for derivatives purpose as well.

In 2017, the United Kingdom's Financial Conduct Authority (FCA), the regulator of Libor, announced that it would nolonger compel participating banks to provide submissions beyond 2021. Since that time, regulators around the worldhave issued continuous warnings, urging financial market participants to transition, across all product classes, to therisk-free rates in anticipation of the near-certain discontinuation of Libor. In the case of existing contracts referencingUSD Libor, this would most likely require amendments to such contracts, providing specific trigger events and clearfallback provisions to ease the transition to SOFR.

Prior to the issuance of the Proposed Regulations, market participants had expressed concerns about the potential taximpact of amending the benchmark interest rates underlying debt instruments, derivatives and other non-debtcontracts, as existing regulations are either ambiguous or would otherwise produce potentially adverse taxconsequences. On April 8, 2019, the ARRC submitted a letter to the Treasury Department and the IRS identifyingspecific tax issues relating to the transition to risk-free rates in the debt and non-debt markets and requesting guidanceto help ease the transition. That letter was followed, on June 5, 2019, by an additional letter from the ARRC to theTreasury Department and the IRS, suggesting specific proposals to address the concerns raised in the April 8 letter.The Proposed Regulations have been issued in response to the ARRC's letters as well as other requests for guidancereceived by the Treasury Department and the IRS.

Description of Proposed RulesThe Treasury Department and the IRS have focused on specific areas where adverse tax consequences may resultfrom amending debt instruments and other contracts to adapt to the cessation of Libor. The Proposed Regulations aregenerally taxpayer-friendly rules that are intended to provide certainty and flexibility. The preamble to the ProposedRegulations specifically provides that they are being adopted to "minimize potential market disruption and facilitate anorderly transition" from Libor to alternative reference rates. From this perspective, the Proposed Regulationsencourage taxpayers to act affirmatively to amend their contracts as needed to provide for replacement rates.Although the Treasury Department and the IRS state in several places that the rules are meant to be "no broader thannecessary," significant latitude is generally afforded to taxpayers in amending their contracts. The ProposedRegulations are also not limited to debt instruments but rather attempt to provide guidance in all circumstances whereLibor may have been used, including derivatives, insurance contracts and lease agreements. These circumstancesare referred to as "non-debt contracts" in the Proposed Regulations.

Although the Proposed Regulations are not effective until their publication in final form, which may be after amendmentto address comments by constituents, they may be relied on in advance of final adoption, provided taxpayers and theirrelated parties apply them consistently.

The specific areas where the Proposed Regulations provide guidance are 1) potential treatment of contractamendments as taxable exchanges of old contracts for new contracts, 2) impact of amendments on other contractsthat may be integrated with the amended contract for U.S. federal income tax purposes, 3) source and character ofone-time payments made by counterparties in connection with amendments, 4) effect of amendments on contractsotherwise exempt from certain rules due to being issued prior to their adoption, 5) treatment of amendments underIncome Tax Regulations defining "variable rate debt instruments," 6) effect of amendments and interest rate fallbackprovisions on "real estate mortgage investment conduits" (REMICs), and 7) safe harbor allocations of interest expenseof foreign corporations against U.S. taxable income.

No Taxable Exchange Treatment

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The most far-reaching aspect of the Proposed Regulations is guidance provided on potential treatment of contractamendments as taxable exchanges. The Proposed Regulations generally provide that most contract changes,including to both debt instruments and non-debt contracts, to address pending unavailability of Libor should not betreated as taxable exchanges. This favorable guidance extends not only to amendments to interest rate provisions butalso to all "associated" alterations and modifications to such contracts, including one-time, lump-sum payments toaddress the effect on value of changing the reference rate.

For amendments to fall under the favorable guidance of the Proposed Regulations, 1) they must be generally made toreplace or provide a fallback to an "interbank offered rate" (IBOR), 2) the replacement or fallback rate must beclassified as a "qualified rate," and 3) the amendment must not cause the fair market value of the contract to besubstantially different.

A qualified rate must be in the same currency, or be meant to approximate borrowing costs in the same currency, asthe rate that is being replaced (including pursuant to a fallback provision). A qualified rate is otherwise defined byenumerated examples, which include residual categories for reference rates specified by regulatory bodies. Certainreplacement rates that have already been adopted by regulatory authorities and their working groups are set forth asacceptable, including SOFR and other risk-free rates adopted in the United Kingdom, Japan, Switzerland, Australia,Canada and Hong Kong. In addition, a qualified rate includes any other rate adopted by a central bank, reserve bank,monetary authority or similar institution, including any committee or working group thereof, to replace an IBOR. TheTreasury Department and the IRS also propose to specify additional replacement rates by publication in the InternalRevenue Bulletin, which would allow for further explicit safe harbors without going through the notice and commentperiod required for promulgation of Income Tax Regulations.

Notably, a qualified rate also includes any rate that falls under the enumerated examples but for which there is alsoadded or subtracted a specified number of basis points, or which is subject to a multiple. However, a fixed rate doesnot appear to be eligible to be treated as a qualified rate. Thus, an amendment to a contract to substitute a fixed ratefor Libor does not appear to fall under the favorable provisions of the Proposed Regulations.

For purposes of meeting the fair market value equivalence requirement, two safe harbors are provided, in addition toaffording taxpayers general latitude to determine fair market value. As a basis for providing such flexibility, theTreasury Department and the IRS in the preamble to the Proposed Regulations acknowledge that determinations offair market value may be difficult. Most saliently, a safe harbor is provided for unrelated counterparties that makeamendments after arm's length negotiations, if the counterparties determine that such amendments do notsubstantially alter the fair market value of the contract, taking into account any one-time payment that is made inconnection with the amendments. It may be prudent for well-advised parties to document in writing their mutualdetermination that the amended contract has substantially the same value as the original contract. Under a secondsafe harbor, if the historic averages of the two rates do not differ by more than 25 basis points, taking into account anyspread, multiples and one-time payments, the amendments will also not be treated as substantially affecting fairmarket value. Finally, parties are further free to use any reasonable, consistently applied valuation method todetermine fair market value, even if falling outside of the enumerated safe harbors.

One interesting aspect of the Proposed Regulations are their treatment of other amendments to debt instruments andnon-debt contracts that occur at the same time as amendments falling under favorable guidance. Instead of taking aholistic approach to all of the changes being contemporaneously made, the Proposed Regulations still treat coveredamendments as part of the original contract, such that other changes being made must be viewed against theamendments subject to non-exchange treatment instead of the original unamended contract. This may afford partieswith tax planning opportunities given, for example, the treatment of rate multiples as qualified rates, subject to therequirement that covered amendments have no substantial impact on fair market value.

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Treatment of One-Time PaymentsWith respect to the source and character of one-time payments made in connection with amendments to replace Liborwith other rates, the Proposed Regulations provide that such payments should be treated as any other payment underthe contract by the counterparty. This rule does leave some uncertainty when there are multiple kinds of paymentsprovided for under a single contract (e.g., where a debt instrument provides for both fees and interest payments). Thisrule also does not address the circumstance where the counterparty that is not the primary obligor under the contract(e.g., the lender) makes the one-time payment. The preamble to the Proposed Regulations justifies this gap inguidance by stating that it is expected that the primary obligor will generally make the one-time payment, as risk-freerates being adopted by regulatory bodies as IBOR replacements generally suggest lower credit risk than an IBOR.However, as provided above, a qualifying replacement rate includes any rate that increases a risk-free replacementrate by a specified number of basis points or multiple. Thus it is conceivable that in certain circumstances thecounterparty that is not the primary obligor may make a one-time payment. The Treasury Department and the IRShave requested comments on the proper treatment of such payments.

Interest Deductions for Foreign CounterpartiesWhen foreign corporations with taxable U.S. business income have liabilities attributable to their U.S. businesses thatare not reflected on their U.S. books and records (and are not treated as such under the Income Tax Regulations), theamount of interest on such liabilities that reduce U.S. taxable income is deemed to be based on their average U.S.borrowing costs. However, an alternative safe harbor is provided in the Income Tax Regulations based on Libor. TheProposed Regulations implement a new safe harbor based on SOFR. The new safe harbor will not be as attractive toforeign corporate taxpayers as the old safe harbor because, as stated above, SOFR is meant to approximate lowercredit risk as compared to Libor, and thus should generally result in a lower reference rate. The Treasury Departmentand the IRS have requested comments on whether an alternative rate may be more appropriate for the safe harbor.

Other MattersThe Proposed Regulations provide that amendments for replacement rates will not result in transactions integratedwith such amended contracts to fail to be treated as integrated, provided that other aspects of the integrationrequirements continue to be met. For example, an amendment of a debt instrument or derivative to replace an interestrate referencing an IBOR with a qualified rate on one or more legs of a transaction that is subject to the hedgeaccounting rules will not be treated as a disposition or termination of either leg of the transaction. In addition, if ahedging transaction, which is treated as a qualified hedge for purposes of the arbitrage investment restrictionsapplicable to tax-exempt bonds, is modified to replace an interest rate referencing an IBOR with a qualified rate, suchamendment is not treated as a termination of that qualified hedge, provided that the hedge as modified continues tomeet the other requirements for a qualified hedge.

In addition, the Proposed Regulations provide clarification with respect to the application of exemptions forgrandfathered obligations. Any contract amendment that is not treated as a taxable exchange under the ProposedRegulations will also not cause the contract to cease to be subject to any grandfathering exemption from later enactedrules, including specifically Chapter 4 withholding on contracts subject to the Foreign Account Tax Compliance Act(FATCA).

The Proposed Regulations provide certain rules that generally increase the likelihood that a debt instrument will beclassified as a variable rate debt instrument, rather than a contingent payment debt instrument subject to potentiallymore burdensome rules. First, an IBOR-referencing qualified floating rate and a fallback rate (which will change theinterest rate on the debt instrument from the IBOR-referencing rate to an alternative reference rate) will be treated as asingle qualified floating rate. Second, the possibility that an IBOR reference rate will become unavailable or unreliable

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is treated as a remote contingency. Third, an IBOR reference rate becoming unavailable is not treated as a change incircumstance that would otherwise result in a deemed exchange. The treatment under the Proposed Regulations of anIBOR reference rate becoming unavailable is particularly interesting. Any other contingency that is classified asremote, which generally permits an instrument to be treated as a variable rate debt instrument, would result in adeemed retirement and reissuance if such a remote contingency actually occurred.

Finally, the Proposed Regulations provide several favorable rules that allow amendments to interests in REMICs to notcause adverse tax consequences. Specifically, an amendment to replace a reference rate that qualifies fornon-exchange treatment is also not treated as an alteration to the terms of an interest in a REMIC, and a fallbackprovision to change from an IBOR if it becomes available is disregarded as a contingency. In addition, any reasonablecosts incurred to effect an alteration or modification that may be paid by holders of REMIC interests in connection withamendments are not treated as post-issuance contributions to a REMIC that would otherwise be subject to anadditional tax.

For more information on the Proposed Regulations and how they could impact your organization, please contact theauthors.

  

Notes

1 The Income Tax Regulations refer to the U.S. Department of the Treasury regulations promulgated under the InternalRevenue Code.

2 The Internal Revenue Code refers to the U.S. Internal Revenue Code of 1986, as amended.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when

analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact

situation, we urge you to consult competent legal counsel.

Authors

Douglas Youngman is a New York financial services attorney who focuses his practice in the field ofderivatives, complex financial transactions and structured products.

212.513.3353 | Douglas.Youngman@hklaw.com

Christopher Marotta is a tax attorney in Holland & Knight's Miami office. Mr. Marotta assists clientswith a broad range of domestic and international tax issues, including in relation to the formation ofinvestment funds, drafting United States tax disclosures for private placement memoranda, negotiatingand structuring the purchase and sale of businesses, advising insurers on representation and warranty

policy coverage, structuring inbound and outbound investment, and other issues relating to mergers, acquisitions andreorganizations.

305.789.7412 | Christopher.Marotta@hklaw.com

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Allied Materials & Equipment Co., Inc. v. U. S., 215 Ct.Cl. 406 (1978)569 F.2d 562, 24 Cont.Cas.Fed. (CCH) P 82,045

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment Distinguished by Bienville v. U.S., Fed.Cir., February 15, 1990

569 F.2d 562United States Court of Claims.

ALLIED MATERIALS & EQUIPMENT CO., INC.v.

The UNITED STATES.

No. 342—75.|

Jan. 25, 1978.

SynopsisSupplier of cylinder assembly to the Army brought action torecover anticipatory profits and more on ground of UnitedStates' breach of contract which was allegedly accomplishedby defendant's sale to a competitor of certain equipmentwhich was contractually obligated for use by supplier inperforming the contract. The District Court entered judgment,and appeal was taken. The Court of Claims remanded, andsupplier moved for rehearing en banc. The Court of Claimsheld that cause would be remanded for determination ofwhether there was a breach not remediable by an equitableadjustment under the contract.

Rehearing denied and case remanded.

West Headnotes (13)

[1] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

Cardinal change concept's applicability is notdictated by nature of damages sought by plaintiffin breach of contract action.

[2] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

A “cardinal change” in contract is a breach whichoccurs when Government effects an alteration in

work so drastic that it effectively requires thecontractor to perform duties materially differentfrom those originally bargained for.

46 Cases that cite this headnote

[3] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

A cardinal change is so profound that it is notredressable under the contract and thus rendersthe Government in breach.

16 Cases that cite this headnote

[4] DamagesLoss of profits and expenses incurred

If contractor has been prevented fromperforming, as in any breach case, awardof anticipatory profits may be an appropriateremedy.

[5] Public ContractsMiscellaneous acts or conduct constituting

breach

United StatesMiscellaneous acts or conduct constituting

breach

Failure to furnish property the Governmentpromised to furnish would sometimes beremediable under the contract and thereforewould not always be a breach.

[6] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

Cardinal change doctrine should not be readso restrictively as to hold that it applies onlyto deviations which are specifically within theconventional changes clause.

1 Cases that cite this headnote

Allied Materials & Equipment Co., Inc. v. U. S., 215 Ct.Cl. 406 (1978)569 F.2d 562, 24 Cont.Cas.Fed. (CCH) P 82,045

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

[7] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

Cardinal changes doctrine is cast in terms whichapply generally to modifications which are sofundamental that they cannot be redressed withincontract by an equitable adjustment to contractprice, whether under the government furnishedproperty clause, the traditional changes clause, orany other.

4 Cases that cite this headnote

[8] Public ContractsMiscellaneous acts or conduct constituting

breach

United StatesMiscellaneous acts or conduct constituting

breach

In action by supplier of cylinder assembliesseeking to recover anticipatory profits and moreon ground of United States' breach of contractwhich was allegedly accomplished by UnitedStates' sale to competitor of certain equipmentwhich was contractually obligated for use bysupplier in performing contract, on remand,supplier would have to show a breach notremediable by an equitable adjustment under thecontract.

[9] United StatesParticular cases

Whether or not the ASBCA record wascomprehensive, in supplier's breach of contractaction against the United States, where the boarddid not engage in fact-finding specifically withregard to whether sale of government machineryconstituted a cardinal change, as this issue wasnot raised by either party at the ASBCA level,drawing of conclusions of ultimate facts was stilla fact-finding function, and case was not ripe forsummary judgment.

2 Cases that cite this headnote

[10] Public ContractsChanged or unexpected conditions

Public ContractsDefective plans or change of plans

United StatesChanged or Unexpected Conditions

United StatesDefective plans or change of plans

The existence of a cardinal change is principallya question of fact, requiring that each case beanalyzed individually in light of the totality ofcircumstances.

6 Cases that cite this headnote

[11] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

A cardinal change is one so profound that itconstitutes a breach of contract, and occurswhen the Government effects an alteration inthe contractual undertaking so drastic that iteffectively requires the contractor to performduties materially different from those originallybargained for.

41 Cases that cite this headnote

[12] Public ContractsDefective plans or change of plans

United StatesDefective plans or change of plans

The cardinal change doctrine is not sorestrictive that it applies only to deviationsspecifically within the conventional changesclause. The doctrine is couched in terms whichapply generally to modifications which are sofundamental that they cannot be redressed withinthe contract by an equitable adjustment to thecontract price, whether under the Government-furnished property clause, the traditional changesclause, or any other.

3 Cases that cite this headnote

Allied Materials & Equipment Co., Inc. v. U. S., 215 Ct.Cl. 406 (1978)569 F.2d 562, 24 Cont.Cas.Fed. (CCH) P 82,045

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

[13] Public ContractsExtra costs or expenses in general

Public ContractsLoss of profits

United StatesExtra costs or expenses in general

United StatesLoss of profits

The cardinal change concept's applicability isnot dictated by the nature of damages soughtby the contractor; the concept may embracein addition to a suit for extra costs incurredin performing work fundamentally outside thescope of the contract, a suit for anticipatedprofits and lost revenues where the contractor hasbeen prevented from performing, as in a breachcase, and the contract has been terminated forconvenience of the Government.

5 Cases that cite this headnote

Attorneys and Law Firms

**563 *407 Charles E. Raley, Washington, D.C., attorneyof record for plaintiff; Israel & Raley, Washington, D.C., ofcounsel.

Robert M. Hollis, Washington, D.C., with whom was Asst.Atty. Gen. Barbara Allen Babcock, Washington, D.C., fordefendant.

Before NICHOLS, Judge, Presiding, and KASHIWA andBENNETT, Judges.

ON PLAINTIFF'S MOTIONFOR REHEARING EN BANC

*408 PER CURIAM:

In an order of September 30, 1977, the court denieddefendant's motion and plaintiff's cross-motion for summaryjudgment, and remanded the case to the Trial Division.Plaintiff has now moved for a rehearing en banc of its cross-motion for summary judgment. Defendant has filed a brief inopposition.

Briefly, this action was brought to recover anticipatory profitsand more on the ground that defendant breached a contractunder which plaintiff was to supply cylinder assemblies to theArmy. The alleged breach was accomplished by defendant'ssale to a competitor of certain tooling equipment which wascontractually obligated for use by plaintiff in performing thecontract. Oral argument was heard on June 6, 1977, afterwhich the aforementioned order was issued, remanding thecase for further development of certain issues by the trialjudge. In particular, we instructed the trial judge to determinewhether defendant's sale of the production equipment hadeffected a cardinal change in the contract, within the meaningof such precedents as, e.g., Edward R. Marden Corp. v. UnitedStates, 194 Ct.Cl. 799, 442 F.2d 364 (1971) and Air-A-PlaneCorp. v. United States, 408 F.2d 1030, 187 Ct.Cl. 269 (1969).If the trial judge found that there was a cardinal change,thus providing this court with jurisdiction, he was then todetermine whether the government was dealing in bad faithprior to and in effecting the termination for convenience.

Both parties have questioned the propriety of framing theissue as whether the sale of equipment was a cardinal change.The court's instructions to the trial judge were not inadvertent,and our position will be further explained in response to eachparty's contentions.[1] [2] [3] [4] It is defendant's position that the cardinal

change doctrine applies only when a plaintiff seeks extracosts incurred because of a deviation from contract terms, butwhich are not recoverable under the contract. Defendant statesthat the cardinal change principle is ‘obviously irrelevantwhere plaintiff is instead seeking anticipated profits andlost revenues.’ Inherent in this statement, however, is thefallacious assumption that the cardinal change concept'sapplicability is dictated by the nature of *409 damagessought by a plaintiff. This is simply not so. Under establishedcase law, a cardinal change is a breach. It occurs whenthe government effects an alteration in the work so drasticthat it effectively requires the contractor to perform dutiesmaterially different from those originally **564 bargainedfor. By definition, then a cardinal change is so profound thatit is not redressable under the contract, and thus renders thegovernment in breach. See, e.g., Edward R. Marden Corp.v. United States, supra, 442 F.2d at 369, 194 Ct.Cl. at 808;Air-A-Plane Corp. v. United States, supra, 408 F.2d at 1033,187 Ct.Cl. at 275—76; Keco Industries, Inc. v. United States,364 F.2d 838, 847—48, 176 Ct.Cl. 983, 998—99 (1966), cert.denied, 386 U.S. 958, 87 S.Ct. 1087, 18 L.Ed.2d 105 (1967);Aragona Construction Co. v. United States, 165 Ct.Cl. 382,390—91 (1964). In Marden, supra, we specifically stated that

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the purpose of the cardinal change doctrine is ‘to providea breach remedy for contractors who are directed by thegovernment to perform work which is not within the generalscope of the contract.’ We have certainly never intimated,however, that the contractor is limited to a suit for extracosts incurred in performing duties fundamentally outside ofthe scope of the contract, and we have never held that theapplicability of this doctrine is in any way dependent on thenature of damages sought by the contractor. Although thetypical case, thus far, has featured a plaintiff who undertook toperform despite the alteration of contractual obligations, thisdoes not preclude a suit by a contractor who, for one reasonor another, has not completed the contract. Undoubtedly, thecautious contractor might often proceed under the revisedcontract because of doubt whether he could invoke thecardinal change doctrine. But if he has been prevented fromperforming, as in any breach case, the award of anticipatoryprofits is an appropriate remedy. See Carchia v. United States,485 F.2d 622, 625, 202 Ct.Cl. 723, 729 (1973); GeneralBuilders Supply Co. v. United States, 409 F.2d 246, 251, 187Ct.Cl. 477, 485—86 (1969); J. D. Hedin Construction Co. v.United States, 408 F.2d 424, 431—32, 187 Ct.Cl. 45, 58—59(1969).

[5] Conversely, it would seem at least moderately obviousthat the failure to furnish property the government *410promised to furnish would sometimes be remediable underthe contract and therefore would not always be a breach.Compare S. S. Mullen, Inc. v. United States, 389 F.2d 390,182 Ct.Cl. 1 (1968) with Chris Berg, Inc. v. United States, 389F.2d 401, 182 Ct.Cl. 23 (1968).

[6] [7] Plaintiff also is of the opinion that cardinal changeanalysis is misapplied in this particular context. In supportof this position, plaintiff notes that the standard changesclause in its contract is limited to variances in ‘drawings,designs, or specifications, where the supplies to be furnishedare to be specially manufactured for the government inaccordance therewith; method of shipment or packing; andplace of delivery.’ The contract also contains a GovernmentFurnished Property clause authorizing equitable adjustmentsfor ‘any delay in delivery of government-furnished property;delivery of such property in a condition not suitable forits intended use; and any withdrawal of authority to useproperty.’ Plaintiff apparently reasons that the presence of aseparate clause pertaining to the availability of the productionfacilities for use by Allied renders the cardinal changesdoctrine inapplicable. There is no need to read the doctrine sorestrictively as to hold that it applies only to deviations which

are specifically within the conventional changes clause.The doctrine is couched in terms which apply generally tomodifications which are so fundamental that they cannot beredressed within the contract by an equitable adjustment tothe contract price, whether under the Government FurnishedProperty clause, the traditional changes clause, or any other.As we noted earlier, some variances in the availability ofproperty contractually to be furnished by the governmentmight well be remediable under the contract by an equitableadjustment.

[8] In the order of September 30, 1977, it was statedthat ‘(t)here may be sufficient foundation for our de novojurisdiction in this case if plaintiff proves only a breach ofcontract, not remediable by change order.’ We might betterhave said, and now say, that plaintiff must show a breach notremediable by an equitable adjustment under the contract.

**565 *411 [9] Plaintiff contends, secondly, that inany event the comprehensive record developed in the priorASBCA proceedings conclusively demonstrates that the saleof the tooled equipment constituted a cardinal change. Thus,argues plaintiff, no additional trial is necessary on this point,and the case is ripe for summary judgment. Again, whetheror not the ASBCA record is comprehensive, the Board didnot engage in fact-finding specifically with regard to whetherthe sale of the government machinery constituted a cardinalchange, as this issue was not raised by either party at theASBCA level. Even when underlying facts are established,the drawing of conclusions as to ultimate facts is still a fact-finding function.

[10] The existence of a cardinal change is principallya question of fact, requiring that each case be analyzedindividually in light of the totality of circumstances. SeeWunderlich Contracting Co. v. United States, 173 Ct.Cl. 180,194, 351 F.2d 956, 966 (1965); Saddler v. United States,152 Ct.Cl. 557, 561, 287 F.2d 411, 413 (1961). It may wellbe that plaintiff will be able to satisfy the burden of goingforward with a prima facie case simply by offering the recordfrom the ASBCA proceedings. Since the applicability of thecardinal change doctrine was not before the Board, however,defendant should be afforded the opportunity to present anyrelevant evidence to the trial judge before this matter is finallyresolved.

Plaintiff has similarly criticized our order for directing atrial on the subject of defendant's bad faith, if any, interminating the contract for convenience, on the ground that

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the comprehensive ASBCA record conclusively establisheddefendant's bad faith. As we suggested in the order, the Boarddid not consider whether the termination for convenience wasissued in bad faith, but rather directed its efforts toward theissue of defendant's bad faith in negotiating the terminationsettlement. Again, if plaintiff regards the Board record assufficiently comprehensive, it has the option of resting on thatrecord. Defendant is nevertheless entitled to an opportunity topresent additional evidence on this point.

For the foregoing reasons, and a majority of judges on activeservice not having voted to rehear the case en banc, *412

it is ordered that plaintiff's motion for a rehearing of itscross-motion for summary judgment is denied, and the caseis remanded to the Trial Division for further proceedings inaccordance with our order of September 30, 1977.

All Citations

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§ 45. Electricity produced from certain renewable resources, etc., 26 USCA § 45

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KeyCite Yellow Flag - Negative Treatment Proposed Legislation

United States Code AnnotatedTitle 26. Internal Revenue Code (Refs & Annos)

Subtitle A. Income Taxes (Refs & Annos)Chapter 1. Normal Taxes and Surtaxes (Refs & Annos)

Subchapter A. Determination of Tax Liability (Refs & Annos)Part IV. Credits Against Tax (Refs & Annos)

Subpart D. Business Related Credits (Refs & Annos)

26 U.S.C.A. § 45, I.R.C. § 45

§ 45. Electricity produced from certain renewable resources, etc.

Effective: March 23, 2018Currentness

(a) General rule.--For purposes of section 38, the renewable electricity production credit for any taxable year is an amountequal to the product of--

(1) 1.5 cents, multiplied by

(2) the kilowatt hours of electricity--

(A) produced by the taxpayer--

(i) from qualified energy resources, and

(ii) at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, and

(B) sold by the taxpayer to an unrelated person during the taxable year.

(b) Limitations and adjustments.--

(1) Phaseout of credit.--The amount of the credit determined under subsection (a) shall be reduced by an amount whichbears the same ratio to the amount of the credit (determined without regard to this paragraph) as--

(A) the amount by which the reference price for the calendar year in which the sale occurs exceeds 8 cents, bears to

(B) 3 cents.

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(2) Credit and phaseout adjustment based on inflation.--The 1.5 cent amount in subsection (a), the 8 cent amount inparagraph (1), the $4.375 amount in subsection (e)(8)(A), the $2 amount in subsection (e)(8)(D)(ii)(I), and in subsection(e)(8)(B)(i) the reference price of fuel used as a feedstock (within the meaning of subsection (c)(7)(A)) in 2002 shall eachbe adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale occurs.If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, such amount shall be rounded to thenearest multiple of 0.1 cent.

(3) Credit reduced for grants, tax-exempt bonds, subsidized energy financing, and other credits.--The amount of thecredit determined under subsection (a) with respect to any project for any taxable year (determined after the application ofparagraphs (1) and (2)) shall be reduced by the amount which is the product of the amount so determined for such year andthe lesser of ½ or a fraction--

(A) the numerator of which is the sum, for the taxable year and all prior taxable years, of--

(i) grants provided by the United States, a State, or a political subdivision of a State for use in connection with the project,

(ii) proceeds of an issue of State or local government obligations used to provide financing for the project the intereston which is exempt from tax under section 103,

(iii) the aggregate amount of subsidized energy financing provided (directly or indirectly) under a Federal, State, or localprogram provided in connection with the project, and

(iv) the amount of any other credit allowable with respect to any property which is part of the project, and

(B) the denominator of which is the aggregate amount of additions to the capital account for the project for the taxableyear and all prior taxable years.

The amounts under the preceding sentence for any taxable year shall be determined as of the close of the taxable year. Thisparagraph shall not apply with respect to any facility described in subsection (d)(2)(A)(ii).

(4) Credit rate and period for electricity produced and sold from certain facilities.--

(A) Credit rate.--In the case of electricity produced and sold in any calendar year after 2003 at any qualified facilitydescribed in paragraph (3), (5), (6), (7), (9), or (11) of subsection (d), the amount in effect under subsection (a)(1) forsuch calendar year (determined before the application of the last sentence of paragraph (2) of this subsection) shall bereduced by one-half.

(B) Credit period.--

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(i) In general.--Except as provided in clause (ii) or clause (iii), in the case of any facility described in paragraph (3),(4), (5), (6), or (7) of subsection (d), the 5-year period beginning on the date the facility was originally placed in serviceshall be substituted for the 10-year period in subsection (a)(2)(A)(ii).

(ii) Certain open-loop biomass facilities.--In the case of any facility described in subsection (d)(3)(A)(ii) placed inservice before the date of the enactment of this paragraph, the 5-year period beginning on January 1, 2005, shall besubstituted for the 10-year period in subsection (a)(2)(A)(ii).

(iii) Termination.--Clause (i) shall not apply to any facility placed in service after the date of the enactment of this clause.

(5) Phaseout of credit for wind facilities.--In the case of any facility using wind to produce electricity, the amount of thecredit determined under subsection (a) (determined after the application of paragraphs (1), (2), and (3) and without regardto this paragraph) shall be reduced by--

(A) in the case of any facility the construction of which begins after December 31, 2016, and before January 1, 2018,20 percent,

(B) in the case of any facility the construction of which begins after December 31, 2017, and before January 1, 2019, 40percent, and

(C) in the case of any facility the construction of which begins after December 31, 2018, and before January 1, 2020,60 percent.

(c) Resources.--For purposes of this section:

(1) In general.--The term “qualified energy resources” means--

(A) wind,

(B) closed-loop biomass,

(C) open-loop biomass,

(D) geothermal energy,

(E) solar energy,

(F) small irrigation power,

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(G) municipal solid waste,

(H) qualified hydropower production, and

(I) marine and hydrokinetic renewable energy.

(2) Closed-loop biomass.--The term “closed-loop biomass” means any organic material from a plant which is plantedexclusively for purposes of being used at a qualified facility to produce electricity.

(3) Open-loop biomass.--

(A) In general.--The term “open-loop biomass” means--

(i) any agricultural livestock waste nutrients, or

(ii) any solid, nonhazardous, cellulosic waste material or any lignin material which is derived from--

(I) any of the following forest-related resources: mill and harvesting residues, precommercial thinnings, slash, andbrush,

(II) solid wood waste materials, including waste pallets, crates, dunnage, manufacturing and construction woodwastes (other than pressure-treated, chemically-treated, or painted wood wastes), and landscape or right-of-way treetrimmings, but not including municipal solid waste, gas derived from the biodegradation of solid waste, or paperwhich is commonly recycled, or

(III) agriculture sources, including orchard tree crops, vineyard, grain, legumes, sugar, and other crop by-productsor residues.

Such term shall not include closed-loop biomass or biomass burned in conjunction with fossil fuel (cofiring) beyondsuch fossil fuel required for startup and flame stabilization.

(B) Agricultural livestock waste nutrients.--

(i) In general.--The term “agricultural livestock waste nutrients” means agricultural livestock manure and litter,including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure.

(ii) Agricultural livestock.--The term “agricultural livestock” includes bovine, swine, poultry, and sheep.

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(4) Geothermal energy.--The term “geothermal energy” means energy derived from a geothermal deposit (within themeaning of section 613(e)(2)).

(5) Small irrigation power.--The term “small irrigation power” means power--

(A) generated without any dam or impoundment of water through an irrigation system canal or ditch, and

(B) the nameplate capacity rating of which is not less than 150 kilowatts but is less than 5 megawatts.

(6) Municipal solid waste.--The term “municipal solid waste” has the meaning given the term “solid waste” under section1004(27) of the Solid Waste Disposal Act (42 U.S.C. 6903), except that such term does not include paper which is commonlyrecycled and which has been segregated from other solid waste (as so defined).

(7) Refined coal.--

(A) In general.--The term “refined coal” means a fuel--

(i) which--

(I) is a liquid, gaseous, or solid fuel produced from coal (including lignite) or high carbon fly ash, including suchfuel used as a feedstock,

(II) is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam, and

(III) is certified by the taxpayer as resulting (when used in the production of steam) in a qualified emission reduction,or

(ii) which is steel industry fuel.

(B) Qualified emission reduction.--The term “qualified emission reduction” means a reduction of at least 20 percent ofthe emissions of nitrogen oxide and at least 40 percent of the emissions of either sulfur dioxide or mercury released whenburning the refined coal (excluding any dilution caused by materials combined or added during the production process),as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available inthe marketplace as of January 1, 2003.

(C) Steel industry fuel.--

(i) In general.--The term “steel industry fuel” means a fuel which--

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(I) is produced through a process of liquifying coal waste sludge and distributing it on coal, and

(II) is used as a feedstock for the manufacture of coke.

(ii) Coal waste sludge.--The term “coal waste sludge” means the tar decanter sludge and related byproducts of thecoking process, including such materials that have been stored in ground, in tanks and in lagoons, that have been treatedas hazardous wastes under applicable Federal environmental rules absent liquefaction and processing with coal into afeedstock for the manufacture of coke.

(8) Qualified hydropower production.--

(A) In general.--The term “qualified hydropower production” means--

(i) in the case of any hydroelectric dam which was placed in service on or before the date of the enactment of thisparagraph, the incremental hydropower production for the taxable year, and

(ii) in the case of any nonhydroelectric dam described in subparagraph (C), the hydropower production from the facilityfor the taxable year.

(B) Determination of incremental hydropower production.--

(i) In general.--For purposes of subparagraph (A), incremental hydropower production for any taxable year shallbe equal to the percentage of average annual hydropower production at the facility attributable to the efficiencyimprovements or additions of capacity placed in service after the date of the enactment of this paragraph, determined byusing the same water flow information used to determine an historic average annual hydropower production baselinefor such facility. Such percentage and baseline shall be certified by the Federal Energy Regulatory Commission.

(ii) Operational changes disregarded.--For purposes of clause (i), the determination of incremental hydropowerproduction shall not be based on any operational changes at such facility not directly associated with the efficiencyimprovements or additions of capacity.

(C) Nonhydroelectric dam.--For purposes of subparagraph (A), a facility is described in this subparagraph if--

(i) the hydroelectric project installed on the nonhydroelectric dam is licensed by the Federal Energy RegulatoryCommission and meets all other applicable environmental, licensing, and regulatory requirements,

(ii) the nonhydroelectric dam was placed in service before the date of the enactment of this paragraph and operated forflood control, navigation, or water supply purposes and did not produce hydroelectric power on the date of the enactmentof this paragraph, and

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(iii) the hydroelectric project is operated so that the water surface elevation at any given location and time that wouldhave occurred in the absence of the hydroelectric project is maintained, subject to any license requirements imposedunder applicable law that change the water surface elevation for the purpose of improving environmental quality of theaffected waterway.

The Secretary, in consultation with the Federal Energy Regulatory Commission, shall certify if a hydroelectric projectlicensed at a nonhydroelectric dam meets the criteria in clause (iii). Nothing in this section shall affect the standardsunder which the Federal Energy Regulatory Commission issues licenses for and regulates hydropower projects underpart I of the Federal Power Act.

(9) Indian coal.--

(A) In general.--The term “Indian coal” means coal which is produced from coal reserves which, on June 14, 2005--

(i) were owned by an Indian tribe, or

(ii) were held in trust by the United States for the benefit of an Indian tribe or its members.

(B) Indian tribe.--For purposes of this paragraph, the term “Indian tribe” has the meaning given such term by section7871(c)(3)(E)(ii).

(10) Marine and hydrokinetic renewable energy.--

(A) In general.--The term “marine and hydrokinetic renewable energy” means energy derived from--

(i) waves, tides, and currents in oceans, estuaries, and tidal areas,

(ii) free flowing water in rivers, lakes, and streams,

(iii) free flowing water in an irrigation system, canal, or other man-made channel, including projects that utilizenonmechanical structures to accelerate the flow of water for electric power production purposes, or

(iv) differentials in ocean temperature (ocean thermal energy conversion).

(B) Exceptions.--Such term shall not include any energy which is derived from any source which utilizes a dam,diversionary structure (except as provided in subparagraph (A)(iii)), or impoundment for electric power productionpurposes.

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(d) Qualified facilities.--For purposes of this section:

(1) Wind facility.--In the case of a facility using wind to produce electricity, the term “qualified facility” means any facilityowned by the taxpayer which is originally placed in service after December 31, 1993, and the construction of which beginsbefore January 1, 2020. Such term shall not include any facility with respect to which any qualified small wind energy propertyexpenditure (as defined in subsection (d)(4) of section 25D) is taken into account in determining the credit under such section.

(2) Closed-loop biomass facility.--

(A) In general.--In the case of a facility using closed-loop biomass to produce electricity, the term “qualified facility”means any facility--

(i) owned by the taxpayer which is originally placed in service after December 31, 1992, and the construction of whichbegins before January 1, 2018, or

(ii) owned by the taxpayer which before January 1, 2018, is originally placed in service and modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both, but only if the modification is approved under theBiomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation asdescribed in 65 Fed. Reg. 63052.

For purposes of clause (ii), a facility shall be treated as modified before January 1, 2018, if the construction of suchmodification begins before such date.

(B) Expansion of facility.--Such term shall include a new unit placed in service after the date of the enactment of thissubparagraph in connection with a facility described in subparagraph (A)(i), but only to the extent of the increased amountof electricity produced at the facility by reason of such new unit.

(C) Special rules.--In the case of a qualified facility described in subparagraph (A)(ii)--

(i) the 10-year period referred to in subsection (a) shall be treated as beginning no earlier than the date of the enactmentof this clause, and

(ii) if the owner of such facility is not the producer of the electricity, the person eligible for the credit allowable undersubsection (a) shall be the lessee or the operator of such facility.

(3) Open-loop biomass facilities.--

(A) In general.--In the case of a facility using open-loop biomass to produce electricity, the term “qualified facility” meansany facility owned by the taxpayer which--

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(i) in the case of a facility using agricultural livestock waste nutrients--

(I) is originally placed in service after the date of the enactment of this subclause and the construction of which beginsbefore January 1, 2018, and

(II) the nameplate capacity rating of which is not less than 150 kilowatts, and

(ii) in the case of any other facility, the construction of which begins before January 1, 2018.

(B) Expansion of facility.--Such term shall include a new unit placed in service after the date of the enactment of thissubparagraph in connection with a facility described in subparagraph (A), but only to the extent of the increased amountof electricity produced at the facility by reason of such new unit.

(C) Credit eligibility.--In the case of any facility described in subparagraph (A), if the owner of such facility is not theproducer of the electricity, the person eligible for the credit allowable under subsection (a) shall be the lessee or the operatorof such facility.

(4) Geothermal or solar energy facility.--In the case of a facility using geothermal or solar energy to produce electricity,the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date ofthe enactment of this paragraph and which--

(A) in the case of a facility using solar energy, is placed in service before January 1, 2006, or

(B) in the case of a facility using geothermal energy, the construction of which begins before January 1, 2018.

Such term shall not include any property described in section 48(a)(3) the basis of which is taken into account by thetaxpayer for purposes of determining the energy credit under section 48.

(5) Small irrigation power facility.--In the case of a facility using small irrigation power to produce electricity, the term“qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date of theenactment of this paragraph and before October 3, 2008.

(6) Landfill gas facilities.--In the case of a facility producing electricity from gas derived from the biodegradation ofmunicipal solid waste, the term “qualified facility” means any facility owned by the taxpayer which is originally placed inservice after the date of the enactment of this paragraph and the construction of which begins before January 1, 2018.

(7) Trash facilities.--In the case of a facility (other than a facility described in paragraph (6)) which uses municipal solidwaste to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placedin service after the date of the enactment of this paragraph and the construction of which begins before January 1, 2018.Such term shall include a new unit placed in service in connection with a facility placed in service on or before the date

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of the enactment of this paragraph, but only to the extent of the increased amount of electricity produced at the facility byreason of such new unit.

(8) Refined coal production facility.--In the case of a facility that produces refined coal, the term “refined coal productionfacility” means--

(A) with respect to a facility producing steel industry fuel, any facility (or any modification to a facility) which is placedin service before January 1, 2010, and

(B) with respect to any other facility producing refined coal, any facility placed in service after the date of the enactmentof the American Jobs Creation Act of 2004 and before January 1, 2012.

(9) Qualified hydropower facility.--

(A) In general.--In the case of a facility producing qualified hydroelectric production described in subsection (c)(8), theterm “qualified facility” means--

(i) in the case of any facility producing incremental hydropower production, such facility but only to the extent ofits incremental hydropower production attributable to efficiency improvements or additions to capacity described insubsection (c)(8)(B) placed in service after the date of the enactment of this paragraph and before January 1, 2018, and

(ii) any other facility placed in service after the date of the enactment of this paragraph and the construction of whichbegins before January 1, 2018.

(B) Credit period.--In the case of a qualified facility described in subparagraph (A), the 10-year period referred to insubsection (a) shall be treated as beginning on the date the efficiency improvements or additions to capacity are placedin service.

(C) Special rule.--For purposes of subparagraph (A)(i), an efficiency improvement or addition to capacity shall be treatedas placed in service before January 1, 2018, if the construction of such improvement or addition begins before such date.

(10) Indian coal production facility.--The term “Indian coal production facility” means a facility that produces Indian coal.

(11) Marine and hydrokinetic renewable energy facilities.--In the case of a facility producing electricity from marine andhydrokinetic renewable energy, the term “qualified facility” means any facility owned by the taxpayer--

(A) which has a nameplate capacity rating of at least 150 kilowatts, and

(B) which is originally placed in service on or after the date of the enactment of this paragraph and the construction ofwhich begins before January 1, 2018.

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(e) Definitions and special rules.--For purposes of this section--

(1) Only production in the United States taken into account.--Sales shall be taken into account under this section onlywith respect to electricity the production of which is within--

(A) the United States (within the meaning of section 638(1)), or

(B) a possession of the United States (within the meaning of section 638(2)).

(2) Computation of inflation adjustment factor and reference price.--

(A) In general.--The Secretary shall, not later than April 1 of each calendar year, determine and publish in the FederalRegister the inflation adjustment factor and the reference price for such calendar year in accordance with this paragraph.

(B) Inflation adjustment factor.--The term “inflation adjustment factor” means, with respect to a calendar year, a fractionthe numerator of which is the GDP implicit price deflator for the preceding calendar year and the denominator of which isthe GDP implicit price deflator for the calendar year 1992. The term “GDP implicit price deflator” means the most recentrevision of the implicit price deflator for the gross domestic product as computed and published by the Department ofCommerce before March 15 of the calendar year.

(C) Reference price.--The term “reference price” means, with respect to a calendar year, the Secretary's determination ofthe annual average contract price per kilowatt hour of electricity generated from the same qualified energy resource andsold in the previous year in the United States. For purposes of the preceding sentence, only contracts entered into afterDecember 31, 1989, shall be taken into account.

(3) Production attributable to the taxpayer.--In the case of a facility in which more than 1 person has an ownership interest,except to the extent provided in regulations prescribed by the Secretary, production from the facility shall be allocated amongsuch persons in proportion to their respective ownership interests in the gross sales from such facility.

(4) Related persons.--Persons shall be treated as related to each other if such persons would be treated as a single employerunder the regulations prescribed under section 52(b). In the case of a corporation which is a member of an affiliated groupof corporations filing a consolidated return, such corporation shall be treated as selling electricity to an unrelated person ifsuch electricity is sold to such a person by another member of such group.

(5) Pass-thru in the case of estates and trusts.--Under regulations prescribed by the Secretary, rules similar to the rules ofsubsection (d) of section 52 shall apply.

[(6) Repealed. Pub.L. 109-58, Title XIII, § 1301(f)(3), Aug. 8, 2005, 119 Stat. 990]

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(7) Credit not to apply to electricity sold to utilities under certain contracts.--

(A) In general.--The credit determined under subsection (a) shall not apply to electricity--

(i) produced at a qualified facility described in subsection (d)(1) which is originally placed in service after June 30,1999, and

(ii) sold to a utility pursuant to a contract originally entered into before January 1, 1987 (whether or not amended orrestated after that date).

(B) Exception.--Subparagraph (A) shall not apply if--

(i) the prices for energy and capacity from such facility are established pursuant to an amendment to the contract referredto in subparagraph (A)(ii),

(ii) such amendment provides that the prices set forth in the contract which exceed avoided cost prices determined atthe time of delivery shall apply only to annual quantities of electricity (prorated for partial years) which do not exceedthe greater of--

(I) the average annual quantity of electricity sold to the utility under the contract during calendar years 1994, 1995,1996, 1997, and 1998, or

(II) the estimate of the annual electricity production set forth in the contract, or, if there is no such estimate, the greatestannual quantity of electricity sold to the utility under the contract in any of the calendar years 1996, 1997, or 1998, and

(iii) such amendment provides that energy and capacity in excess of the limitation in clause (ii) may be--

(I) sold to the utility only at prices that do not exceed avoided cost prices determined at the time of delivery, or

(II) sold to a third party subject to a mutually agreed upon advance notice to the utility.

For purposes of this subparagraph, avoided cost prices shall be determined as provided for in 18 CFR 292.304(d)(1) or any successor regulation.

(8) Refined coal production facilities.--

(A) Determination of credit amount.--In the case of a producer of refined coal, the credit determined under this section(without regard to this paragraph) for any taxable year shall be increased by an amount equal to $4.375 per ton of qualifiedrefined coal--

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(i) produced by the taxpayer at a refined coal production facility during the 10-year period beginning on the date thefacility was originally placed in service, and

(ii) sold by the taxpayer--

(I) to an unrelated person, and

(II) during such 10-year period and such taxable year.

(B) Phaseout of credit.--The amount of the increase determined under subparagraph (A) shall be reduced by an amountwhich bears the same ratio to the amount of the increase (determined without regard to this subparagraph) as--

(i) the amount by which the reference price of fuel used as a feedstock (within the meaning of subsection (c)(7)(A)) forthe calendar year in which the sale occurs exceeds an amount equal to 1.7 multiplied by the reference price for suchfuel in 2002, bears to

(ii) $8.75.

(C) Application of rules.--Rules similar to the rules of the subsection (b)(3) and paragraphs (1) through (5) of thissubsection shall apply for purposes of determining the amount of any increase under this paragraph.

(D) Special rule for steel industry fuel.--

(i) In general.--In the case of a taxpayer who produces steel industry fuel--

(I) this paragraph shall be applied separately with respect to steel industry fuel and other refined coal, and

(II) in applying this paragraph to steel industry fuel, the modifications in clause (ii) shall apply.

(ii) Modifications.--

(I) Credit amount.--Subparagraph (A) shall be applied by substituting “$2 per barrel-of-oil equivalent” for “$4.375per ton”.

(II) Credit period.--In lieu of the 10-year period referred to in clauses (i) and (ii)(II) of subparagraph (A), the creditperiod shall be the period beginning on the later of the date such facility was originally placed in service, the date themodifications described in clause (iii) were placed in service, or October 1, 2008, and ending on the later of December

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31, 2009, or the date which is 1 year after the date such facility or the modifications described in clause (iii) wereplaced in service.

(III) No phaseout.--Subparagraph (B) shall not apply.

(iii) Modifications.--The modifications described in this clause are modifications to an existing facility which allowsuch facility to produce steel industry fuel.

(iv) Barrel-of-oil equivalent.--For purposes of this subparagraph, a barrel-of-oil equivalent is the amount of steelindustry fuel that has a Btu content of 5,800,000 Btus.

(9) Coordination with credit for producing fuel from a nonconventional source.--

(A) In general.--The term “qualified facility” shall not include any facility which produces electricity from gas derivedfrom the biodegradation of municipal solid waste if such biodegradation occurred in a facility (within the meaning of section45K) the production from which is allowed as a credit under section 45K for the taxable year or any prior taxable year.

(B) Refined coal facilities.--

(i) In general.--The term “refined coal production facility” shall not include any facility the production from which is

allowed as a credit under section 45K for the taxable year or any prior taxable year (or under section 29 1 , as in effecton the day before the date of enactment of the Energy Tax Incentives Act of 2005, for any prior taxable year).

(ii) Exception for steel industry coal.--In the case of a facility producing steel industry fuel, clause (i) shall not applyto so much of the refined coal produced at such facility as is steel industry fuel.

(10) Indian coal production facilities.--

(A) Determination of credit amount.--In the case of a producer of Indian coal, the credit determined under this section(without regard to this paragraph) for any taxable year shall be increased by an amount equal to the applicable dollaramount per ton of Indian coal--

(i) produced by the taxpayer at an Indian coal production facility during the 12-year period beginning on January 1,2006, and

(ii) sold by the taxpayer--

(I) to an unrelated person (either directly by the taxpayer or after sale or transfer to one or more related persons), and

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(II) during such 12-year period and such taxable year.

(B) Applicable dollar amount.--

(i) In general.--The term “applicable dollar amount” for any taxable year beginning in a calendar year means--

(I) $1.50 in the case of calendar years 2006 through 2009, and

(II) $2.00 in the case of calendar years beginning after 2009.

(ii) Inflation adjustment.--In the case of any calendar year after 2006, each of the dollar amounts under clause (i) shallbe equal to the product of such dollar amount and the inflation adjustment factor determined under paragraph (2)(B) forthe calendar year, except that such paragraph shall be applied by substituting “2005” for “1992”.

(C) Application of rules.--Rules similar to the rules of the subsection (b)(3) and paragraphs (1), (3), (4), and (5) of thissubsection shall apply for purposes of determining the amount of any increase under this paragraph.

[(D) Repealed. Pub.L. 114-113, Div. Q, Title I, § 186(d)(2), Dec. 18, 2015, 129 Stat. 3074]

(11) Allocation of credit to patrons of agricultural cooperative.--

(A) Election to allocate.--

(i) In general.--In the case of an eligible cooperative organization, any portion of the credit determined under subsection(a) for the taxable year may, at the election of the organization, be apportioned among patrons of the organization onthe basis of the amount of business done by the patrons during the taxable year.

(ii) Form and effect of election.--An election under clause (i) for any taxable year shall be made on a timely filedreturn for such year. Such election, once made, shall be irrevocable for such taxable year. Such election shall not takeeffect unless the organization designates the apportionment as such in a written notice mailed to its patrons during thepayment period described in section 1382(d).

(B) Treatment of organizations and patrons.--The amount of the credit apportioned to any patrons under subparagraph(A)--

(i) shall not be included in the amount determined under subsection (a) with respect to the organization for the taxableyear, and

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(ii) shall be included in the amount determined under subsection (a) for the first taxable year of each patron ending onor after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or,if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from thecooperative of the apportionment.

(C) Special rules for decrease in credits for taxable year.--If the amount of the credit of a cooperative organizationdetermined under subsection (a) for a taxable year is less than the amount of such credit shown on the return of thecooperative organization for such year, an amount equal to the excess of--

(i) such reduction, over

(ii) the amount not apportioned to such patrons under subparagraph (A) for the taxable year,

shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treatedas tax imposed by this chapter for purposes of determining the amount of any credit under this chapter.

(D) Eligible cooperative defined.--For purposes of this section the term “eligible cooperative” means a cooperativeorganization described in section 1381(a) which is owned more than 50 percent by agricultural producers or by entitiesowned by agricultural producers. For this purpose an entity owned by an agricultural producer is one that is more than50 percent owned by agricultural producers.

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(Added Pub.L. 102-486, Title XIX, § 1914(a), Oct. 24, 1992, 106 Stat. 3020; amended Pub.L. 106-170, Title V, § 507(a) to(c), Dec. 17, 1999, 113 Stat. 1922; Pub.L. 106-554, § 1(a)(7) [Title III, § 319(1)], Dec. 21, 2000, 114 Stat. 2763, 2763A-646;Pub.L. 107-147, Title VI, § 603(a), Mar. 9, 2002, 116 Stat. 59; Pub.L. 108-311, Title III, § 313(a), Oct. 4, 2004, 118 Stat. 1181;Pub.L. 108-357, Title VII, § 710(a) to (f), Oct. 22, 2004, 118 Stat. 1552 to 1557; Pub.L. 109-58, Title XIII, §§ 1301(a) to (e), (f)(1) to (4), 1302(a), 1322(a)(3)(C), Aug. 8, 2005, 119 Stat. 986, 990, 1011; Pub.L. 109-135, Title IV, §§ 402(b), 403(t), 412(j),Dec. 21, 2005, 119 Stat. 2610, 2628, 2637; Pub.L. 109-432, Div. A, Title II, § 201, Dec. 20, 2006, 120 Stat. 2944; Pub.L.110-172, §§ 7(b), 9(a), Dec. 29, 2007, 121 Stat. 2482, 2484; Pub.L. 110-343, Div. B, Title I, §§ 101(a) to (e), 102(a) to (e),106(c)(3)(B), 108(a) to (d)(1), Oct. 3, 2008, 122 Stat. 3808, 3810, 3815, 3819; Pub.L. 111-5, Div. B, Title I, § 1101(a), (b), Feb.17, 2009, 123 Stat. 319; Pub.L. 111-312, Title VII, § 702(a), Dec. 17, 2010, 124 Stat. 3311; Pub.L. 112-240, Title IV, §§ 406(a),407(a), Jan. 2, 2013, 126 Stat. 2340; Pub.L. 113-295, Div. A, Title I, §§ 154(a), 155(a), Title II, § 210(g)(1), Dec. 19, 2014,128 Stat. 4021, 4032; Pub.L. 114-113, Div. P, Title III, § 301(a), Div. Q, Title I, §§ 186(a) to (c), (d)(2), 187(a), Dec. 18, 2015,129 Stat. 3038, 3073, 3074; Pub.L. 115-123, Div. D, Title I, §§ 40408(a), 40409(a), Feb. 9, 2018, 132 Stat. 149, 150; Pub.L.115-141, Div. U, Title IV, § 401(a)(14) to (16), Mar. 23, 2018, 132 Stat. 1185.)

Footnotes1 Redesignated 26 U.S.C.A. § 45K by Pub.L. 109-58, Title XIII, § 1322(a)(1), Aug. 8, 2005, 119 Stat. 1011.26 U.S.C.A. § 45, 26 USCA § 45Current through P.L. 116-68.

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§ 48. Energy credit, 26 USCA § 48

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KeyCite Yellow Flag - Negative Treatment Proposed Legislation

United States Code AnnotatedTitle 26. Internal Revenue Code (Refs & Annos)

Subtitle A. Income Taxes (Refs & Annos)Chapter 1. Normal Taxes and Surtaxes (Refs & Annos)

Subchapter A. Determination of Tax Liability (Refs & Annos)Part IV. Credits Against Tax (Refs & Annos)

Subpart E. Rules for Computing Investment Credit

26 U.S.C.A. § 48, I.R.C. § 48

§ 48. Energy credit

Effective: March 23, 2018Currentness

(a) Energy credit.--

(1) In general.--For purposes of section 46, except as provided in paragraphs (1)(B), (2)(B), and (3)(B) of subsection (c),the energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service duringsuch taxable year.

(2) Energy percentage.--

(A) In general.--Except as provided in paragraphs (6) and (7), the energy percentage is--

(i) 30 percent in the case of--

(I) qualified fuel cell property,

(II) energy property described in paragraph (3)(A)(i) but only with respect to property the construction of whichbegins before January 1, 2022,

(III) energy property described in paragraph (3)(A)(ii), and

(IV) qualified small wind energy property, and

(ii) in the case of any energy property to which clause (i) does not apply, 10 percent.

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(B) Coordination with rehabilitation credit.--The energy percentage shall not apply to that portion of the basis of anyproperty which is attributable to qualified rehabilitation expenditures.

(3) Energy property.--For purposes of this subpart, the term “energy property” means any property--

(A) which is--

(i) equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure,or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool,

(ii) equipment which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight butonly with respect to property the construction of which begins before January 1, 2022,

(iii) equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning ofsection 613(e)(2)), but only, in the case of electricity generated by geothermal power, up to (but not including) theelectrical transmission stage,

(iv) qualified fuel cell property or qualified microturbine property,

(v) combined heat and power system property,

(vi) qualified small wind energy property, or

(vii) equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermalenergy sink to cool a structure, but only with respect to property the construction of which begins before January 1, 2022,

(B)(i) the construction, reconstruction, or erection of which is completed by the taxpayer, or

(ii) which is acquired by the taxpayer if the original use of such property commences with the taxpayer,

(C) with respect to which depreciation (or amortization in lieu of depreciation) is allowable, and

(D) which meets the performance and quality standards (if any) which--

(i) have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy), and

(ii) are in effect at the time of the acquisition of the property.

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Such term shall not include any property which is part of a facility the production from which is allowed as a creditunder section 45 for the taxable year or any prior taxable year.

(4) Special rule for property financed by subsidized energy financing or industrial development bonds.--

(A) Reduction of basis.--For purposes of applying the energy percentage to any property, if such property is financed inwhole or in part by--

(i) subsidized energy financing, or

(ii) the proceeds of a private activity bond (within the meaning of section 141) the interest on which is exempt fromtax under section 103,

the amount taken into account as the basis of such property shall not exceed the amount which (but for thissubparagraph) would be so taken into account multiplied by the fraction determined under subparagraph (B).

(B) Determination of fraction.--For purposes of subparagraph (A), the fraction determined under this subparagraph is1 reduced by a fraction--

(i) the numerator of which is that portion of the basis of the property which is allocable to such financing or proceeds, and

(ii) the denominator of which is the basis of the property.

(C) Subsidized energy financing.--For purposes of subparagraph (A), the term “subsidized energy financing” meansfinancing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financingfor projects designed to conserve or produce energy.

(D) Termination.--This paragraph shall not apply to periods after December 31, 2008, under rules similar to the rules ofsection 48(m) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).

(5) Election to treat qualified facilities as energy property.--

(A) In general.--In the case of any qualified property which is part of a qualified investment credit facility--

(i) such property shall be treated as energy property for purposes of this section, and

(ii) the energy percentage with respect to such property shall be 30 percent.

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(B) Denial of production credit.--No credit shall be allowed under section 45 for any taxable year with respect to anyqualified investment credit facility.

(C) Qualified investment credit facility.--For purposes of this paragraph, the term “qualified investment credit facility”means any facility--

(i) which is a qualified facility (within the meaning of section 45) described in paragraph (1), (2), (3), (4), (6), (7), (9),or (11) of section 45(d),

(ii) which is placed in service after 2008 and the construction of which begins before January 1, 2018 (January 1, 2020,in the case of any facility which is described in paragraph (1) of section 45(d)), and

(iii) with respect to which--

(I) no credit has been allowed under section 45, and

(II) the taxpayer makes an irrevocable election to have this paragraph apply.

(D) Qualified property.--For purposes of this paragraph, the term “qualified property” means property--

(i) which is--

(I) tangible personal property, or

(II) other tangible property (not including a building or its structural components), but only if such property is usedas an integral part of the qualified investment credit facility,

(ii) with respect to which depreciation (or amortization in lieu of depreciation) is allowable,

(iii) which is constructed, reconstructed, erected, or acquired by the taxpayer, and

(iv) the original use of which commences with the taxpayer.

(E) Phaseout of credit for wind facilities.--In the case of any facility using wind to produce electricity which is treatedas energy property by reason of this paragraph, the amount of the credit determined under this section (determined afterthe application of paragraphs (1) and (2) and without regard to this subparagraph) shall be reduced by--

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(i) in the case of any facility the construction of which begins after December 31, 2016, and before January 1, 2018,20 percent,

(ii) in the case of any facility the construction of which begins after December 31, 2017, and before January 1, 2019,40 percent, and

(iii) in the case of any facility the construction of which begins after December 31, 2018, and before January 1, 2020,60 percent.

(6) Phaseout for solar energy property.--

(A) In general.--Subject to subparagraph (B), in the case of any energy property described in paragraph (3)(A)(i) theconstruction of which begins before January 1, 2022, the energy percentage determined under paragraph (2) shall be equalto--

(i) in the case of any property the construction of which begins after December 31, 2019, and before January 1, 2021,26 percent, and

(ii) in the case of any property the construction of which begins after December 31, 2020, and before January 1, 2022,22 percent.

(B) Placed in service deadline.--In the case of any energy property described in paragraph (3)(A)(i) the construction ofwhich begins before January 1, 2022, and which is not placed in service before January 1, 2024, the energy percentagedetermined under paragraph (2) shall be equal to 10 percent.

(7) Phaseout for fiber-optic solar, qualified fuel cell, and qualified small wind energy property.--

(A) In general.--Subject to subparagraph (B), in the case of any qualified fuel cell property, qualified small wind property,or energy property described in paragraph (3)(A)(ii), the energy percentage determined under paragraph (2) shall be equalto--

(i) in the case of any property the construction of which begins after December 31, 2019, and before January 1, 2021,26 percent, and

(ii) in the case of any property the construction of which begins after December 31, 2020, and before January 1, 2022,22 percent.

(B) Placed in service deadline.--In the case of any energy property described in subparagraph (A) which is not placed inservice before January 1, 2024, the energy percentage determined under paragraph (2) shall be equal to 0 percent.

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(b) Certain progress expenditure rules made applicable.--Rules similar to the rules of subsections (c)(4) and (d) of section46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposesof subsection (a).

(c) Definitions.--For purposes of this section--

(1) Qualified fuel cell property.--

(A) In general.--The term “qualified fuel cell property” means a fuel cell power plant which--

(i) has a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process, and

(ii) has an electricity-only generation efficiency greater than 30 percent.

(B) Limitation.--In the case of qualified fuel cell property placed in service during the taxable year, the credit otherwisedetermined under subsection (a) for such year with respect to such property shall not exceed an amount equal to $1,500for each 0.5 kilowatt of capacity of such property.

(C) Fuel cell power plant.--The term “fuel cell power plant” means an integrated system comprised of a fuel cell stackassembly and associated balance of plant components which converts a fuel into electricity using electrochemical means.

(D) Termination.--The term “qualified fuel cell property” shall not include any property the construction of which doesnot begin before January 1, 2022.

(2) Qualified microturbine property.--

(A) In general.--The term “qualified microturbine property” means a stationary microturbine power plant which--

(i) has a nameplate capacity of less than 2,000 kilowatts, and

(ii) has an electricity-only generation efficiency of not less than 26 percent at International Standard Organizationconditions.

(B) Limitation.--In the case of qualified microturbine property placed in service during the taxable year, the creditotherwise determined under subsection (a) for such year with respect to such property shall not exceed an amount equalto $200 for each kilowatt of capacity of such property.

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(C) Stationary microturbine power plant.--The term “stationary microturbine power plant” means an integrated systemcomprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associatedbalance of plant components which converts a fuel into electricity and thermal energy. Such term also includes allsecondary components located between the existing infrastructure for fuel delivery and the existing infrastructure forpower distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency,and power factors.

(D) Termination.--The term “qualified microturbine property” shall not include any property the construction of whichdoes not begin before January 1, 2022.

(3) Combined heat and power system property.--

(A) Combined heat and power system property.--The term “combined heat and power system property” means propertycomprising a system--

(i) which uses the same energy source for the simultaneous or sequential generation of electrical power, mechanicalshaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (includingheating and cooling applications),

(ii) which produces--

(I) at least 20 percent of its total useful energy in the form of thermal energy which is not used to produce electricalor mechanical power (or combination thereof), and

(II) at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof),

(iii) the energy efficiency percentage of which exceeds 60 percent, and

(iv) the construction of which begins before January 1, 2022.

(B) Limitation.--

(i) In general.--In the case of combined heat and power system property with an electrical capacity in excess of theapplicable capacity placed in service during the taxable year, the credit under subsection (a)(1) (determined withoutregard to this paragraph) for such year shall be equal to the amount which bears the same ratio to such credit as theapplicable capacity bears to the capacity of such property.

(ii) Applicable capacity.--For purposes of clause (i), the term “applicable capacity” means 15 megawatts or a mechanicalenergy capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energycapacities.

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(iii) Maximum capacity.--The term “combined heat and power system property” shall not include any propertycomprising a system if such system has a capacity in excess of 50 megawatts or a mechanical energy capacity in excessof 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities.

(C) Special rules.--

(i) Energy efficiency percentage.--For purposes of this paragraph, the energy efficiency percentage of a system is thefraction--

(I) the numerator of which is the total useful electrical, thermal, and mechanical power produced by the system atnormal operating rates, and expected to be consumed in its normal application, and

(II) the denominator of which is the lower heating value of the fuel sources for the system.

(ii) Determinations made on Btu basis.--The energy efficiency percentage and the percentages under subparagraph(A)(ii) shall be determined on a Btu basis.

(iii) Input and output property not included.--The term “combined heat and power system property” does not includeproperty used to transport the energy source to the facility or to distribute energy produced by the facility.

(D) Systems using biomass.--If a system is designed to use biomass (within the meaning of paragraphs (2) and (3) ofsection 45(c) without regard to the last sentence of paragraph (3)(A)) for at least 90 percent of the energy source--

(i) subparagraph (A)(iii) shall not apply, but

(ii) the amount of credit determined under subsection (a) with respect to such system shall not exceed the amount whichbears the same ratio to such amount of credit (determined without regard to this subparagraph) as the energy efficiencypercentage of such system bears to 60 percent.

(4) Qualified small wind energy property.--

(A) In general.--The term “qualified small wind energy property” means property which uses a qualifying small windturbine to generate electricity.

(B) Qualifying small wind turbine.--The term “qualifying small wind turbine” means a wind turbine which has anameplate capacity of not more than 100 kilowatts.

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(C) Termination.--The term “qualified small wind energy property” shall not include any property the construction ofwhich does not begin before January 1, 2022.

(d) Coordination with Department of Treasury grants.--In the case of any property with respect to which the Secretarymakes a grant under section 1603 of the American Recovery and Reinvestment Tax Act of 2009--

(1) Denial of production and investment credits.--No credit shall be determined under this section or section 45 with respectto such property for the taxable year in which such grant is made or any subsequent taxable year.

(2) Recapture of credits for progress expenditures made before grant.--If a credit was determined under this section withrespect to such property for any taxable year ending before such grant is made--

(A) the tax imposed under subtitle A on the taxpayer for the taxable year in which such grant is made shall be increasedby so much of such credit as was allowed under section 38,

(B) the general business carryforwards under section 39 shall be adjusted so as to recapture the portion of such creditwhich was not so allowed, and

(C) the amount of such grant shall be determined without regard to any reduction in the basis of such property by reasonof such credit.

(3) Treatment of grants.--Any such grant--

(A) shall not be includible in the gross income or alternative minimum taxable income of the taxpayer, but

(B) shall be taken into account in determining the basis of the property to which such grant relates, except that the basisof such property shall be reduced under section 50(c) in the same manner as a credit allowed under subsection (a).

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(Added Pub.L. 87-834, § 2(b), Oct. 16, 1962, 76 Stat. 967; amended Pub.L. 88-272, Title II, § 203(a)(1), (3)(A), (b), (c), Feb.26, 1964, 78 Stat. 33, 34; Pub.L. 89-800, § 1, Nov. 8, 1966, 80 Stat. 1508; Pub.L. 89-809, Title II, § 201(a), Nov. 13, 1966, 80Stat. 1575; Pub.L. 90-26, §§ 1, 2(a), 3, June 13, 1967, 81 Stat. 57, 58; Pub.L. 91-172, Title I, § 121(d)(2)(A), Title IV, § 401(e)(2) to (4), Dec. 30, 1969, 83 Stat. 547, 603; Pub.L. 92-178, Title I, §§ 102(a)(2), 103, 104(a)(1), (b) to (f)(1), (g), 108(b), (c),Dec. 10, 1971, 85 Stat. 499 to 502, 507; Pub.L. 94-12, Title III, §§ 301(c)(1), 302(c)(3), Title VI, § 604(a), Mar. 29, 1975, 89Stat. 38, 44, 65; Pub.L. 94-455, Title VIII, §§ 802(b)(6), 804(a), Title X, § 1051(h)(1), Title XIX, §§ 1901(a)(5), (b)(11)(A),1906(b)(13)(A), Title XXI, § 2112(a)(1), Oct. 4, 1976, 90 Stat. 1583, 1591, 1647, 1764, 1795, 1834, 1905; Pub.L. 95-473, §2(a)(2)(A), Oct. 17, 1978, 92 Stat. 1464; Pub.L. 95-600, Title I, § 141(b), Title III, §§ 312(c)(1) to (3), 314(a), (b), 315(a) to (c),Title VII, § 703(a)(3), (4), Nov. 6, 1978, 92 Stat. 2791, 2826 to 2829, 2939; Pub.L. 95-618, Title III, § 301(b), (d)(1), (2), Nov.9, 1978, 92 Stat. 3195, 3199, 3200; Pub.L. 96-222, Title I, §§ 101(a)(7)(G), (H), (L)(i)(I) to (IV), (ii)(III) to (VI), (iii)(II), (III),(v)(II) to (V), (M)(ii), (iii), 103(a)(2)(A), (4)(B), 108(c)(6), Apr. 1, 1980, 94 Stat. 198 to 201, 208, 209, 228; Pub.L. 96-223,Title II, §§ 221(b), 222(a) to (e)(1), (f) to (i), 223(a)(1), (c)(1), Apr. 2, 1980, 94 Stat. 261 to 266; Pub.L. 96-451, Title III, §

§ 48. Energy credit, 26 USCA § 48

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302(a), Oct. 14, 1980, 94 Stat. 1991; Pub.L. 96-605, Title I, § 109(a), Title II, § 223(a), Dec. 28, 1980, 94 Stat. 3525, 3528;Pub.L. 97-34, Title II, §§ 211(a)(2), (c), (e)(3), (4), (h), 212(a)(3), (b), (c), (d)(2)(A), 213(a), 214(a), (b), Title III, § 332(b), Aug.13, 1981, 95 Stat. 227 to 229, 235, 236, 239, 240, 296; Pub.L. 97-248, Title II, §§ 205(a)(1), (4), (5)(A), 209(c), Sept. 3, 1982,96 Stat. 427, 429, 447; Pub.L. 97-354, §§ 3(d), 5(a)(7), (8), Oct. 19, 1982, 96 Stat. 1689, 1692; Pub.L. 97-362, Title I, § 104(a),Oct. 25, 1982, 96 Stat. 1729; Pub.L. 97-424, Title V, § 546(a), Jan. 6, 1983, 96 Stat. 2198; Pub.L. 97-448, Title I, § 102(e)(2)(A), (f)(2), (3), (6), Title II, § 202(c), Title III, § 306(a)(3), Jan. 12, 1983, 96 Stat. 2371, 2372, 2396, 2400; Pub.L. 98-369, Div.A, Title I, §§ 11, 31(b), (c), 111(e)(8), 113(a)(1), (b)(3), (4), 114(a), Title IV, §§ 431(c), 474(o)(10) to (18), Title VII, §§ 712(b),721(x)(1), 735(c)(1), Title X, § 1043(a), July 18, 1984, 98 Stat. 503, 517, 518, 633, 635, 637, 638, 808, 836, 837, 946, 971,981, 1044; Pub.L. 99-121, Title I, § 103(b)(5), Oct. 11, 1985, 99 Stat. 510; Pub.L. 99-514, Title II, § 251(b), (c), Title VII, §701(e)(4)(C), Title VIII, § 803(b)(2)(B), Title XII, §§ 1272(d)(5), 1275(c)(5), Title XV, § 1511(c)(3), Title XVIII, §§ 1802(a)(4)(C), (5)(B), (9)(A), (B), 1809(d)(2), (e), 1847(b)(6), 1879(j)(1), Oct. 22, 1986, 100 Stat. 2184, 2186, 2343, 2355, 2594, 2599,2745, 2788, 2789, 2821, 2856, 2908; Pub.L. 100-647, Title I, §§ 1002(a)(14), (16)(A), (20), (29), (30), 1013(a)(41), Nov. 10,1988, 102 Stat. 3355 to 3357, 3544; Pub.L. 101-508, Title XI, §§ 11801(c)(6)(A), 11813(a), Nov. 5, 1990, 104 Stat. 1388-523,1388-541; Pub.L. 102-227, Title I, § 106, Dec. 11, 1991, 105 Stat. 1687; Pub.L. 102-486, Title XIX, § 1916(a), Oct. 24, 1992,106 Stat. 3024; Pub.L. 108-357, Title III, § 322(d)(2)(A), (B), Title VII, § 710(e), Oct. 22, 2004, 118 Stat. 1475, 1557; Pub.L.109-58, Title XIII, §§ 1336(a) to (d), 1337(a) to (c), Aug. 8, 2005, 119 Stat. 1036, 1038; Pub.L. 109-135, Title IV, § 412(m),(n), Dec. 21, 2005, 119 Stat. 2638; Pub.L. 109-432, Div. A, Title II, § 207, Dec. 20, 2006, 120 Stat. 2945; Pub.L. 110-172, §11(a)(8), (9), Dec. 29, 2007, 121 Stat. 2485; Pub.L. 110-343, Div. B, Title I, §§ 103(a), (c) to (e), 104(a) to (d), 105(a), Oct. 3,2008, 122 Stat. 3811, 3813, 3814; Pub.L. 111-5, Div. B, Title I, §§ 1102(a), 1103(a), (b)(1), 1104, Feb. 17, 2009, 123 Stat. 319to 321; Pub.L. 112-240, Title IV, § 407(b), (c)(1), Jan. 2, 2013, 126 Stat. 2341; Pub.L. 113-295, Div. A, Title I, § 155(b), TitleII, § 209(d), Dec. 19, 2014, 128 Stat. 4021, 4028; Pub.L. 114-113, Div. P, Title III, §§ 302(a), (b), 303(a) to (c), Div. Q, TitleI, § 187(b), Dec. 18, 2015, 129 Stat. 3038, 3039, 3074; Pub.L. 115-123, Div. D, Title I, §§ 40409(b), 40411(a) to (f), Feb. 9,2018, 132 Stat. 150; Pub.L. 115-141, Div. U, Title IV, § 401(a)(20) to (23), (350), Mar. 23, 2018, 132 Stat. 1185, 1201.)

26 U.S.C.A. § 48, 26 USCA § 48Current through P.L. 116-68.

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AUI Const. Group, LLC v. Vaessen, 2016 IL App (2d) 160009 (2016)67 N.E.3d 500, 409 Ill.Dec. 288

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 IL App (2d) 160009Appellate Court of Illinois,

Second District.

AUI CONSTRUCTION GROUP,LLC, Plaintiff–Appellant,

v.Louis J. VAESSEN, in His Capacity as Trustee

of the Louis J. Vaessen Trust Dated 6/24/2003½ Interest; Carol A. Vaessen, in Her Capacityas Trustee of the Carol A. Vaessen Trust Dated

6/24/2003 ½ Interest; GSG 7, LLC; ClipperWindpower, LLC; Postensa Wind StructuresUS, LLC; Rock River Ready Mix, Inc.; Illinois

Truck and Equipment Company, Inc.; CummingsElectrical, Inc.; KR Wind, Inc., d/b/a MammoetWind, Inc.; Unknown Owners; and Nonrecord

Claimants, Defendants (Louis J. Vaessen, inHis Capacity as Trustee of the Louis J. Vaessen

Trust Dated 6/24/2003 ½ Interest; Carol A.Vaessen, in Her Capacity as Trustee of the CarolA. Vaessen Trust Dated 6/24/2003 ½ Interest;GSG 7, LLC; Clipper Windpower, LLC; Postensa

Wind Structures, US, LLC; Rock River Ready Mix,Inc.; Illinois Truck and Equipment Company, Inc.;Cummings Electrical, Inc.; Unknown Owners; and

Nonrecord Claimants, Defendants–Appellees).

No. 2–16–0009.|

Nov. 9, 2016.

SynopsisBackground: Subcontractor for construction of tower forwind energy system brought action to foreclose on mechanic'slien against property on which system was built and to recoverover $3 million. The Circuit Court, Lee County, Daniel A.Fish, J., granted motion to dismiss filed by property ownersand motion for summary judgment filed by general contractoron project. Subcontractor appealed.

[Holding:] The Appellate Court, Schostok, P.J., held thattower was non-lienable trade fixture as opposed to lienableland improvement.

Affirmed.

West Headnotes (18)

[1] Mechanics' LiensFixtures in general

Tower for wind energy system was non-lienable trade fixture on property, as opposedto lienable land improvement under MechanicsLien Act; easement agreement provided that allproperty installed by system's developer wouldremain developer's property, that developercould terminate agreement upon three months'notice, and that, upon notice, it would dismantleand remove all improvement fixtures ownedby developer, property owners did not receiveanything other than rent under agreement, whichwas not benefit for purposes of Act, while itwould have been expensive to remove, tower wasnot incapable of removal, while only top four feetof foundation would be removed if tower wasremoved, property owners would still be able toresume farming land that was occupied by tower,and plain language of agreement indicated thatproperty owners contemplated that there wouldbe no liens placed on their property based onsystem. S.H.A. 770 ILCS 60/0.01 et seq.

[2] Pretrial ProcedureNature and scope of remedy in general

The purpose of a motion for involuntarydismissal based upon certain defects or defensesis to dispose of issues of law and easily provedissues of fact at the outset of litigation. S.H.A.735 ILCS 5/2–619.

[3] Pretrial ProcedureWell-pleaded facts

A motion for involuntary dismissal based uponcertain defects or defenses admits as true allwell-pleaded facts, along with all reasonable

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inferences that can be gleaned from those facts.S.H.A. 735 ILCS 5/2–619.

[4] Pretrial ProcedureWell-pleaded facts

When ruling on a motion to dismiss based oncertain defects or defenses, a court must interpretall pleadings and supporting documents in thelight most favorable to the nonmoving party.S.H.A. 735 ILCS 5/2–619.

[5] Appeal and ErrorDismissal and Nonsuit in General

On appeal from a ruling on a motion todismiss based on certain defects or defenses,the reviewing court must consider whether theexistence of a genuine issue of material factshould have precluded the dismissal or, absentsuch an issue of fact, whether dismissal is properas a matter of law. S.H.A. 735 ILCS 5/2–619.

5 Cases that cite this headnote

[6] Mechanics' LiensConstruction of lien laws in general

The purpose of the Mechanics Lien Act is toprotect those who, in good faith, furnish materialor labor for the improvement of real property.S.H.A. 770 ILCS 60/0.01 et seq.

[7] Mechanics' LiensNature of lien in general

The Mechanics Lien Act permits a lien uponproperty where a benefit has been received by theowner and where the value or condition of theproperty has been increased or improved by thefurnishing of the labor or materials. S.H.A. 770ILCS 60/0.01 et seq.

[8] Mechanics' LiensConstitutional and statutory provisions

The Mechanics Lien Act is a comprehensivestatute that outlines the rights, responsibilities,

and remedies of parties to construction contracts,including owners, contractors, subcontractors,and third parties. S.H.A. 770 ILCS 60/0.01 etseq.

[9] Mechanics' LiensPresumptions and burden of proof

The burden of proving that each requirement ofthe Mechanics Lien Act has been satisfied is onthe party seeking to enforce the lien. S.H.A. 770ILCS 60/0.01 et seq.

[10] Mechanics' LiensNature and form in general

Because the right to a mechanic's lien is statutory,a plaintiff seeking to enforce the lien must strictlycomply with the Mechanics Lien Act.

[11] Mechanics' LiensConstruction of lien laws in general

Once a plaintiff seeking to enforce a mechanics'lien has complied with the procedural requisites,the Mechanics Lien Act is liberally construed inorder to accomplish its remedial purpose. S.H.A.770 ILCS 60/0.01 et seq.

[12] Mechanics' LiensMachinery

The factors to be considered in determiningwhether equipment added to property constitutesa land improvement and is thus lienable undera mechanics' lien are (1) the nature of itsattachment to the realty, (2) its adaptation to andnecessity for the purposes to which the premisesare devoted, and (3) whether it was intended thatthe item in question should be considered partof the realty; intent is the preeminent factor, theother considerations being primarily evidencesof intent.

[13] Mechanics' LiensProperty Which May Be Subject to Lien

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The fact that an item can be removed withoutmaterial injury to the realty does not of itselfdestroy its lienability under a mechanics' lien.

[14] FixturesIntent in making annexation

That an item can be removed does notconclusively establish that it is a trade fixturewhere it is clear that there is an intentto permanently improve the property by itsinstallation.

[15] FixturesAgreements

Parties may contract to evidence an intention thatthe title to chattels which become annexed torealty does not pass and that they retain theircharacter as trade fixtures until paid for; thisagreement is binding upon the parties to theagreement where no rights of third parties areunfairly affected.

[16] Appeal and ErrorTheory and Grounds of Decision Below and

on Review

Appellate Court may affirm on any basisappearing in the record.

[17] FixturesNature and requisites of conversion into

realty in general

An improvement to property that the partiesconsider to be temporary will be found to betemporary instead of a trade fixture unless thatimprovement really cannot be removed.

[18] Mechanics' LiensEstates or Interest Which May Be Subject

to Lien

Although leases may be subject to mechanics'liens, easements are not.

Attorneys and Law Firms

*502 Carolyn L. Morehouse, Chad J. Shifrin, and Daniel S.Brennan, of Laurie & Brennan LLP, of Chicago, for appellant.

Riccardo A. DiMonte and Ryan R. Van Osdol, of DiMonte& Lizak, LLC, of Park Ridge, for appellees Louis J. Vaessenand Carol A. Vaessen.

Douglas E. Lee, of Ehrmann, Gehlbach, Badger, Lee &Considine, LLC, of Dixon, for appellee GSG 7, LLC.

James E. Morgan, of Howard and Howard, of Chicago, forappellee Clipper Windpower, LLC.

No brief filed for other appellees.

John S. Mrowiec and Timothy R. Conway, of Conway &Mrowiec, of Chicago, for amicus curiae Associate GeneralContractors of America et al.

Garrett L. Boehm, Jr., and Nicholas R. Lykins, of Johnson &Bell, Ltd., of Chicago, and Eric B. Travers, of Kegler BrownHill & Ritter Co., LPA, of Columbus, Ohio, for amicus curiaeAmerican Subcontractors Association, Inc.

Eugene Grace and Gene Grace, of Washington, D.C., amicuscuriae American Wind Energy Association.

OPINION

Presiding Justice SCHOSTOK delivered the judgment of thecourt, with opinion.

**290 ¶ 1 The instant controversy arises from a windenergy system that was developed by GSG 7 and builton the property of Louis and Carol Vaessen. After thetower was completed, one of the subcontractors that workedon the tower, AUI Construction Group, LLC (AUI), fileda complaint to foreclose a mechanic's lien against theVaessens' property and sought to recover over $3 million. TheVaessens filed a motion to dismiss the complaint, and ClipperWindpower, LLC (Clipper), a general contractor on theproject, filed a motion for summary judgment. Both motionsasserted **291 *503 that the wind energy system remainedGSG 7's personal property and was a nonlienable trade fixturerather than an improvement to the property. The circuit courtof Lee County agreed and granted the Vaessens' motion to

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dismiss and Clipper's motion for summary judgment. AUIappeals from that order. For the reasons that follow, we affirm.

¶ 2 BACKGROUND

¶ 3 On June 29, 2007, Louis and Carol Vaessen entered intoa windpark easement agreement with GSG 7, a developerof wind energy. Among other things, the easement providedGSG 7 the exclusive right “to erect, install, construct,replace, maintain, repair and operate wind energy conversionsystems on the Property as Developer determined in its solediscretion.” The agreement provided that the Vaessens wouldreceive annual payments of $7500 upon erection of a windturbine.

¶ 4 Following its agreement with the Vaessens, GSG 7entered into an agreement with Clipper to supply the windturbine and the tower to support that wind turbine. Clippermanufactured wind turbines but not the towers to supportthose turbines. Therefore, Clipper entered into a fixed-pricecontract with Postensa Wind Structures US, LLC (Postensa),for the construction of a prototype tower designed to supportthe wind turbine.

¶ 5 Postensa, in turn, entered into a cost-plus agreementwith AUI for the construction of the foundation and tower.The Postensa–AUI agreement is dated November 3, 2011,but it was not executed until January 16, 2012, by AUIand until February 1, 2012, by Postensa. The recital to theagreement stated that Postensa had entered into an agreementwith Clipper to design and build the foundation and tower fora wind-powered electrical generator facility that was ownedby GSG 7. The Postensa–AUI agreement provided that theestimated total construction costs for AUI's scope of workwould be $1,664,791.

¶ 6 A memorandum of the windpark easement agreementbetween the Vaessens and GSG 7 was recorded on December22, 2011.

¶ 7 After AUI completed its work in March or May of2012, it claimed that the total amount due from Postensawas $5,904,272.69. After giving Postensa credit for variouspayments, AUI asserted that there remained an outstandingbalance of $3,188,634.44. AUI filed an arbitration demandagainst Postensa for the approximately $3 million that itclaimed it was still owed.

¶ 8 On June 25, 2013, the arbitrator entered a partial award. OnAugust 20, 2013, Postensa filed for bankruptcy. On December4, 2013, the arbitrator entered a final award in favor of AUI for$3,527,043 (including $655,839 in AUI's attorney fees andcosts).

¶ 9 On April 17, 2014, AUI filed a complaint to foreclosea mechanic's lien against the Vaessens. AUI asserted that,because the materials, fixtures, services, and labor it furnishedconstituted a valuable and permanent improvement to theproperty, the Vaessens benefitted in an amount equivalent tothe arbitration award. AUI further requested that the Vaessens'property be sold at public auction to satisfy its lien.

¶ 10 On June 23, 2014, the Vaessens filed a motion pursuantto section 2–619 of the Code of Civil Procedure (Code)(735 ILCS 5/2–619 (West 2014)) to dismiss AUI's complaint.On October 17, 2014, Clipper filed a motion for summaryjudgment. Both motions asserted that the wind energy systemremained GSG 7's personal property and was a nonlienabletrade fixture rather than an improvement to the property.

*504 **292 ¶ 11 On April 15, 2015, the trial court grantedthe Vaessens' motion to dismiss and Clipper's motion forsummary judgment. The trial court explained that mechanic'slien laws are based on the theory that an owner is benefittedby improvements that become part of his premises. As such,the owner should pay for this accruing benefit when the ownerinduced or encouraged the erection of the improvement.Relying on Crane Erectors & Riggers, Inc. v. La SalleNational Bank, 125 Ill.App.3d 658, 662, 80 Ill.Dec. 945,466 N.E.2d 397 (1984), the trial court found that therewere three factors to be considered in determining whetherequipment has become a fixture to the realty and thuslienable. Specifically, those factors were (1) the nature ofthe equipment's attachment to the realty, (2) the equipment'sadaptation to and necessity for the purposes to which thepremises are devoted, and (3) whether it was intended that theequipment should be considered part of the real estate. Afterconsidering these factors, the trial court determined that GSG7 retained ownership of the wind energy system accordingto the unambiguous terms of the easement and that AUI hadnotice of the terms of the easement through the recordedmemorandum. The trial court expounded:

“If AUI's mechanic's lien were allowedto attach to the real estate and GSG[7] chose to terminate the easement

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and removed all of its property broughtonto the premises as allowed by

the easement agreement, [ 1 ] the lienwould remain upon the real estate afterremoval of the benefit upon which thelien was based. Therefore, to allowAUI's filing of a mechanic's lien toattach to the real estate where removalof the fixture is allowed would producean absurd result not intended by thelien act.”

1 As will be discussed in more detail, infra ¶ 20,the Vaessen–GSG 7 agreement provided that, upontermination of the easement agreement, GSG 7 wasobligated to remove the wind energy system from theVaessens' property.

¶ 12 On May 14, 2015, AUI filed a motion to reconsider. OnDecember 11, 2015, the trial court denied that motion. AUIthereafter filed a timely notice of appeal.

¶ 13 ANALYSIS

[1] ¶ 14 On appeal, AUI argues that the trial court erred ingranting the Vaessens' section 2–619 motion to dismiss theircomplaint and Clipper's motion for summary judgment. AUIinsists that a question of fact remains as to whether the towerwas a lienable land improvement as opposed to a nonlienabletrade fixture. AUI further argues that the trial court erred inits consideration of factors that determine whether a structureis lienable.

[2] [3] [4] [5] ¶ 15 The purpose of a section 2–619motion to dismiss is to dispose of issues of law and easilyproved issues of fact at the outset of litigation. Van Meterv. Darien Park District, 207 Ill.2d 359, 367, 278 Ill.Dec.555, 799 N.E.2d 273 (2003). A section 2–619 motion admitsas true all well-pleaded facts, along with all reasonableinferences that can be gleaned from those facts. Porter v.Decatur Memorial Hospital, 227 Ill.2d 343, 352, 317 Ill.Dec.703, 882 N.E.2d 583 (2008). “[W]hen ruling on a section 2–619 motion to dismiss, a court must interpret all pleadingsand supporting documents in the light most favorable to thenonmoving party.” Id. On appeal from a ruling on a section2–619 motion, the reviewing court must consider whetherthe existence of a genuine issue of material fact should have

precluded the dismissal or, absent such an issue of fact,whether dismissal is proper as a matter of law. **293 *505Thurman v. Champaign Park District, 2011 IL App (4th)101024, ¶ 18, 355 Ill.Dec. 575, 960 N.E.2d 18.

¶ 16 The purpose of a motion for summary judgment isto determine whether a genuine issue of triable fact exists(People ex rel. Barsanti v. Scarpelli, 371 Ill.App.3d 226, 231,308 Ill.Dec. 647, 862 N.E.2d 245 (2007)), and such a motionshould be granted only when “the pleadings, depositions, andadmissions on file, together with the affidavits, if any, showthat there is no genuine issue as to any material fact andthat the moving party is entitled to judgment as a matter oflaw” (735 ILCS 5/2–1005(c) (West 2014)). An order grantingsummary judgment should be reversed if the evidence showsthat a genuine issue of material fact exists or if the judgment isincorrect as a matter of law. Clausen v. Carroll, 291 Ill.App.3d530, 536, 225 Ill.Dec. 692, 684 N.E.2d 167 (1997). We reviewde novo the trial court's grant of a motion for summaryjudgment. Coole v. Central Area Recycling, 384 Ill.App.3d390, 395, 323 Ill.Dec. 289, 893 N.E.2d 303 (2008).

[6] [7] [8] [9] [10] [11] ¶ 17 The purpose of theMechanics Lien Act (Act) (770 ILCS 60/0.01 et seq. (West2014)) is to protect those who, in good faith, furnish materialor labor for the improvement of real property. Mostardi–PlattAssociates, Inc. v. Czerniejewski, 399 Ill.App.3d 1205, 1209,340 Ill.Dec. 790, 929 N.E.2d 94 (2010). The Act permits alien upon property where a benefit has been received by theowner and where the value or condition of the property hasbeen increased or improved by the furnishing of the laboror materials. Id. The Act is a comprehensive statute thatoutlines the rights, responsibilities, and remedies of partiesto construction contracts, including owners, contractors,subcontractors, and third parties. Cordeck Sales, Inc. v.Construction Systems, Inc., 382 Ill.App.3d 334, 353, 320Ill.Dec. 330, 887 N.E.2d 474 (2008). The burden of provingthat each requirement of the Act has been satisfied is onthe party seeking to enforce the lien. Czerniejewski, 399Ill.App.3d at 1209, 340 Ill.Dec. 790, 929 N.E.2d 94. Becausethe right to a mechanic's lien is statutory, a plaintiff muststrictly comply with the Act. Cordeck, 382 Ill.App.3d at353, 320 Ill.Dec. 330, 887 N.E.2d 474. However, once aplaintiff has complied with the procedural requisites, the Actis liberally construed in order to accomplish its remedialpurpose. Weydert Homes, Inc. v. Kammes, 395 Ill.App.3d 512,516, 334 Ill.Dec. 467, 917 N.E.2d 64 (2009).

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[12] [13] [14] [15] ¶ 18 The central question in thiscase is whether AUI's work constituted improvement to realproperty, which is lienable (Czerniejewski, 399 Ill.App.3dat 1209, 340 Ill.Dec. 790, 929 N.E.2d 94), as opposed toimprovement to a trade fixture, which is not (B. Kreisman &Co. v. First Arlington National Bank of Arlington Heights,91 Ill.App.3d 847, 852, 47 Ill.Dec. 757, 415 N.E.2d 1070(1980)). The factors to be considered in determining whetherequipment added to property constitutes a land improvementand is thus lienable are: (1) the nature of its attachment tothe realty, (2) its adaptation to and necessity for the purposesto which the premises are devoted, and (3) whether it wasintended that the item in question should be considered part ofthe realty. Crane Erectors, 125 Ill.App.3d at 662, 80 Ill.Dec.945, 466 N.E.2d 397. Intent is the preeminent factor, the otherconsiderations being primarily evidences of intent. Id. Thefact that an item can be removed without material injury to therealty does not of itself destroy its lienability. Id. Further, thatan item can be removed does not conclusively establish thatit is a trade fixture where it is clear that there is an intent topermanently improve the property by its installation **294*506 See Dual Temp Installations, Inc. v. Chicago Title &

Trust Co., 41 Ill.App.3d 415, 417–18, 354 N.E.2d 131 (1976).“Parties may, however, contract to evidence an intention thatthe title to chattels which become annexed to realty doesnot pass and that they retain their character as trade fixturesuntil paid for; this agreement is binding upon the parties tothe agreement where no rights of third parties are unfairlyaffected.” Crane Erectors, 125 Ill.App.3d at 662, 80 Ill.Dec.945, 466 N.E.2d 397 (citing Jones v. Jos. Greenspon's SonPipe Corp., 381 Ill. 615, 619–20, 46 N.E.2d 67 (1943)).

¶ 19 The first two factors suggest that the tower is lienable.As the trial court aptly stated:

“The nature of the attachment of the[wind energy system (WES) ] to thepremises is considerable. The WESconsists of a tower over 500 feet tall,[and a] turbine system attached toa foundation reaching nearly 12 feetbelow ground with power lines androads. This form of attachment clearlysuggests permanent attachment to thepremises. Secondly, the equipmentis specific and necessary for theproduction of wind energy to which

at least a portion of the premises [is]devoted.”

¶ 20 As to the third factor, this factor strongly weighs infavor of finding that the parties intended that the tower wasa trade fixture that would remain the property of GSG 7 andnot become a land improvement. The easement agreementprovides that all property installed by GSG 7 would remainthe property of GSG 7 and would be removable by GSG 7upon three months' notice to the Vaessens. The agreementfurther provides that GSG 7 could terminate the agreementupon three months' notice and that GSG 7 would dismantleand remove all improvement fixtures and property ownedby GSG 7. As such, the agreement clearly demonstrates thatthe Vaessens and GSG 7 did not intend the tower to be apermanent land improvement. As the intent of the parties isthe most important factor in determining whether an item isa removable trade fixture or a permanent improvement, theeasement agreement establishes that the tower was a tradefixture. See id.

¶ 21 AUI insists that the easement should not be bindingagainst it, because it performed $1.7 million in work beforethe windpark easement was recorded. AUI points out that inCrane Erectors the court determined that agreements wouldbe binding only “where no rights of third parties are unfairlyaffected.” Id. As its rights would be “unfairly affected” if wefound that the easement affected its ability to file a lien on theVaessens' property, AUI argues, we should find that it did nothave timely notice of that easement.

¶ 22 In making this argument, AUI would have us overlookits own contract with Postensa. That agreement provides inrelevant part:

“[Postensa] has entered an agreement with ClipperWindpower LLC (‘Turbine Supplier’) to design and buildthe foundation and tower (‘Design–Builder's Work’) fora wind-powered electrical generation facility known asthe Eve project consisting of one (1) 2.5 MW windturbine generator located in Sulette County, Illinois,USA (the ‘Project’) and owned by GSG 7, LLC(‘Owner’).” (Emphasis added.)

The Postensa–AUI contract states that the owner of theproject upon which AUI would be working was GSG 7. Inthis important regard, the Postensa–AUI agreement mirrors

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the Vaessens–GSG 7 agreement in providing that the ownerof the project was GSG 7, not the Vaessens.

*507 **295 [16] ¶ 23 Further, the Postensa–AUIagreement, dated November 3, 2011, predated the recordingof the easement on December 22, 2011. There is no indicationin the record that AUI performed any work on the projectprior to November 3, 2011. Nor is there any reason todraw such an inference. As AUI had knowledge through itscontract with Postensa that the work it would be performingwould ultimately benefit GSG 7, it is not unfair to find thatthe agreement between the Vaessens and GSG 7—whichprovided the exact same thing—was binding on them as well.AUI points out that the trial court did not rely on AUI'scontract with Postensa in determining that AUI had notice ofthe easement agreement. However, it is well settled that wemay affirm on any basis appearing in the record. See Burkhartv. Wolf Motors of Naperville, 2016 IL App (2d) 151053, ¶ 23,

406 Ill.Dec. 887, 61 N.E.3d 1155. 2

2 The American Subcontractors Association (ASA) hasfiled an amicus curiae brief in support of AUI's position.ASA argues that the trial court's decision is contraryto both the Act and public policy because AUI shouldnot have been required to do a title search to determinethe relationship between the Vaessens and GSG 7. Weneed not determine whether AUI should have conductedsuch a title search, because, as explained above, in lightof AUI's own contract with Postensa, AUI should haveknown that the Vaessens were not the owners of theproject.

¶ 24 AUI further insists that there are other factors that thetrial court should have considered as to the lienability of thetower, beyond those enumerated by Crane Erectors. Thoseadditional factors include: (1) whether the item provides anybenefit or enhancement to the property; (2) whether the item isremovable without material damage to the realty; (3) whetherit is impractical to remove the item; (4) whether the itemwas used to convert the premises from one use to another;and (5) the agreement and relationship between the parties.AUI contends that, as no single factor is dispositive (CraneErectors, 125 Ill.App.3d at 662–64, 80 Ill.Dec. 945, 466N.E.2d 397), the trial court should have found, consideringall of the factors together, that the tower was in fact alienable structure. The defendants respond that AUI is tryingto “cherry-pick” from other cases and add factors that the trialcourt is simply not required to consider.

¶ 25 We believe that all of the additional factors that AUIargues the trial court should have considered are consistentwith the ones enumerated in Crane Erectors, which the trialcourt did consider. All of the additional factors that AUIpoints to pertain to what the parties intended when theyentered their contract. Again, as Crane Erectors stated, theparties' intent in forming their contract is the preeminentfactor. Id. at 662, 80 Ill.Dec. 945, 466 N.E.2d 397.

¶ 26 Moreover, the consideration of these factors would notchange our view. As to whether the tower provided a benefitto the Vaessens, we note that the Vaessens did not receiveanything other than rent from GSG 7, which is not a benefitfor purposes of the Act. See L.J. Keefe Co. v. Chicago &Northwestern Transportation Co., 287 Ill.App.3d 119, 122,222 Ill.Dec. 634, 678 N.E.2d 41 (1997). In L.J. Keefe, theowner of the land underlying railway tracks granted a licenseto Commonwealth Edison Company to install power lines onits land. The plaintiff was retained to perform tunneling workto allow the installation of steel casing and pipe grouting forCommonwealth Edison Company and attempted to enforcea lien against the owner of the land. The court held that nolien is enforceable against the owner of the **296 *508land when a subcontractor constructs or installs apparatus fora contractor's sole benefit and the work does not improve theland or benefit the landowner. Id. The court held that there wasno contract to improve the land. Id. Rather, CommonwealthEdison Company had been granted a license to constructan apparatus for its own benefit, not for the benefit ofthe landowner. Id. The subcontractor's work was performedsolely for the benefit of Commonwealth Edison Companyand did not benefit the land or the landowner in any way. Id.The court specifically found that the rent that the landownerhad received from Commonwealth Edison Company was “tooattenuated to fall within the purview of the Act.” Id.

¶ 27 We note that there is case law suggesting that whetherconstruction provides a benefit to the property is the “centralinquiry” in mechanic's lien cases. See First Bank of Roscoev. Rinaldi, 262 Ill.App.3d 179, 183, 199 Ill.Dec. 850, 634N.E.2d 1204 (1994). However, there is also case law thatindicates that no single factor is dispositive in determiningwhether an item is a lienable improvement. See CraneErectors, 125 Ill.App.3d at 662–64, 80 Ill.Dec. 945, 466N.E.2d 397. Regardless, we find that this factor weighs infavor of finding that the tower was not lienable.

¶ 28 Relying on Crane Erectors, AUI next argues that,because the removal of the tower would be impractical and

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cause damage to the property, these considerations weigh infavor of finding that the tower was a permanent improvement.Relying on Jones, 381 Ill. at 619–22, 46 N.E.2d 67, and E.R.Darlington Lumber Co. v. Burton, 156 Ill.App. 82, 86–87(1910), Clipper responds that those considerations will notoutweigh the parties' intent in building an item unless it is infact impossible to remove the item.

¶ 29 In Crane Erectors, the plaintiff installed an overheadcrane in the defendant's warehouse. After the plaintiff failedto receive payment for its work, the plaintiff sought to enforceits mechanic's lien claim against the defendant. The defendantargued that the crane was leased by its warehouse tenant,which prevented a lien claim against the defendant. Thereviewing court considered numerous factors in determiningthat the crane had become a permanent fixture in thewarehouse and that therefore a lien against the defendant wasproper. Those factors included that (1) because the crane wasvery large, running the length of the warehouse, it wouldbe impractical (but not impossible) to remove it; (2) thedefendant, and not its tenant, had made payments to theplaintiff for the work done; and (3) the crane remained in thebuilding after a transfer of ownership. Crane Erectors, 125Ill.App.3d at 660–64, 80 Ill.Dec. 945, 466 N.E.2d 397.

¶ 30 In Jones, the supreme court considered whether 1382 feetof well casing embedded and cemented into the ground for oiland gas extraction was a trade fixture. Evidence was presentedthat a bomb would have to be used to remove the casing.The appellate court determined that the casing constituted apermanent land improvement, but the supreme court reversed,explaining:

“The Appellate Court clearly erred in holding that theappellant had no right to enter upon the leasehold premisesand repossess the casing because the same had becomeembedded and cemented in the oil well. To so hold was, ineffect, to transfer the title to the casing from the vendor tothe vendee, through the act of the latter, in plain violationof the terms of the contract. * * *

* * *

*509 **297 Since it appears that the landlord and[the lessee] agreed that the casing could be removed, wehold that the oil casing placed in the ground under suchcircumstances is a trade fixture as between the landlord and[the lessee].” Jones, 381 Ill. at 619, 621–22, 46 N.E.2d 67.

¶ 31 In Darlington, a landowner entered into an agreementto lease 160 acres of her land to be used as an amusementpark. The agreement provided that the lease would be forfive years and that all of the buildings or fixtures erectedthereon would be removed at the end of the lease. After thebuildings were erected and a dam put in to form a lake,the lessee defaulted in the payment of rent. Thereafter, theDarlington Lumber Company, which had furnished materialfor the structures, sought to enforce a mechanic's lien againstthe landowner on the basis that the improvements to the landwere permanent. The reviewing court determined that a liencould not be enforced against those improvements that couldbe removed. However, as to the dam, the reviewing courtstated:

“It is obvious that such improvement could not be removedfrom the premises except at considerable expense, andwithout rendering the material used practically worthless,and totally destroying the lake. The privilege granted toremove such materials at the termination of the lease wastherefore of no practical value or advantage to the lessee,and may be regarded as nugatory, and the improvementbeing incapable of removal necessarily inured to theowners of the fee of the premises. The [landowner] havingauthorized the erection of improvements which [she] mustbe held to have known to be of that character and which ofnecessity would remain upon the premises at the expirationof the lease, and thus inure to the benefit of the then ownerof the fee, cannot be permitted to invoke the removal clausein the lease to escape liability for the cost of the same.”Darlington, 156 Ill.App. at 86–87.

[17] ¶ 32 From Jones and Darlington, 3 we can extrapolatethat an improvement that the parties consider to be temporarywill be found to be temporary unless that improvement reallycannot be removed. To hold otherwise would essentiallytransfer ownership rights in the property when the partiesthemselves did not intend to transfer such rights. See Jones,381 Ill. at 619, 46 N.E.2d 67. We note that this was part ofthe trial court's rationale in denying AUI's lien claim againstthe Vaessens.

3 As Darlington is an appellate court decision prior to1935, it is not precedential. Bryson v. News AmericaPublications, Inc., 174 Ill.2d 77, 95, 220 Ill.Dec. 195,672 N.E.2d 1207 (1996). However, we may still considerit as persuasive authority.

¶ 33 Here, it is clear that the tower can be removed. AUI'spresident, Mario Carbone, testified that bombs would have to

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be used to remove the tower. We observe that this was thesame method that would have been used to remove the wellcasing in Jones. Further, Carbone testified that it would cost

over $600,000 to remove that tower. 4 Although expensiveto remove, the tower was clearly not “incapable of **298*510 removal.” See Darlington, 156 Ill.App. at 87.

4 The Vaessens argue that “Carbone's opinions in hisaffidavit are unsupported expert opinions that cannotbe considered at the summary judgment phase, becausethey would not be admissible at trial.” Specifically,the Vaessens argue that “Carbone is not qualified togive expert testimony regarding removal of the [tower]from the Subject Premises, methods of removal, costof removal, and whether the Subject Premises wouldbe damaged by removal.” We need not address thisargument, because, even if we were to find that all of histestimony was admissible, it would not change the result.

¶ 34 Moreover, we find AUI's reliance on Crane Erectorsto be misplaced. Although that court indicated that one ofthe reasons it found that an overhead crane was a permanentfixture was that it would be impractical to remove it, the courtalso found pertinent two additional reasons not present here—that the landlord, rather than the tenant, had made paymentsto the contractor and that the crane remained in the buildingeven after the ownership of the building had changed. It isapparent that the court's determination that the crane was apermanent improvement was based on the totality of thosecircumstances.

¶ 35 AUI additionally points out that the Vaessens–GSG 7 agreement provides that the tower will have afoundation installed 12 feet deep into the ground. However,upon termination of the easement, the agreement providesthat only the top four feet of the foundation will beremoved. AUI suggests that, as the foundation will not becompletely removed, the improvement to the property isindeed permanent.

¶ 36 We note that AUI points to nothing in the record thatsuggests that leaving concrete buried 4 to 12 feet belowthe Vaessens' farmland will affect their use of the property.Rather, the record supports an inference that after the toweris removed the Vaessens will be able to resume farming onthe land that was occupied by the tower. As such, this fact isconsistent with the conclusion that the tower was not intendedto be a permanent land improvement.

¶ 37 In sum, although it is clear that it will be expensiveto remove the tower from the Vaessens' property, it is alsoevident that it is not impossible to do so. As such, thisconsideration does not outweigh the fact, reflected in theVaessens–GSG 7 agreement, that the tower was intended tobe temporary.

¶ 38 As to the next factor that AUI argues the trial court shouldhave considered—whether the item was used to convertthe premises from one use to another—we find that this isequivalent to a factor that the trial court did consider—theitem's adaptation to and necessity for the purposes to whichthe premises are devoted. The trial court found that, becausea portion of the premises was converted from farmland toharnessing wind energy, this factor weighed in favor offinding that the tower was lienable.

¶ 39 The fifth additional factor—the Vaessens–GSG 7agreement—as we have already discussed extensively,weighs heavily in favor of finding that the tower was nota lienable structure. Thus, even considering these additionalfactors, it is readily apparent that Vaessens and GSG 7 did notintend the tower to be a permanent improvement.

¶ 40 AUI further contends, however, that beyond the factorslisted above, there are other factors—specific to this case—that warrant a finding that the tower was a lienableobject. Specifically, AUI argues that (1) the Vaessens–GSG 7 agreement expressly contemplated lienable work;(2) Illinois law treats wind energy devices as taxable realproperty; and (3) AUI's construction agreement with Postensacontemplated lienable work. We do not believe that any ofthose considerations warrants a different result.

¶ 41 AUI points to paragraph 5.3 of the Vaessens–GSG 7agreement, which requires GSG 7 to “keep Owner's interestin the Property free and clear of all liens and claims of liensfor labor and services performed on, and materials, suppliesand equipment furnished to the Property in connection withDeveloper's use of the **299 *511 Property.” AUI alsoasserts that the Vaessens–GSG 7 agreement provides forthe construction of “improvements,” “facilities,” and “realproperty.” AUI contends that these provisions demonstratethat the Vaessens and GSG 7 contemplated that theconstruction of the tower would constitute lienable work. Wedisagree. The plain language of these provisions indicatesthe exact opposite: that the Vaessens contemplated that therewould be no liens placed on their property based on GSG 7'sdevelopment of a wind energy system.

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¶ 42 As to the tax consequences of the wind energy system,AUI argues that Illinois's tax treatment of wind energy devicesweighs heavily in favor of finding that the tower is animprovement on real estate and not a trade fixture. AUIasserts that, under the Property Tax Code (35 ILCS 200/1–1 et seq. (West 2014)), the property tax valuation of a windenergy device is based on the “real property cost basis” of“the land and real property improvements of a wind energydevice,” valued at $360,000 per megawatt of nameplatecapacity, minus an allowance for physical depreciation, andwith adjustments for inflation. See 35 ILCS 200/10–600, 10–605 (West 2014).

¶ 43 In response, Clipper argues that the Property Tax Codedoes not treat a wind energy device as a fixture to the owner'sland. Clipper asserts that, because Illinois does not have ageneral personal property tax, and because it does not wantto permit multimillion-dollar turbines to escape all taxation, itimposes a real property tax on a wind energy device, but onlyafter isolating the wind energy device from the land. See 35ILCS 200/10–620 (West 2014). Pursuant to section 10–620 ofthe Property Tax Code, the owner of the wind energy devicemust have a land surveyor prepare a plat of the area of thedevice, and that plat is then issued its own parcel identificationnumber so that the device may be separately taxed. Clipperargues that section 10–620's approach to taxing wind turbinesis entirely consistent with the Vaessens–GSG 7 agreement,which requires GSG 7 to pay taxes associated with the winddevelopment project that GSG 7 continues to own after theinstallation.

¶ 44 We agree with Clipper's interpretation of section 10–620of the Property Tax Code. There is nothing in that provision,or any other provision of the Property Tax Code, that suggeststhat a wind turbine that is installed on property is consideredto be a permanent improvement to the land. Rather, the factthat the Illinois General Assembly added a specific section tothe Property Tax Code to cover wind turbines suggests that itwas concerned that those wind turbines would not otherwisebe taxed, because they are not land improvements.

¶ 45 As to AUI's argument that its construction agreementwith Postensa contemplated lienable work, we note that AUIcites no authority as to why that fact should even have abearing in this case. Absent any such authority or cogentanalysis of why this fact is relevant, this fact does not requireus to reach a different result. Ill. S. Ct. R. 341(h)(7) (eff. Feb.6, 2013).

¶ 46 Finally, we note that an amici curiae brief has beenfiled in support of AUI's position by the Associated GeneralContractors of America, Builders Association, CentralIllinois Builders of AGC, Fox Valley Associated GeneralContractors, and Southern Illinois Builders Association(collectively referred to as AGC). AGC argues that thetrial court's ruling is contrary to both Illinois law andpublic policy that prohibit no-lien construction contractsand projects. Specifically, AGC contends that the Actprohibits construction contracts that require contractors orsubcontractors **300 *512 to waive their lien rights “inanticipation of and in consideration for the awarding of acontract or subcontract.” 770 ILCS 60/1(d) (West 2014).

¶ 47 AGC's argument is flawed because there is no contractuallanguage here that requires contractors to waive their lien

rights. 5 AGC implicitly recognizes this, as it instead assertsthat the trial court's ruling had the effect of resurrecting theno-lien contracts that the Illinois General Assembly prohibits.We disagree. The trial court's decision was based on Illinoisjurisprudence that trade fixtures are not subject to mechanic'sliens. AGC essentially asks that we disregard that law and findthat even trade fixtures are subject to mechanic's liens. Thisargument should be directed at the Illinois General Assembly,not this court.

5 As discussed earlier, the Vaessens–GSG 7 agreementprovided that GSG 7 was to ensure that no liens wereplaced on the Vaessens' property. However, as thatcontract was between a landowner and a developer, it isnot contrary to any of the provisions of the Act.

¶ 48 AGC next argues that the trial court erred in findingthat AUI could have filed a lien against GSG 7 pursuantto the Uniform Commercial Code (UCC). AGC contendsthat UCC security interests simply do not exist “in ordinarybuilding materials incorporated into an improvement onland.” 810 ILCS 5/9–334(a) (West 2014). As AUI built thewind structure with concrete, rebar, electrical conduit, andother “ordinary building materials,” the UCC does not apply.AGC therefore argues that AUI should have been allowed tofile a mechanic's lien against the Vaessens' fee simple interestin the land.

¶ 49 We do not disagree with AGC's assertion that AUI doesnot have any basis to file a UCC lien against GSG 7. However,that does not mean we should ignore the above-discussedprecedent and find that AUI should be allowed to maintain amechanic's lien against the Vaessens instead.

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¶ 50 AGC's final argument is that the trial court failed torecognize AUI's separate and distinct mechanic's lien rightsagainst GSG 7's interest in the land. AGC argues that, undersection 1(a) of the Act, a mechanic's lien “extends to an estatein fee, for life, for years, or any other estate or any right ofredemption or other interest which the owner may have inthe lot or tract of land at the time of making such contract ormay subsequently acquire.” 770 ILCS 60/1(a) (West 2014).Under section 21(a), a subcontractor has a lien “on the sameproperty as provided for the contractor.” 770 ILCS 60/21(a)(West 2014). AGC contends that it therefore follows thatAUI's mechanic's lien extended to GSG 7's interest in the land,as set forth in AUI's lien claim and complaint to foreclose.

[18] ¶ 51 In making this argument, AGC argues that GSG7's interest in the land, “while cloaked as an easement, isin substance a long-term leasehold interest.” AGC primarilypoints to the fact that the agreement could last 50 years as thereason why the agreement should be treated as a lease ratherthan an easement. AGC seeks to reclassify the agreement as alease because, although leases may be subject to mechanic'sliens (Hacken v. Isenberg, 288 Ill. 589, 124 N.E. 306 (1919)),easements clearly are not. See Matanky Realty Group, Inc. v.Katris, 367 Ill.App.3d 839, 305 Ill.Dec. 774, 856 N.E.2d 579(2006). In Matanky, the reviewing court explained:

“An easement provides a right or privilege in the useof another's property. [Citation.] An easement qualifiesas appurtenant when the user of the right enjoys adominant estate over the used **301 *513 land, whichis considered the servient estate. [Citation.] The individualwith the easement is entitled to the necessary use of theeasement. [Citation.] Accordingly, the easement providesuse rights; however, it does not provide ownership rightsor an ownership interest in the land. As a result, defendantscannot be considered owners of the [land at issue] or anyportion thereof merely because they have rights under theeasement.” Id. at 842, 305 Ill.Dec. 774, 856 N.E.2d 579.

¶ 52 Here, as explained earlier, the Vaessens–GSG 7agreement provided that it could last as little as three months.This mitigates against a finding that the agreement was inreality a lease. Further, as the trial court noted, finding thatAUI could place a lien on the Vaessens' land even if GSG 7were to remove the tower would be inequitable and contrary

to the plain language of the Act. 6

6 We note that both AUI and AGC argue that, althoughAUI seeks to place a lien on the Vaessens' property, theVaessens' farm will not be subject to foreclosure, becauseGSG 7 agreed to indemnify the Vaessens. Therefore,GSG 7, not the Vaessens, will be ultimately liable topay AUI. Although that might be true (assuming GSG7 does not itself file for bankruptcy), there is nothingin the Act that permits a contractor to obtain a lienagainst a landowner simply because that landowner hasan indemnity agreement with a developer. We declineAUI and AGC's implicit invitation to expand the Act toallow a lien to be placed against a landowner in such asituation. See Inter–Rail Systems, Inc. v. Ravi Corp., 387Ill.App.3d 510, 516, 326 Ill.Dec. 771, 900 N.E.2d 407(2008) (mechanic's liens should not be extended to casesnot provided for by the language of the Act even thoughthey might fall within its reason).

¶ 53 CONCLUSION

¶ 54 For the reasons stated, we affirm the decision of thecircuit court of Lee County.

¶ 55 Affirmed.

Justices McLAREN and JORGENSEN concurred in thejudgment and opinion.

All Citations

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