Sunvalley Solar, Inc. (“Sunvalley”), is a solar equipment distributor in California. It brought an action in California state court against CEEG (Shanghai) Solar Science & Technology Co., Ltd. and China Sunergy (Nanjing) Co., Ltd. (together, the “Chinese manufacturers”) for breach of a distribution agreement due to failure to provide crystalline photovoltaic (PV) modules compliant with Underwriter Laboratory (UL) labeling and inspection standards. Sunvalley thought it had a fair claim in California state court, because the distribution agreement contained a choice of law provision designating California as its governing law.

The distribution agreement, however, was a master agreement that contemplated execution of individual, project-specific purchase orders for the PV modules. Sunvalley and the Chinese manufacturers executed multiple purchase orders, each of which included an arbitration provision mandating disputes be arbitrated before the Chinese International Economic and Trade Arbitration Commission. The distribution agreement was silent as to a method of dispute resolution. It contained an order-of-precedence provision noting that “the stipulations set forth in [the distribution agreement] apply in the case of any contradiction with {a} purchase order.”

The Chinese manufacturers removed Sunvalley’s California state action to federal court, relying on a federal statute that provides federal jurisdiction for disputes relating to an international arbitration agreement. The Chinese manufacturers then moved to compel arbitration of Sunvalley’s claims, arguing that the arbitration provisions in the purchase orders applied to the distribution agreement as well.

The appeals court that supervises federal trial courts in California agreed with the federal trial court’s opinion granting the Chinese manufacturers’ motions to compel arbitration. The appeals court held that the distribution agreement “cannot be read in isolation”; that the project-specific purchase orders must be considered as well; and that, because the arbitration provisions in the purchase orders did not directly conflict with the distribution agreement, the arbitration provisions governed the dispute between Sunvalley and the Chinese manufacturers.

This opinion highlights inherent risks in complex agreements, especially master agreements and all agreements that incorporate or reference separate documents. Documents clearly anticipated by a master agreement – including future, later-negotiated task or purchase orders – may be deemed an essential part of the parties’ agreement. An order-of-precedence provision, which generally specifies the prevailing terms in the event of an inconsistency or contradiction between different contract documents, may not be sufficient to resolve conflicts where one document does not directly address the other document’s specific terms. Courts will attempt to interpret contract documents together – and to the extent that a contractual interpretation is possible between both documents, courts will choose the compatible interpretation over an interpretation finding that two contract documents conflict.

The lesson? One can never be too careful negotiating complex agreements – and beware the additional terms in referenced documents.