To look at your specific exception I would really need a stack trace, not just some out of context error.
To exclude a path, you should set .KeepDepth on the SvnUpdateArgs to true.
Without .KeepDepth your code is equivalent to
$ svn up --depth exclude PATH
which would yield an error.
With with .KeepDepth it would be the
$ svn up --set-depth exclude PATH
that you try to apply.
In SharpSvn it is easier to use the slightly more low level
SvnClient.CropWorkingCopy(PATH, SvnDepth.Excluded)
as that makes it clearer what you try to do.