Construct.law - Autumn 2023
Case law update: termination of construction contracts
By Katherine Keenan
Energy Works (Hull) Limited v MW High Tech Projects UK Limited provides a helpful discussion on issues encountered on complex engineering projects and reinforces that exercising a right to terminate should not be a decision taken lightly.
Energy Works (Hull) Limited v MW High Tech Projects UK Limited, M+W Group GmbH v Outotec (USA) Inc. [2022] EWHC 3275 (TCC)
Background
The project comprised the design and construction of an energy-from-waste plant. Energy Works (Hull) Limited (EWH) was the employer and MW High Tech Projects UK Limited (MWHT) the main contractor. The parties entered into a contract based on IChemE Red Book (5th Edition 2013), an engineering, procurement and construction (EPC) form, with bespoke amendments in November 2015 (the Main Contract). MWHT agreed to design and build the plant for £154 million to process and gasify refuse‑derived fuel into sustainable electricity.
MWHT appointed Outotec (USA) Inc (Outotec) as sub-contractor with regards to the gasifier.
Almost 11 months after the contractual date for completion, MWHT had suspended work with the gasifier not commissioned. On 4 March 2019, EWH terminated MWHT’s appointment under the Main Contract for contractor default and/or in common law (as repudiatory breach). EWH issued proceedings, claiming damages for breach of contract relating to delay, losses arising from termination including engaging third parties to complete the works and defects. MWHT added Outotec as a Part 20 defendant, alleging that, if responsible for losses to EWH, they arose from Outotec’s breach of sub-contract.
Claims and counterclaims
EWH claimed £131.5 million from MWHT, comprising delay damages, costs of completing the works and £10 million alleged defects. MWHT counterclaimed for final payment (£24.5 million) under the Main Contract. MWHT sought a contribution from Outotec if found liable for gasifier defects, who denied liability and counterclaimed for unpaid sub-contract sums.
Termination of the main contract
The contractual date for completion was 9 April 2018 (subject to extensions of time). By March 2019, the gasifier plant had not been commissioned and MWHT had suspended work, alleging that the refuse-derived fuel (RDF) delivered by EWH was non-compliant.
Liquidated damages in the Main Contract were £84,800 per day, with an aggregate cap of 15% of the contract price (the Delay Damages Cap) which was reached on 7 January 2019 (assuming no extensions of time).
The Main Contract permitted EWH to terminate MWHT for contractor's default if it became “liable for a sum or sums in aggregate equal to or greater than the Delay Damages Cap.”
The cap was exceeded unless MWHT was entitled to 56 days’ extension, which the Court found it was not. EWH were entitled to terminate when they did on 4 March 2019 (56 days after exceeding the cap).
Extension of time
MWHT unsuccessfully sought a 27-week extension, submitting that EWH had failed to deliver RDF, or failed to deliver RDF that complied with the Main Contract.
To establish the claimed extension, MWHT needed to prove EWH’s breach, that this caused delay and that MWHT had complied with contractual notification requirements. MWHT failed to prove breaches by EWH. MWHT had refused to accept deliveries of RDF that it should have accepted. EWH had on occasion failed to deliver RDF in accordance with the specification, however the question was whether this caused delay.
The Court found that MWHT were playing a two-sided game, alleging down the line to Outotec and up the line to EWH that each caused the delay, making MWHT’s programmes unreliable.
On a contractual based approach to extensions of time, the Court considered what critically delayed works. The causes were the rectification of the defective fuel feed system (MWHT’s responsibility) and MWHT’s decision to suspend works. MWHT therefore were not entitled to an extension of time.
The Main Contract contained notification provisions which MWHT only followed on a limited number of occasions, therefore except in those cases the extension claims would have failed regardless.
Principal issues
The principal issue was whether EWH was entitled to terminate under the Main Contract. If MWHT was entitled to an extension of time, EWH’s notice would take effect as a termination for convenience rather than contractor default and the cost difference in those scenarios were significant.
Suspension
MWHT suspended commissioning activities at several points. The Court addressed whether there was a right to suspend due to EWH’s breaches relating to RDF deliveries.
Where a contract is silent, a party cannot respond to breaches as it sees fit. Damages are the primary remedy. A contractor has no right to suspend except where expressly provided under the contract or by law Even if MWHT was entitled to refuse non-compliant deliveries, without some repudiatory breach by EWH there was no right to refuse all deliveries or suspend commissioning. MWHT should have continued to perform while pursuing claims for extensions of time.
Common law repudiator breach
The Court considered EWH’s right to terminate at common law, whether MWHT was in repudiatory breach of contract and whether EWH had correctly accepted that breach. EWH relied on the scale of delay, MWHT’s suspension of works and MWHT’s non-compliance with contractual reporting obligations.
A repudiatory breach goes “to the root of the contract”. Pepperall J acknowledged that the scale of delay (almost 11 months) can contribute towards a repudiatory breach, finding it did so in this case. Alongside MWHT’s unjustified refusal to continue commission, this entitled EWH to terminate. A project simply being delayed does not amount to a repudiatory breach.
Had MWHT justified some of its extension of time claim, the termination may have been invalid and the commercial situation very different.
Assignment of the sub-contract
Under a standard term of the contract form, the Main Contract provided that where the contract is terminated for contractor default, EWH was entitled to require the benefit of sub-contracts to be assigned to it (similar provisions exists in major JCT forms). After terminating MWHT under the Main Contract, EWH exercised its right to assign Outotec’s sub-contract.
When EWH issued its claim, MWHT sought to pass liability to Outotec as Part 20 defendant. During preliminary issues hearings, the Court determined that the assignment of the sub-contract was to enable enforcement of sub-contract rights by the employer against the sub-contractor and so this left MWHT without the ability to pursue Outotec for breach of sub-contract and with a gap in trying to pass down losses.
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