Infra.Law
Assignment of Subcontracts and Claims under Parent Company Guarantees
By Sara Cunningham & Hasan Almosoy
A recent decision by the Technology and Construction Court in the case of MW High Tech Projects UK Ltd v Outotec (USA) Inc & Ors [2023] EWHC 2885 (TCC) highlights the significant implications for contractors agreeing contract clauses obligating them to assign subcontracts to the employer upon termination of their contract and comments on a liability under parent company guarantees and abuse of process. In short, the court found that:
- A purported re-assignment of the subcontract to the contractor was not effective, as no consent from the subcontractor had been obtained to the re-assignment in compliance with the subcontract.
- The main contractor did not have a contractual right of recourse under the parent company guarantee (“PCG”) against the subcontractor’s parent company without the benefit of the underlying subcontract. A PCG does not always create independent liability. If the guarantee terms are linked to the primary contract, the guarantor's liability for breach of contract may hinge on the ability to pursue such claims directly against the subsidiary.
- The scope of liability under a PCG depends on the specific wording of the agreement. A broadly worded guarantee may encompass claims beyond direct breaches of the primary contract, including claims such as misrepresentation.
- A party alleging an abuse of process must meet a high threshold. Courts will assess a range of factors, including potential prejudice to the opposing party, overlap with prior proceedings, and the claimant's conduct.
Comments
- Main contractors should give careful consideration to the circumstances when they are obliged to assign the benefit of their subcontracts to the employer, particularly where they may owe liabilities to the employer after that assignment.
- For those agreeing to give PCGs, this case reinforces the need to scrutinise the terms of the guarantee and whether they stray beyond those of a pure ‘guarantee’ and into the realms of creating a standalone liability owed to the other party. Of course, those receiving the benefit of the PCG may well be seeking the reverse.
- Finally, the judgment reinforces the high threshold to successfully argue an abuse of process.
Background
Proceedings commenced under the Main Contract
In 2015, Energy Works Hull Limited (“EWH”) entered into a main contract with MW High Tech Projects UK Ltd (“MW”) for the construction of a new waste to energy power plant in Hull for a price of around £154 million. MW subcontracted with Outotec to supply plant for use as part of the main contract works (the “Subcontract”). The Subcontract was an amended version of the IChemE Yellow Book. Metso, Outotec’s parent company, gave MW three PCGs over the relevant period. EWH terminated the main contract with MW due to alleged extensive delays and defects. MW complied with its contractual obligation to assign the benefit of the Subcontract with Outotec to EWH. EWH then commenced proceedings against MW in July 2019, claiming damages for breach of the main contract. MW sought to bring Outotec into those proceedings, attempting to pass some of the liability for EWH’s claims onto Outotec. At the time, EWH had not re-assigned the Subcontract back to MW and so, unsurprisingly, as a preliminary issue, the court determined that MW had no right to make its claims against Outotec for damages for pre-assignment breaches of the Subcontract.
Proceedings under the Subcontract and related Parent Company Guarantee
EWH and MW eventually settled the earlier action, which included an agreement to re-assign the benefit of the Subcontract back to MW. Shortly after the purported re-assignment, MW commenced proceedings against Outotec and its parent company, Metso, on 21 December 2022. MW claimed against Outotec for breach of the purportedly re-assigned Subcontract and for misrepresentation. The claim alleged that Outotec misled MW about their capabilities and technology, leading MW to enter into the Subcontract and suffer losses. The claim against Metso under the PCG was also for misrepresentation and breach of contract
Judgment
Outotec applied to strike out MW’s claim or obtain summary judgment against MW. Outotec argued that the entire claim brought by MW was an abuse of process and that MW’s breach of contract claim should be dismissed on the basis of ineffective re-assignment. In determining strike out or summary judgment, the court reached the following findings.
The re-assignment was ineffective
Clause 9.1 provided that neither MW or Outotec could assign the Subcontract without the consent of the other. When the Subcontract was assigned to EWH, it became subject to the same restriction in clause 9.1 of the Subcontract prohibiting re-assignment without Outotec’s consent. The court determined that Outotec did not consent to the re-assignment of the Subcontract back to MW. Therefore, the re-assignment was ineffective and the court dismissed MW’s breach of contract claim against Outotec.
There was no right to pursue Metso separately under the parent company guarantee
Since the re-assignment was deemed ineffective, MW no longer had a contractual right to enforce the Subcontract. This was important as Metso’s liability under the PCG depended on MW’s ability to sue Outotec directly. Without a direct claim against Outotec, there was no basis for invoking the guarantee against Metso. The court decided that the same defences used by Outotec, based on the lack of consent to the re-assignment, were also available to Metso. Therefore, because MW could not bring a claim against Outotec, it could not bring a claim against Metso. However, this did not close the door on all claims against Metso.
MW could bring claims for misrepresentation
The scope of MW’s claim covered representations made over an extended period, the alleged falsity of those representations and their consequences for MW. Misrepresentation claims against Outotec – abuse of process argument
While the court acknowledged that MW could have brought the misrepresentation claim earlier, the failure to do so was not a strong enough reason to strike it out – there was no evidence of dishonesty or bad faith by MW, but rather only questionable timing. As such Outotec did not meet the threshold for evidencing there had been an abuse of process.
The court also found that Metso could not succeed in its abuse of process argument. As Metso was not a party to the previous proceedings, it could not argue that it had been unfairly litigated against twice. Misrepresentation claims against Metso
The issue to be determined was whether or not the claim for misrepresentation was a failure by Outotec to perform, duly or properly, any of its duties or obligations arising "in connection with the subcontract" so as to fall within the scope of the PCG. The courts view, relying on Ashville Investments Ltd v Elmer Contractors Ltd was that the statements made were “in connection with the subcontract”. MW did not require the benefit of the Subcontract to pursue such claim. As such, MW could pursue Metso under the PCG for misrepresentation even if the Outotec claim failed.
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