High Court awards £119m in termination costs, delay damages and defect rectification costs to owner of energy-from-waste plant project (Energy Works Hull v MW)
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Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and another [2022] EWHC 3275 (TCC)
CASE ANALYSIS: Lexis®PSL Construction (EXC0006838)
This case involved a complex post-termination dispute between the owner of an energy-from-waste plant, Energy Works (Hull) Ltd (EWH), and the contractor engaged to design and build the plant, MW High Tech Projects UK Ltd (M+W), with contribution claims against M+W’s sub-contractor, Outotec (USA) Inc (Outotec). The case gave rise to important questions of principle such as the enforceability of liquidated damages post-termination, a contractor’s right to suspend, causation and the assessment of damages. The Technology and Construction Court (TCC) awarded circa £119m to EWH, which consisted of liquidated damages for delay, costs of completing the works, and defect rectification costs. The court rejected M+W’s extension of time claims, and concluded that M+W did not have any right to suspend works on the basis of the alleged non-compliances in respect of EWH’s procurement and quality management of refuse-derived fuel (RDF) for the plant. In relation to the third-party proceedings, the court allowed one of M+W’s contribution claims against Outotec in respect of defects in the fuel feed system, but awarded circa US$6.8m of outstanding milestone payments and circa US$1 million of wrongfully deducted recharges to Outotec (subject to abatement). Written by Mathias Cheung, barrister at Atkin Chambers.
What are the practical implications of this case?
The detailed judgment of the Honourable Mr Justice Pepperall chronicles the practical risks and issues which are commonly encountered on energy and infrastructure projects, especially those involving cutting edge technology which presents significant challenges in design and construction. It also emphasises the importance of a contractor’s reporting obligations, in the context of a contract which did not limit liability for wilful defaults such as deliberate misreporting of progress. This case will be of particular interest to practitioners, construction professionals and other stakeholders operating within the construction, infrastructure and energy industries.
The court also had the occasion to provide helpful guidance and clarification on a number of wider legal issues which will be relevant to disputes involving construction, infrastructure and energy projects. First, the court confirmed that a contractor has no general right to suspend works or respond to an employer’s breach of contract as it sees fit in the absence of any express contractual/statutory provisions, and the primary remedy is simply a claim for damages. This is highly relevant to those advising clients who are considering the legality and risks of suspending works on other projects.
Further, this case illustrates the practical application of Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29 to liquidated damages (LADs) provisions in construction, infrastructure and energy projects, as the court relied on the Supreme Court’s decision to uphold the enforceability of the LADs provided by the contract. This case will therefore also be of general interest to those advising on the enforceability of LADs in other projects.
Finally, the detailed discussions in the judgement regarding issues of causation and quantum are illustrative of the court’s general approach to such matters in a complex dispute. This can in turn inform the type of factual and documentary evidence which claimants in other dispute may wish to gather in order to succeed in making a substantial recovery, especially where the costs / losses are ongoing.
What was the background of the dispute
EWH and M+W entered into an Engineering, Procurement and Construction (EPC) contract dated 20 November 2015 for the design and construction of the energy-from-waste plant in Hull, which was intended to process and gasify RDF in order to generate electricity. The design, manufacture and supply of the gasifier train and steam system were sub-contracted to Outotec.
The project suffered from significant delays due to numerous issues encountered during the design and construction of the plant, including difficulties in getting the equipment in the gasifier train to operate as intended. By March 2019, almost 11 months after the contractual date for completion, the gasifier plant had still not been commissioned, and work had been suspended by M+W since February 2019 on the purported basis that the RDF being delivered to the site was non-compliant.
As a result, on 4 March 2019, EWH gave notice to M+W to terminate the EPC contract pursuant to clause 44.1(c) (ie on the basis that the delay damages cap had been reached), alternatively at common law for repudiation.
EWH’s claims
EWH issued proceedings against M+W in the TCC in July 2019. The quantum of the claim was amended a few times due to the ongoing nature of the outstanding works, and in its final schedule of loss served with its closing submissions, EWH claimed a total sum of £131,362,885.23 plus interest, consisting of LADs for delay, additional costs of completing the works, defect rectification costs, and costs of consumables and provision of electricity for which M+W was responsible.
Although there was a liability cap of up to £153,897,518 under clause 45.1 of the EPC contract, clause 45.3A, which provided that the liability cap would not apply to any wilful default of M+W. EWH’s case was that M+W was in wilful default by deliberately misreporting on the progress of the works and by suspending the works in an attempt to mask the extent of the delay caused by remedial works to the gasifier and fuel feed system.
M+W’s case and contribution claim against Outotec
M+W’s primary case was that it was entitled to extensions of time for defaults by EWH due to an alleged failure to deliver any RDF initially and subsequent failure to supply compliant RDF for commissioning works, alleged inadequacies in the quality management system for the RDF, and alleged failures to cooperate and deal with M+W fairly and openly. These alleged breaches and the issue of causation went to the very heart of the dispute and M+W’s liability to EWH, as did the issues of reasonableness and mitigation in respect of the quantum of EWH’s claim.
M+W also denied the majority of the defective works alleged by EWH, either on the basis that the works were compliant (eg on the issue of excessive noise levels) or that the outstanding works were part of normal commissioning rather than defect rectification (eg on the design of the fuel feed system).
M+W sought to pass down its liability in respect of some of the defective works to Outotec, and its initial attempt to pass down LADs to Outotec was abandoned after the Honourable Mrs Justice O’Farrell’s preliminary issues judgment in [2020] EWHC 2537 (TCC). Outotec, on the other hand, counterclaimed for various sums including unpaid milestones and VAT, variations, and LADs and recharges which were said to be wrongfully withheld.
What did the court decide?
The summary below focuses on the findings of law and fact in the main proceedings between EWH and M+W, which took up the bulk of the court’s time during the trial in June/July 2019.
No general right to suspend works
At paras [73]–[83], the judge considered the authorities and academic commentary on contractor’s rights to suspend works, and he had ‘no hesitation’ in finding that where a contract is silent, a party cannot respond to the other’s breach of contract as it sees fit, as the primary remedy for a breach of contract is a claim for damages. In other words, a contractor has no right to suspend works except where expressly provided by contract or by statute.
The judge emphasised at para [83] that even if M+W was entitled to refuse specific deliveries of non-compliant RDF, absent some repudiatory breach by EWH, there was no right to refuse other future deliveries or to suspend commissioning. M+W simply had to continue to perform its obligations, and then pursue claims for extensions of time and/or additional payment if appropriate.
Extension of time claims and causation
The judge rejected the alleged failure to deliver RDF between June and August 2018 at paras [84]–[100], on the basis that M+W imposed extra-contractual conditions on EWH and failed to provide unconditional notifications of M+W’s RDF requirements. At paras [130]–[165], the judge also rejected the alleged lack of accreditation of the testing laboratory for the RDF, alleged lack of a sampling protocol and other alleged inadequacies in the quality management system. The separately alleged failures to cooperate and to deal fairly and openly did not take matters any further, as the judge observed at paras [166]–[173].
The only breach which was made out on the evidence was the alleged non-compliances in the RDF supplied, which exceeded the specified limits for heavy metal and fines on a limited number of days in October and November 2018: see paras [124]–[129]. However, the judge took the view at [254]–[265] that the critical causes of delay in that November 2018 to March 2019 were in fact the rectification works for the defective fuel feed system and M+W’s later decision to suspend commissioning.
The judge was particularly critical of M+W’s witness evidence on the design concerns regarding the fuel feed at paras [178]–[187], and indeed, he observed at [20] that M+W’s primary witness (Mr Roy Meakin) ‘allowed himself to become an advocate in M+W’s cause and repeatedly strained to explain events according to its narrative rather than simply and straightforwardly assisting the court with his recollectio’”, which is a cautionary tale for parties and their witnesses in the future.
While not necessary to the judge’s conclusions in the light of his factual findings, it is noteworthy that the judge accepted at para [176] that a contractor ‘would be entitled to a full extension of time without apportionment in the event that there were two concurrent causes of delay only one of which gave rise to a claim for an extension’. This can be contrasted with the approach taken in recent times: see egJerram Falkus Construction Ltd v Fenice Investments In (No 4) [2011] EWHC 1935 (TCC) at para [52] (cited with approval by the Honourable Mr Justice Fraser in North Midland Building Ltd v Cyden Homes Ltd [2017] EWHC 2414 (TCC) at paras [25]–[29]), where the Honourable Mr Justice Coulson (as he then was) considered that there would be no extension of time entitlement if the completion date would not have been achieved anyway because of concurrent delays caused by the contractor’s own default.
Enforceability of liquidated damages post-termination
Given that the judge rejected all of M+W’s extension of time claims, the question then was whether the LADs remained enforceable post-termination.
The Supreme Court’s decision in Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29 was handed down shortly after the trial, and the judge had little difficulty at paras [309]–[315] following the reasoning in Triple Point and concluding that ‘liquidated damages were payable in the event of termination even though Take Over was not in fact achieved’.
Wilful default
After surveying the case law at paras [326]–[329], the judge concluded at para [330] that ‘wilful default’ is generally ‘wider than a deliberate default and may be established upon proof of recklessness’, such that the contractor must have either ‘intended to commit such breach or was recklessly indifferent as to whether its conduct was in breach of contract or not’. This is helpful guidance to those advising on contracts with similarly worded exceptions to exclusion/limitation clauses.
The judge went on to find at paras [333]–[342] that M+W’s misreporting on the progress of the works was deliberate, and he further held that the suspension of works in 2019 was reckless given that ‘M+W’s true purpose was to be able to show concurrency of delay and thereby achieve some commercial leverage’. It is clear, therefore, that commercially sharp behaviour may well amount to wilful default and, depending on the terms of the contract, carry serious financial repercussions.
However, the judge concluded at para [348] that the termination losses claimed by EWH were not caused by the wilful defaults, such that the liability cap remained applicable and the finding of wilful default had no effect in respect of EWH’s claims.
Financing costs not excluded as loss of revenue
M+W contended that EWH’s claim for financing costs was excluded by clause 45.1(b) of the EPC contract, which excluded any liability for loss of revenue. However, the judge considered at [395] that, whilst there was a correlation between financing costs and revenue, ‘it is self-evident that revenue and costs fall on different sides of any profit and loss account’, and ‘as a matter of ordinary language a claim for additional financing costs is not a claim for lost revenue’.
The judge relied on, inter alia, GB Gas Holdings Ltd v Accenture (UK) Ltd [2009] EWHC 2734 (Comm) where additional borrowing costs were held not to be excluded as a loss of revenue, and he emphasised at para [397] that ‘clear words would be required to exclude a claim for additional financing costs incurred by reason of the delayed completion’. This is helpful guidance for parties seeking to understand the scope of similar exclusion clauses in other contracts, as well as draftsmen of future contracts.
Quantum and Mitigation
Finally, it is interesting to note the judge’s approach to the issue of mitigation, as M+W’s overall case was that the costs of completion and defect rectification costs claimed by EWH were unreasonably high and could have been mitigated. The judge adopted a holistic approach and took into account the competing factors when assessing EWH’s losses at paras [355]–[462].
For instance, in respect of the costs of instructing an alternative contractor, Black & Veatch, to carry out some of the outstanding works, the judge accepted at para [381] that ‘the pool of potential alternative contractors was limited’ and ‘EWH was right to appoint its chosen contractor quickly after termination without launching a protracted procurement process’. While he also noted that the risk of termination was foreseen in May 2018, and the decision to negotiate with only one contractor gave rise to ‘a foreseeable and avoidable risk of leaving itself with little or no bargaining power’, this did not prevent the judge from awarding circa £8.3m (out of a claim for circa £12m).
On the whole, as summarised at paras [6.6]–[6.7], the judge awarded £117,195,361.27 to EWH in LADs for delay and termination losses, plus a further £2,152,021.55 in respect of the major defect claims (with the minor defect claims held over to be dealt with in a separate judgment).
Case details
- Court: King’s Bench Division (Technology and Construction Court)
- Judge: The Honourable Mr Justice Pepperall
- Date of judgment: 20 December 2022
