Should contractors assign their sub-contracts?

Construction and engineering contracts often include a requirement on the contractor to assign its sub-contracts to the employer upon termination of the building contract for contractor default.

But once the contractor has assigned its sub-contracts to the employer, what rights does the contractor have against those sub-contractors who have put the contractor in default , in respect of the employer’s cost of completing the works and its other losses that it seeks to recover from the contractor?

The Technology and Construction Court (TCC) has recently considered this issue, in the case of Energy Works (Hull) Ltd (EWH) v MW High Tech Projects UK Ltd (MW)

Background

In 2015 EWH appointed MW as its main contractor for the design, procurement, construction, commissioning and testing of a waste to energy plant in the north of England. In turn, MW subcontracted certain elements of the project to Outotec (USA) Inc (Outotec)

The project ran into difficulty and suffered delays, and EWH purported to terminate MW’s contract for a contractor default, on the ground that the liquidated and ascertained damages payable for delay to completion exceeded the contractual cap for which MW could be liable.

The contract stated that, on termination in these circumstances, MW was required to assign its subcontract with Outotec to EWH, which it duly did, even though MW maintained that EWH had no right to terminate for breach because MW was entitled to additional time for completion.

MW sought to pass on to Outotec such liability as MW had to EWH. Outotec objected on the basis that its sub-contract with MW had been assigned to EWH. In response, MW argued that the assignment was an assignment of future rights only and did not extend to past or accrued rights, or alternatively if the assignment did include past and accrued rights, MW could claim a contribution from Outotec under the Civil Liability (Contribution) Act 1978 (Contribution Act).The TCC was asked to determine these 2 preliminary issues.

Judgment

In considering whether both accrued and future rights had been assigned, the TCC held that, in following previous case law, the expression “assign the subcontract” means the assignment of accrued and future rights. Whilst it would be possible to limit an assignment to future rights only, clear words would be required in order to do so.

The TCC also confirmed that the assignment of the sub-contract did not transfer MW’s obligations under the sub-contract and did not take effect as a novation, which would have required clear words to express such intention and would have required the consent of all of EWH, MW and Outotec.

Having divested itself of any direct rights to claim against Outotec, MW sought a contribution from Outotec in respect of its liability to EWH under the Contribution Act. Claims for contribution may be made under the Contribution Act where two parties are liable for the “same damage” suffered by a third party. The third party is able to claim in full against either of the wrongdoers, who will then be entitled to “contribution” from the other on a just and equitable basis, having regard to the extent of each party’s responsibility for the damage. Contribution claims are often brought in construction disputes between designers and contractors in relation to allegations of defective work caused both by design and workmanship issues.

Outotec resisted MW’s claim for contribution on the basis that any damage caused by breaches of its sub-contract were suffered at sub-contract level and were distinct from the damage suffered by EWH under the main contract. MW claimed that the defects in Outotec’s work under the sub-contract were the cause of delay under the main contract for which EWH had terminated and were accordingly for the “same damage” as that suffered under the main contract.

The TCC came to different conclusions for different heads of claim:

• in relation to any liability that MW has for delay damages claimed by EWH, the TCC held that, where periods of delay overlapped under the main contract and under the sub-contract, the overlapping periods of delay would be for the “same damage”, for which MW could seek a contribution from Outotec under the Contribution Act. However, to the extent there were distinct periods of delay under each of the main contract and the sub-contract, MW would not be entitled to seek such a contribution as MW’s liability would concern “the same type of harm but not the same harm”
• in relation to termination losses claimed by EWH (i.e. additional costs of completing the works), the TCC held these not to be the “same damage” under the main contract and as under the sub-contract. Outotec had no obligation to satisfy MW’s time obligations under the main contract and therefore, there was no route by which EWH, as assignee of the sub-contract, could claim the additional costs of completion from Outotec
• in relation to defects claimed by EWH, the TCC held these to represent the “same damage” as the parallel claim EWH had as assignee under the sub-contract. Although the claims arose at different contractual tiers, they related to the same damage or harm i.e. a defective plant

Comment

This case presents a significant exposure to main contractors who are required to assign their sub-contracts to the employer upon termination of the building contract for contractor default.

The wording that the TCC considered is hard to distinguish from the wording in the commonly used JCT and NEC forms so the TCC’s decision is likely to have a wide impact. Main contractors may well seek to negotiate amendments to their building contracts to prevent assignment or to limit the requirement for the assignment of future rights only or to adopt the FIDIC position of allowing the employer to instruct only such as assignments as are reasonable.

The TCC’s findings as to contribution are complex and will require further detailed analysis, as the TCC was only asked to consider or determine three narrow questions as to whether the categories of damage identified are the same damage for the purpose of the Contribution Act. The TCC was not asked to form any views as to the likely success of those claims at trial.

For more specialist legal advice please get in touch with Lucilla Waugh on 0191 211 7984 or email [email protected]