High Court considers nature and effect of assignment of a subcontract following termination of main contract in construction project

Introduction

In the case of Energy Works (Hull) Limited v MW High Tech Projects UK Limited & Others [2020] EWHC 2537 (TCC), the Technology and Construction Court was asked to rule on the nature of an assignment of a subcontract following the termination of the main contract in a major development project. 

The contracts and claims

The claimant, Energy Works (Hull) Limited (“EWHL”) entered into a contract dated 20 November 2015 with the defendant, MW High Tech Projects UK Limited (“MW”) as its main contractor under an EPC contract for the design, procurement, commissioning and testing of a fluidised bed gasification power plant to process refuse derived fuel produced by commercial, industrial and municipal solid waste (the “Main Contract”). MW entered into a sub-contract on 20 November 2015 under which it engaged Outotec (USA) Inc (“Outotec”) to supply key elements of the gasification plant (the “Sub-Contract”).

EWHL purported to terminate the Main Contract on 4 March 2019 for contractor default alleging delay by MW in completing the works including outstanding defects with the result that damages for delay exceeded the contractual cap. MW disputed EWHL’s entitlement to terminate on the basis of delay and contended that it was entitled to an extension of time to complete the works. MW asserted that the termination by EWHL took effect as a termination for convenience and not for default. 

The Main Contract contained a provision which, upon termination for default, permitted EWHL to require MW to “assign any subcontract” to EWHL. The Subcontract contained a provision under which MW was entitled to assign the Subcontract to EWHL if EWHL so required. MW did not agree upon the terms of a deed of assignment and on 20 June 2019, MW gave notice to EWHL to assign the Sub-Contract with Outotec to EWHL. 

In July 2019, EWHL commenced High Court proceedings against MW claiming damages estimated at £133m for: (i) the costs of rectifying the defects; (ii) delay damages (under the Main Contract or as general damages); and (iii) additional costs of completing the works and other costs following the termination (under the Main Contract or as damages for repudiatory breach). MW disputed EWHL’s claims and put forward a counterclaim for £46.7m based on provisions for payment following a termination for convenience.

MW joined Outotec to the proceedings seeking to pass on to Outotec any liability MW might have in respect of EWHL’s claims. MW claimed: (i) liquidated damages under the Sub-Contract for delays in delivery of the plant; and (ii) an indemnity for MW’s liability to EWHL for defects in the plant for which Outotec was responsible including remedial costs and consequential delay and termination losses arising under or as a result of breach of the Main Contract.

MW’s primary case against Outotec was that the assignment only assigned the future right to performance and did not assign accrued rights under the Sub-Contract. On this basis, MW was entitled to claim against Outotec for direct accrued contractual rights which existed before the assignment. Alternatively, if as Outotec and EWHL argued, the assignment transferred all past and future rights under the Sub-Contract to EHWL, MW contended that the assignment also transferred all past and future liabilities and obligations under the Sub-Contract and took effect as a novation.

MW’s secondary position was that Outotec and MW are liable to EWHL in respect of the same damage such that MW could claim a contribution from Outotec under the Civil Liability (Contribution) Act 1978.  

Outotec disputed the additional claim brought by MW arguing that MW had no claim against it in relation to the quality of its work because the assignment was effective to transfer all benefits, including accrued rights and the right to sue, to EWHL. It further contended that MW was not entitled to any contribution under the 1978 Act as MW and Outotec were not liable to EWHL for the same damage for the purpose of the 1978 Act.

The preliminary issues to be determined

The court was asked to determine the following preliminary issues:

1. whether in respect of the assignment MW retained the benefit of rights under the Sub-Contract, or if not, whether it takes effect as an assignment of both the benefit and burden of the burden of the Sub-Contract (or a novation);
2. whether MW was entitled to pursue its claims for contribution against Outotec as direct claims by virtue of accrued rights under the Sub-Contract, or based upon its liability for the “same damage” under the 1978 Act. 

Judgment

In its judgment handed down in September 2020, the court held that: (i) there had been an effective assignment of MW’s accrued and future rights under the Sub-Contract to EWHL and that MW therefore did not retain the benefit of rights under the Subcontract; and (ii) the assignment did not take effect as a novation.   

In Linden Gardens Trust Limited v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, Lord Browne-Wilkinson stated that in the absence of any contrary intention, reference to an assignment was understood to mean assignment of the benefit of a contract, i.e., accrued and future rights. In the present case, the court found that a natural and ordinary meaning of the words in the Main Contract and Sub-Contract to “assign the Sub-Contract” was an agreement to assign all MW’s benefits under the Sub-Contract, i.e. both future rights and accrued rights. The Main Contract and Sub-Contract did not contain any provisions limiting the rights to be assigned. 

On the issue of novation, the court concluded the reference to assignment in the Contract and Sub-Contract was a very strong indication that the parties intended assignment and not novation and there was no indication of an intention to extinguish the Sub-contract and replace it with a new subcontract.     

Having found that MW had assigned its accrued and future rights under the Sub-Contract to EWHL, MW had no right to seek a direct remedy from Outotec under the Sub-Contract. It followed that MW was not entitled to pursue its additional claim against Outotec under the Sub-Contract but would be limited in doing so under the 1978 Act. The court found that part of MW’s liability for delay and defects under the Main Contract was the same damage as any Outotec liability under the Sub-Contract. However, MW’s liability to EWHL in respect of losses arising from termination of the Contract was not the same damage as any Outotec liability under the Sub-Contract.  

Clauses concerning the assignment of subcontracts are important provisions for the parties to consider in the event of the termination of the main contract in construction projects.  Whilst each case will depend upon the precise wording of the subcontract assignment provisions, clauses allowing a party to require the “assignment of any subcontract” may be commonly found in construction contracts and the judgment in this case provides helpful guidance for parties on the interpretation of this wording.