09 Apr 2018

The Technology and Construction Court has concluded that a contractor cannot claim liquidated damages if the absolute obligation to meet a delivery date is altered to be an obligation to use the "fullest endeavours". The court also considered whether estoppel principles would apply to interim payments under a contract.

The key lessons that emerge from this case include that:

  • a party's approval and payment of an invoice does not necessarily mean that the party will be prevented from disputing the payment at a later date
  • adding "without prejudice" to an invoice approval or payment will show that the payment or approval was not intended to extinguish either party's rights to dispute the approval or payment at a later date
  • if, from the beginning, the parties agree that payments or approvals should not extinguish the parties' rights to dispute the payments or approvals at a later date, it assists if this is reflected in the relevant contract, alongside a no waiver clause. However, even without express agreement, it is likely such a term will be implied
  • if relaxing certain performance obligations using a supplemental agreement, consider entering into a settlement agreement or waiver of existing rights in relation to the previous agreement.  

Background

Aker Offshore Partner Limited (Aker) were appointed by Talisman to carry out services on two of Talisman's process modules at the Clyde Platform for the Flyndre-Cawdor oilfield.

On 11 April 2014, Aker engaged a specialist sub-contractor HSM Offshore BV (HSM) to carry out these services under a contract incorporating the LOGIC Sub-Contract conditions (the Contract). The Contract envisaged a Ready for Sail Away date of 10 May 2015 (the Target Ready for Sail Away Date). If HSM failed to achieve that date, they would be liable to pay liquidated damages of €150,000 per day to a maximum damages liability of €1,500,000, unless Aker had caused the delay.  

When it became evident that the Target Ready for Sail Away Date would not be met, a separate Memorandum of Understanding was signed by the parties on 18 March 2015, making a number of changes to the Contract.

Following Sail Away on 10 August 2015 (i.e. three months after the Target Ready for Sail Away date), HSM issued proceedings against Aker, seeking an additional c. €7.5million in its final account. Aker disputed those claims and counterclaimed both for liquidated damages and for repayment of some sums already paid, as part of the final account.

Final Account dispute

The Final Account dispute can be summarised as:

  • HSM sought to recover an additional c. €7.5million in its final account for materials, labour positions, management positions and third party costs. It ran alternative arguments: (a) due to the way that the Contract had been managed, Aker was estopped from denying these claims; and (b) the express terms of the Memorandum of Understanding allowed these claims.
  • Aker sought to claw back repayment of sums it had paid HSM in interim applications. HSM's defence was that, because Aker had paid the interim applications, Aker was estopped from now re-opening the claims. 

The Hon Mr Justice Coulson disagreed with HSM that the interim applications were final, for the following reasons:

1. Contract Express Terms

The Judge stated that the Contract "could not be clearer" in allowing Aker to dispute any payment made under it and that the Memorandum Of Understanding had not altered its meaning. For example, the Contract expressly stated that payment of an individual invoice did not "affect the rights of the parties". Interestingly, the Judge said that even if this clause had not been included, then something like it would inevitably be implied in any contract of this sort. Any deviation from this business norm would have to be expressly recorded in clear terms. 

The Contract also required that any waiver of these rights had to be in writing. No such waiver existed. 

2. Without prejudice

The payments were expressly made "without prejudice" and it was clear that everyone involved in the project at the time understood this. These words made it clear that the payments were made without the loss of either party's rights.

3. "One way street"

The Judge noted that, for HSM, the invoicing arrangement seemed to be a "one way street". HSM had alleged that Aker were bound by the payments that they made, and yet they acted as though they were not bound by their own the payment claims. 

For the Judge, this unilateral code of conduct was a contradiction, making estoppel "so inherently unlikely as to be unarguable". 

4. General circumstances for approvals

The Judge made a general point that the process of monthly payments in this case was merely a highly pressured version of similar processes used around the world for construction projects. In those projects, quantity surveyors agree to any payments on a monthly basis, knowing that payments would eventually be reviewed at the final account process. For the Judge, there was nothing which took "this case out of the ordinary" and it would have been "artificial to conclude that … Aker was bound by such payments". 

Specific heads of claim

In relation to HSM's claims for materials, labour positions, management positions and third party costs as express claims under the Memorandum of Agreement, the Judge's decisions were very fact specific. However the general theme from the Judge's commentary was that the presentation of HSM's claim was unhelpful for HSM's case and in certain cases meant it was "impossible to correlate it with either the Memorandum of Understanding or the [Contract]", and that HSM's pleadings had not undertaken the required contractual analysis. The absence of independent quantity surveyors on both sides also led to "judicial exasperation". 

Liquidated Damages Counterclaim

The Contract had stated that if HSM failed to achieve Ready for Sail Away by the Target Ready for Salile Away Date, liquidated damages would be applied. 

However, the Memorandum Of Understanding:

  • included that, "… in return for HSM utilizing their fullest endeavours to complete Mechanical Completion of the [Modules] on or before 1 July 2015, HSM [would receive various concessions]"
  • did not mention either the Target Ready for Sail Away Date, any new target Ready for Sail Away date or liquidated damages. 

Nonetheless, Aker claimed liquidated damages for HSM failing to meet the various dates under the Contract. However, the Judge held that the obligation on HSM in the Memorandum of Understanding (to use "fullest endeavours") was sufficiently different from the original absolute obligation under the Contract (to complete by a specific date) that the liquidated damages provisions from the Contract fell away. The Memorandum of Understanding did not contain a liquidated damages regime and therefore Aker could not apply liquidated damages.

The Judge confirmed that Aker could still make a claim against HSM for any losses it suffered if HSM breached its obligations in the Memorandum of Understanding. However, that inevitably would be a more difficult claim for Aker to prove, as Aker would have to demonstrate both that HSM had failed to use "fullest endeavours" and evidence its losses. 

Conclusion

This case provides some useful guidance on liquidated damages and interim payment provisions and gives comfort to payers under a contract that their approval and payment of an invoice will not inevitably mean that they are prevented from claiming back any disputed amount.