Take your time and keep your options open: a review of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others  EWHC 3275 (TCC)
It goes without saying that termination of a contract - for whatever reason - is not something that should be undertaken lightly and care must be taken to ensure that every step is implemented correctly. The case of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and Others  EWHC 3275 (TCC) was not solely about the right to terminate, but one of the biggest disputes between Energy Works (Hull) Ltd (“EWH”) and MW High Tech Projects UK Ltd (“M+W”) was about EWH’s termination of the contract between the parties, and it is the focus of this blog.
Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others  EWHC 3275 (TCC)
By way of background, on 20 November 2015, EWH engaged M+W under an EPC Contract (“the Contract”) to design and construct an energy-from-waste plant in Hull for the total price of £153,897,518. The Contract incorporated the IChemE Red Book standard form, as amended by the parties.
The original completion date (Take Over) was 9 April 2018. However, the project fell into delay and disputes arose between the parties.
Under the Contract, M+W was liable to pay liquidated damages at the rate of £84,800 per day in the event that completion was delayed beyond the Take Over date, save for any entitlement to an extension of time. The liquidated damages were capped at 15% of the Contract Price (the “Delay Damages Cap”). It is also important to note that, under the Contract, EWH acquired the right to terminate when the Delay Damages Cap was reached and further delay damages could not be claimed.
The Delay Damages Cap was reached on 7 January 2019 (39 weeks after the intended Take Over date). However, EWH did not serve its notice of termination until 4 March 2019 (47 weeks after the Take Over date). The notice of termination relied on two grounds:
- A right of termination pursuant to the Contract (i.e., because the Delay Damages Cap had been reached); and/or
- A right to terminate the Contract at common law for repudiatory breach.
In relation to the first ground of termination, unless M+W could demonstrate an entitlement to an extension of time of at least 56 days, the Delay Damages Cap had been exceeded and EWH was entitled to terminate the Contract.
The right to terminate under the Contract and M+W’s claim for an extension of time
M+W sought a total extension of time of 27 weeks comprising three periods: (a) 1 June to 14 August 2018; (b) 9 November 2018 to 4 February 2019; and (c) 5 February to 4 March 2019. Whilst a more detailed explanation can be found at paragraph 43 of the Judgment (which summarises M+W’s Defence and Counterclaim), in short, M+W submitted that it was entitled to such extension by reason of EWH’s alleged failure to deliver any “refuse derived fuel” (referred to as “RDF”, the waste that was to be converted to energy by the plant), or alternatively, EWH failed to deliver RDF that complied with the contractual specification.
However, in order to establish an entitlement to an extension of time, M+W was required to prove: (i) that there had been a breach of contract by EWH; (ii) that such breach of contract caused delay; and (iii) that M+W had complied with its contractual notification requirements.
Mr Justice Pepperall gave extensive reasoning (by reference to the factual and contractual matrix) at paragraphs 46 to 290 of the Judgment which, for obvious reasons, is not repeated here. M+W’s claims were rejected by the judge on the basis that M+W could not establish breaches of contract on the part of EWH that caused delay and, although academic, M+W had not in a number of cases given adequate notice. What was perhaps compelling factual evidence in this case was that M+W were playing a two-sided game during the project alleging to both their key subcontractor and the employer that each was causing delay.
As a result, EWH was entitled to terminate for Contractor’s Default pursuant to Contract as, by 4 March 2019, the Delay Damages Cap had been surpassed.
A right to terminate at Common Law
Although the Judge had already found in EWH’s favour, he went on to consider EWH’s right to terminate at common law (i.e., whether M+W had been in repudiatory breach of the Contract and whether EWH had correctly accepted that breach). EWH relied on three matters:
- The scale of delay at termination;
- The overall suspension of commissioning just prior to termination which M+W justified on the grounds of an alleged breach by EWH in relation to the provision of RDF; and
- M+W’s alleged failure to comply with its contractual reporting obligations.
Mr Justice Pepperall acknowledged that as, at termination, the scale of the delay by M+W was almost 11 months, which resulted in the Delay Damages cap being reached, EWH, therefore, had no entitlement for further liquidated damages. He also found that the scale of the delay can count towards repudiatory breach of contract.
Turning to the suspension of works, the Judge rejected M+W’s entitlement to suspend commissioning and held that, even if the delay experienced was not sufficient for repudiatory breach of contract, the refusal to continue commissioning the gasifier was. Having reached that conclusion, the Judge did not go on to consider whether M+W’s failure to comply with its reporting obligations was sufficient for a repudiatory breach of contract. Ultimately, he decided that, if he was wrong that EWH had terminated in accordance with the Contract, EWH validly terminated the Contract at common law.
The Judge later found that M+W’s failure to comply with its reporting obligation by misreporting the progress of the works was deliberate and indicative of wilful default which, although did not cause EWH’s termination losses, can carry serious financial repercussions. The Judge also held that a party cannot respond to a breach by suspending works unless there is an express contractual right to do so.
Take away points
Guidance on the ability to terminate a contract is always welcomed and, although a lengthy judgment, it is worth taking the time to read. The judgment provides useful findings in respect of the IChemE conditions (including whether a financing charges claim is caught by the loss of revenue exclusion clause) and a useful summary of English law surrounding breach of contract and suspension of obligations. It further provides useful guidance on what can be considered to be “wilful default”.
Finally, this case provides a useful illustration of the termination process both under the terms of the contract and through common law.