EPC contracts commonly provide that, on termination of the contract, the contractor will be required to assign subcontracts to the employer. For an employer, the ability to take assignment of subcontracts is important. Key subcontractors must be kept on board to ensure the project’s continuance. This can include, for example, module or inverter suppliers (in the case of solar projects), wind turbine suppliers (in the case of wind projects) and gas turbine or engine suppliers (for conventional power projects). For contractors, the ability to assign subcontracts can be necessary to avoid the risk of breakage costs payable to a subcontractor. However, a recent case before the Technology and Construction Court has demonstrated the need for care in how these clauses are drafted and operated.
The case of Energy Works (Hull) Limited v MW High Tech Projects UK Limited [2020 EWHC 2537 (TCC)] concerned an EPC contract under the IChemE Red Book for a fluidised bed gasification power plant. The employer terminated the contract, claiming that the contractor was in culpable delay as a result of which the cap on delay damages was exceeded. This was a default termination event under the contract. The contractor, however, asserted that it was entitled to an extension of time for the delay and therefore the employer had terminated for convenience.
Following the termination, the contractor assigned to the employer its subcontract for the supply and installation of the gasifier.
Although the contractor disputed the employer’s right to terminate the contract as a default termination, it nevertheless wanted to pass on to the subcontractor any liability it had to the employer for claims against it arising out of the termination and alleged breaches of the EPC contract. The difficult it had, however, was that, having assigned the subcontract to the employer, it lost its rights under the subcontract to bring claims against the subcontractor.
The contractor tried to get round this problem by arguing that the effect of the assignment was simply to transfer to the employer the right to the benefit of future performance of the subcontract and that it did not transfer any accrued rights which it had to sue the subcontractor for existing breaches of contract. However, the wording of the contract did not support that argument as it simply stated that the contractor would, on termination, assign the contract. The assignment document itself used the same wording. Thus, the effect of the assignment was to transfer both future rights and accrued rights.
The contractor, having lost on its main argument, fell back on a second argument that it could claim against the subcontractor for a contribution. The basis for this was that a 1978 Act, the Civil Liability Contribution Act. This Act entitles a party (Party A) that has liability to another party (Party B) to make a third person (Party C) contribute to that liability where it is for the “same damage”. In this case, the Court decided that some of the liability that the contractor had under the EPC contract was the “same damage” as the subcontractor had under the subcontract, so the contractor was able to pass on some of its liability. This applied to claims for defects and for delay damages (to the extent that periods of delay under the EPC contract and the subcontract overlapped). However, additional costs of completion and other amounts payable as termination losses were not the same damage because the subcontractor had no comparable liability for these under the subcontract.
The case illustrates the importance of careful drafting to ensure that a provision for assignment of a contract on termination applies so that only the benefit of future rights is assigned, not the benefit of accrued rights.
FIDIC contracts provide better wording. Under clause 15.2.3, the contractor must comply with any reasonable instructions given by the employer for the assignment of a subcontract. This would enable the contractor to argue that the assignment should take effect as an assignment of future rights only.
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