Interserve Industrial Services Ltd v ZRE Katowice SA

Introduction

The background

It appears that Alstom and the defendant entered into a main contract; however a copy of such main contract has not been provided in the application. Thereafter the defendant and the claimant entered into two subcontracts, the scaffolding subcontract and the insulation subcontract. There is no material distinction between the terms of those two subcontracts. A copy of the insulation subcontract is at pages 62 - 161 of the application bundle; I shall refer to it as "the subcontract".

The terms of the subcontract

The Dispute

In his witness statement in answer to the application, Mr Slinger (the claimant's solicitor) did not take issue with that summary of the underlying position which led to the making of the December agreement. However he addressed the nature of the dispute at paragraphs 24 to 26 of his witness statement as follows (page 170):

“24.

The present dispute is solely under the December agreement, relating to non-payment of sums that have fallen due under the December agreement. There is no dispute before the court arising under the final account provisions. The December agreement is final and conclusive in relation to interim payments. It does not affect the final account provisions in any way, as Mr Helps acknowledges in paragraph 19 of his statement.

25.

In any event the defendant does not explain how the dispute under the December agreement should, in such circumstances where matters not related to the December agreement were also in issue, also fall to be determined under clause 67 of the subcontracts.

26.

If the defendant's analysis was correct, then any dispute under the December agreement would always also involve a dispute under the subcontracts, and this would prevent effect being given to clause 8. Again, the court should be slow to interpret a clause to render it wholly ineffective, and no grounds for doing so have been advanced by the defendant."

The December agreement

The body of the December agreement provided as follows:

Summary of the defendant's case

See also paragraph 11 of Mr Helps’ witness statement (page 55) where he asserts that:

“The December agreement operates as a variation of the interim payment provisions of clause 60, in accordance with clause 1.6."

Summary of the claimant's case

In paragraph 9 of the particulars of claim, the claimant asserts that:

“The (December) agreement was a stand-alone document outside of both the access subcontract and the insulation subcontract ..."

The relevant authorities

It is therefore convenient to turn to consider the decision of Jackson J in McConnell, and the three cases to which he referred in his judgement. In paragraph 42 of his judgement Jackson J held that "... in each case the relationship between the first agreement on the second agreement was crucial." That is, of course, the starting point: it states the exercise that is to be carried out, namely an analysis of the two agreements in question, in order to identify the relevant features of the relationship between the two agreements. With that in mind, it is instructive to consider the three cases to which Jackson J referred in his judgement.

The first case was Shepherd. In Shepherd there was a dispute about the valuation of variations. The compromise agreement provided as follows:

“We, Mecright Ltd, accept the sum of £ 366,000 …. in full and final settlement of all our claims under the above contract without prejudice to our outstanding obligations."

Note the actual language used: “ … in full and final settlement of all our claims under the above contract …” (my underlining). Given that language, it is perhaps not surprising that HHJ Humphrey LLoyd QC held at paragraph 12 of his judgement (cited by Jackson J at paragraph 34 in McConnell) as follows:

“… the settlement agreement is an agreement which, but for the plea of economic duress, would have the effect of extinguishing all the disputes that then existed ... so that there could be no dispute capable of being referred to adjudication thereafter in relation to valuation."

HHJ Humphrey LLoyd QC continued at paragraph 14 of his judgement:

“… a dispute about a settlement agreement of this kind could not be a dispute under the subcontract, since the effect of a settlement agreement is one which replaces the original agreement to the extent to which it applies. Here the agreement has the effect of replacing Shepherd's obligations to value and to pay Mecright under the subcontract the value of the work. The only subsisting obligation to pay that apparently was not extinguished was the obligation to release retention as and when the time arose. So there could be no dispute under the subcontract."

I respectfully concur with HHJ Humphrey LLoyd QC’s analysis of the settlement agreement in Shepherd. Once the settlement agreement was made in that case, there was nothing left, in the sense that no dispute remained alive or actionable under the prior subcontract. The settlement agreement in that case operated much as a Tomlin Order operates in the context of litigation.

The second case is Quarmby Construction Co Ltd v Larraby Land Ltd, a decision of HHJ Grenfell in 2003. Here the employer had a claim for liquidated and ascertained damages (“LADs”). The contractor offered the following terms:

“ … As you are well aware there are a number of live issues between us, not least your refusal to honour valuation number 12. However, for purely commercial reasons only, we are prepared to pay you the sum of £43,196.85 in full and final settlement of your claims relating to liquidated and ascertained damages under the contract. The sum is calculated as ...

This payment will not constitute an admission that these sums are due and owing to Larraby …, nor thatQuarmby … waives its right to challenge certificates issued by the architect."

That offer was accepted by the employer (and I shall refer to the ensuing agreement as "the July settlement agreement"). However the contractor subsequently made an application for an extension of time (“EOT”) which the architect refused. While the immediate issue in that case was whether the contractor could put the issue of his entitlement to an EOT to adjudication, the underlying issue was whether the July settlement agreement had compromised or resolved all outstanding issues between the parties in the case. HHJ Grenfell held that it had not, and thus the contractor’s claim for an EOT could go to adjudication.

I respectfully concur with HHJ Grenfell’s analysis of the July settlement agreement in that case, and would thus construe it to be of a different type of agreement to the settlement agreement in Shepherd.

The third case was Westminster Building Co Ltd v Beckingham [2004] BLR 163, a decision of HHJ Thornton QC. Here are the employer and the contractor signed a capping agreement which included the following provision:

“Total fees shall not exceed £300,000 including VAT before deductions."

I adopt Jackson J’s summary of the ensuing events as follows. “There was subsequently a dispute about what payments were due to the contractor. This dispute was referred to adjudication. The adjudicator held that the capping agreement was unsupported by consideration, and therefore ineffective. The contractor brought proceedings to enforce the adjudicator's decision. The employer, relying on Judge LLoyd's decision in Shepherd , argued that the adjudicator lacked jurisdiction because the capping agreement amounted to a compromise of underlying disputes." HHJ Thornton QC rejected the employer's defence, and gave summary judgement to enforce the adjudicator's decision. He held, distinguishing the facts in this case from those in Shepherd, as follows:

“… the (capping) agreement was not a settlement agreement settling disputes or a stand alone agreement. It was clearly intended to be a variation agreement, varying the terms of the underlying contract. It is to be read with and is part of that underlying contract. Furthermore it does not settle all disputes, it merely provides a new contract sum or cap, albeit that that cap is subject to unspecified deductions. Thus, a dispute as to whether it is enforceable is one arising under the contract, since its terms form part of and are to be read with the underlying contract."

I respectfully concur with HHJ Thornton QC’s analysis of the capping agreement in that case. On its facts, the capping agreement plainly did not settle all, or any, disputes that might arise under the prior building contract.

Then, in McConnell, there was a main contract to construct a gas pipeline in Lancashire. That main contract contained dispute resolution provisions, including reference to adjudication, and then to arbitration. A dispute developed, which was resolved by the parties entering into a settlement agreement. The settlement agreement adjusted the contract price, and then provided at its clauses 2.2 and 2.3 as follows:

“2.2

This adjustment to the total contract price shall be in full and final settlement of the following:

(i)

the contractor's entitlement to adjustment of the total contract price in respect of compensation events (as defined by clause 60 of the contract) ....occurring prior to the date of this supplemental agreement ...

(ii)

the contractor's entitlement to reimbursement for all additional costs ... including all damages for prolongation, delay and disruption, whether such entitlement arises under the contract in tort or otherwise ...

(iii)

the contractor's entitlement to adjustment of the total contract price in respect of any compensation event (as defined by clause 60 of the contract) arising from any act, omission, default ... or other matter occurring after the date of this supplemental agreement ...

2.3

In consideration of those matters taken into account at 2.2 (i) and (ii) above, the date for completion of the works shall be: mechanical completion :28th February 2003; completion of the works: 19th September 2003."

There was no separate dispute resolution provision in the settlement agreement.

The ensuing history was set out by Jackson J as follows:

“11.

After the supplemental agreement had been executed,McConnell duly proceeded with the remainder of the works. Following completion of the works, it was necessary to establish what further payments were due to McConnell in addition to the sum of £30.5 million specified in the supplemental agreement. This involved (a) examining the work which was done and the events which occurred after 12 December 2002, (b) identifying which matters were included in the revised contract price of £30.5 million, and (c) evaluating what payments were due to McConnell in respect of matters not included within the revised contract price.

12.

NGG paid the sums which they conceded were due. By letter dated … McConnell claimed that it was entitled to a further payment of £1.4 million. This claim was based upon a re-measure of provisional sum items and provisional quantities as well as compensation events said to have occurred after 12 December 2002.

13.

NGG rejected McConnell’s claim. By a letter dated ...NGG asserted that most of the matters for which McConnell was claiming additional payment had been settled by the supplemental agreement.

14.

By a notice of adjudication … McConnell referred its claim against NGG to adjudication. NGG did not accept that an adjudicator would have jurisdiction. In those circumstances, unsurprisingly the parties did not agree upon the identity of the adjudicator. Accordingly, McConnell applied to the President of the ICE to appoint an adjudicator … the President appointed Mr Elven to act as adjudicator.

15.

NGG maintained that Mr Elven and had no jurisdiction to adjudicate upon McConnell’s claim, because the issues between the parties concerned the meaning and effect of the supplemental agreement. The supplemental agreement did not contain an adjudication clause. …”

When the contractors sought to enforce the decision of the adjudicator, the employer maintained before Jackson J that the adjudicator’s decision had been made without jurisdiction. Having regard to the three authorities cited above, Jackson J held at paragraph 44 that:

“ … the supplemental agreement operated as a variation of the original contract, and was subject to the same adjudication provisions."

He then explained that he had reached that conclusion for five reasons which he then set out.

As his fifth reason Jackson J stated that:

“The reasoning of Mr Justice Ramsey in L Brown and Sons Ltd v Crosbie [2005] EWHC 3503 (TCC) strongly supports the above analysis (in particular paragraph 51 of Mr Justice Ramsey's judgement)."

In L Brown Ramsey J held as follows:

“50.

Unlike Shepherd, this was not a case of a full and final settlement agreement. Whilst I accept that the terms relied on did not, in express language, refer to particular clauses in the contract as being varied, I consider that the introduction of the bonus system and the waiver of liquidated damages did vary the contract ... the side agreements were changing or varying the entitlement under the contract.

51.

In addition, I bear in mind that it is quite common in the construction industry for parties to enter into side or supplemental agreements which add to or vary the terms when matters arise during the course of the contract. Those agreements frequently do not have their own provisions for dispute resolution, including adjudication. If the officious bystander had asked such parties what dispute resolution methods applied, I consider that they would invariably assume that those in the underlying contract would apply. The idea that different or no provisions applied to such additional changed obligations would, in my judgement, be an impossible situation and make adjudication unworkable for such projects.

52.

In this case I consider that the side agreements fell into this category of agreement. It was necessary to have regard to the underlying contract, in particular to see what liquidated damages had been waived. As a result, because in my judgement the side agreements were variations to the contract, I consider that the disputes under those side agreements would be properly categorised as disputes under the contract."

As with Jackson J in McConnell, I note in particular paragraph 51 of Ramsey J’s judgement in L Brown, with its specific reference to the following matters:

the practice in the construction industry of parties entering into side or supplemental agreements which add to or vary the terms of a prior, often but not necessarily a "main", contract;

the fact that such side or supplemental agreements " frequently do not have their own provisions for dispute resolution”;

thus coming to the conclusion that “ … the idea that different or no (dispute resolution) provisions applied to such additional changed obligations would … be an impossible situation …”

It is also appropriate to consider what is meant by the term “stand alone agreement” (see paragraph 42 of Jackson J’s judgement in McConnell; and paragraph 25 of HHJ Thornton QC’s judgement in Westminster v Beckingham). In my judgement the term “stand alone agreement” is there being referred to an agreement that is (a) entirely independent of any prior agreement between the same parties; (b) contains all necessary terms to found a cause of action based upon a breach of its terms; and (c) is thus capable of operating on its own without recourse to, or necessary reference to, a prior agreement between the same parties.

The relationship between the subcontract and the December agreement

It is to be noted that:

Following the making of the December agreement, the parties still had to perform their respective obligations under the subcontract. The work under the subcontract had not been completed. As a result, after the parties made the December agreement, the parties remained in an ongoing contractual relationship in connection with the subcontract works.

The making of the December agreement was not in full and final settlement of all claims or disputes which had arisen, or which might arise, under the subcontract.

Instead, the December agreement resolved the dispute that had arisen in connection with the unpaid invoices in the outstanding sum of £820,773.02.

I therefore conclude that the circumstances of the present case, in particular the subject matter and terms of the December agreement:

are very different from those which obtained in Shepherd, where the settlement agreement was made in full and final satisfaction of all claims under the relevant main contract; and

have some similarity with the circumstances which obtained in both Quarmby and McConnell, where the party's obligations under the respective "main" contracts remained to be performed, irrespective of the terms of the respective settlement agreements.

As regards the issue whether the December agreement was a stand alone agreement, or varied the subcontract, Mrs Pigott made a number of submissions designed to show that, on its proper construction, the December agreement acted so as to vary the subcontract. See by way of example paragraphs 25 (2) and (3) of her written submissions.

In her oral submissions, Miss Hitching made a general submission that, on its proper construction, the December agreement did not vary the subcontract at all (DG/130-131). Miss Hitching developed that general submission by making more details submissions about the various causes of the December agreement (DG/134-136):

As regards clause 2, and Mrs Pigott's submission that clause 2 of the December agreement varied clause 60.9 of the subcontract: Miss Hitching submitted that clause to did not vary clause 60.9 of the subcontract; it referred to it, and stated that it did not apply "in respect of the outstanding sum"; but that did not amount to a variation of clause 60.9 of the subcontract. Clause 60.9 applied to payments that were due under interim payment certificates, which were different in kind to payments due under the December agreement

As regards clause 3: Miss Hitching submitted that clause 3 did not vary any existing obligation of the claimant under the subcontract.

As regards clause 4: Miss Hitching submitted that it did not vary the subcontract; instead achievement of the milestones defined under the December agreement were the conditions precedent for the defendant to pay the sums stated under the December agreement. Clause 4 did not vary in the existing timetable set out in the subcontract for the claimant to carry out the subcontract works.

As regards clause 5: Miss Hitching repeated her submission that achievement of the milestones defined under the December agreement were conditions precedent (or "triggers") for the defendant to pay the sums stated under the December agreement. That was quite distinct from the contractual machinery that would come into operation under the subcontract so as to enable the claimant to be paid for achieving the work done.

As regards clause 6, and Mrs Pigott's submission that clause 6 of the December agreement varied clause 69.1 of the subcontract: Miss Hitching submitted that clause 69 of the subcontract referred to the defendant failing to make payment in accordance with the provisions of clause 60 of the subcontract, which contained provisions for making interim applications for payment; whereas clause 6 of the December agreement contained a separate provision, dealing with the subject matter of the December agreement itself.

As regards clause 7, and Mrs Pigott's submission that the effect of clause 7 was that the December agreement ‘was intrinsically connected with the subject matter of the subcontract’: Miss Hitching submitted that, to the contrary, on its proper construction, clause 7 provided that it was not “ inter-twined" with the subcontract.

As regards clause 10, and Mrs Pigott's submission that its terms amounted to a clear statement that the December agreement was intended to operate as a limited variation of the subcontract: Miss Hitching submitted that it was a standard clause; and that it was necessary to look at the subject matter of the December agreement, and decide whether it did in fact amend the terms of the subcontract. If clauses 1 to 9 the December agreement did not in fact amend the subcontract, then the terms of clause 10 should not lead to a conclusion that the December agreement did, in fact, amend the subcontract.

I have come to the conclusion that there is force in many of Miss Hitching’s submissions in this regard. I have thus come to the provisional conclusion (this being an interim application) that, on its proper construction, in many respects the December agreement either does not in fact vary the terms of the subcontract, or – if it does – then it does not do so in any material respect. However, the determination of that issue does not provide an answer to the key issue in the application, which is whether or not the December agreement incorporated the dispute resolution provisions of the subcontract.

Put as a matter of contractual analysis, in my judgement the key issue in the application is whether, on its proper construction, there was an implied term of the December agreement that disputes under the December agreement would be subject to the same dispute resolution procedure as obtained in the subcontract. Adopting the analysis or rationale of Ramsay J in L Brown, I have come to the conclusion that there was such an implied term of the December agreement. In those circumstances it is necessary to go on to consider the separate provisions of clause 67 of the subcontract, which contain the dispute resolution procedure, and clause 8 of the December agreement.

The distinction between a dispute resolution clause, and an exclusive jurisdiction clause.

Steyn J held as follows:

“Clause 13 was a self-contained agreement providing for the resolution of disputes by arbitration; clause 14 specified the lex arbitri, the curial law or the law governing the arbitration which would apply to this particular arbitration ...

There was no inconsistency between clauses 13 and 14, and both clauses were valid and binding …"

In her oral submissions (DG/152) Miss Hitching submitted that it was necessary to consider (a) whether the two agreements, namely the subcontract and the December agreement, should be read as two separate agreements, or one single agreement; and (b) if they were to be read as one single agreement, whether clause 67 at the subcontract could be reconciled with clause 8 of the December agreement.

I do not accept the first of Miss Hitching’s submissions in this regard. In my judgement it is not a question of whether the two agreements should be read as either two separate agreements or one single agreement. Instead, as stated above, the key issue is whether there was an implied term of the December agreement that it would be subject to the same dispute resolution procedure as obtained in the subcontract. I have concluded that there was such an implied term, and in that sense it is necessary to look at the December agreement as containing such an implied term. I do however accept the second of Miss Hitching’s submissions in this regard, namely that it is necessary to consider how the two clauses are to be reconciled.

Applying the analysis or rationale of Steyn J in Paul Smith, I read clause 67 of the subcontract as providing a self-contained regime providing for the resolution of disputes; and clause 8 of the December agreement as providing for the lex arbitri, or curial law, governing any arbitration brought under clause 67. As such, I find there is no inconsistency between the two clauses, and both are valid and binding. Such a conclusion is consistent with the decision of Gloster J in Axa Re v Ace Global Markets Ltd [2006] EWHC 216 (Comm): see paragraph 19 of her judgement in that case.

In those circumstances, the decisions of the Court of Appeal in Deutsche Bank AG vSebastian Holdings Inc (No 2) [2001] 2 All ER (Comm) 245 and of Blair J in PT Thiess Contractors Indonesia v PT Kaltim Prima Coal and Ors [2011]EWHC 1482 (Comm) are not directly relevant to the present case. Deutsche was a case which involved two separate contracts; it concerned complex multi-national banking transactions. The Court of Appeal held at paragraph 42 that:

“ … where there are multiple related agreements, the task of the court in determining whether a dispute falls within the jurisdiction clauses of one or more related agreements, depends upon the intention of the parties as revealed by the agreements, against these general principles …"

PT Thiess was a case where one agreement contained an arbitration clause, while another agreement referred matters relating to security to the jurisdiction of the court. Blair J held that there was nothing unusual in having these disparate matters dealt with in different forums or tribunals: see paragraph 41 of his judgement. I would distinguish both of those cases on their facts from the present case.

Similarly, in Habas Sinai v Sometal S.A.L [2010] EWHC 29 (Comm) Christopher Clarke J had to consider the terms of a contract which, after setting out certain specific matters, contained the following words: "All the rest will be same as our previous contracts". At paragraph 46 of his judgement Christopher Clarke J analysed the position as follows:

“Where those parties agree the essential terms of a contract, and also that their contract shall include the terms of a previous contract or contracts between them, the court may have to determine which provisions of which contract(s) they meant to incorporate."

However, no such or similar words are to be found in the December agreement. Instead I have concluded that there was an implied term of the December agreement that it would be subject to the same dispute resolution provisions as obtained in the subcontract. I would therefore also distinguish Habas Sinai on its facts from the present case.

Conclusion