Interserve Construction Ltd v Hitachi Zosen Inova AG

These proceedings arise out of the construction of an energy from waste plant in Hartlebury, Worcestershire. The Defendant, Hitachi Zosen Inova AG (“HZI”) was the main EPC contractor and entered into a design and build sub-contract with the Claimant, Interserve Construction Ltd. (“ICL”), in respect of civil works and building facilities (“the Contract”). The Contract was made on 21 May 2014. In the Contract, HZI was referred to as the Purchaser and ICL as the Contractor. From 27 May 2014, work proceeded until, by letter dated 6 July 2015, HZI sought to terminate ICL’s employment. ICL was removed from the site.

So far as termination is concerned, the material terms of the Contract were those of clause 43, headed “Termination for Contractor Default”, which provided as follows:

“43.1

If:

(a)

the Contractor becomes bankrupt or insolvent …..; or

(b)

the Purchaser is so entitled to terminate this Contract in accordance with

Sub-Clause 14.9; or

(c)

the Contractor does not comply with his obligations under Sub-Clauses 3.9,

3.11, 3.12, 3.13, or 3.18; or

(d)

the Contractor assigns the contract or subcontracts the whole of the Works

without the consent of the Purchaser; or

(e)

the Contractor has failed to pay or allow any Liquidated Damages due in

accordance with this Contract within twenty-five (25) Business Days of receipt of the Purchaser’s notice confirming that the same have become due and payable; or

(f)

the circumstances set out in Sub-Clauses 32A.10 or 35.2(v) or 37.7(iv) have

occurred; or

(g)

without reasonable excuse has not commenced the Works by the date which

is ten (10) Days after the Commencement Date; or

(h)

fails to proceed regularly and diligently with the Works;

(i)

the Contractor is persistently in breach of the terms of this Contract as set

out in clause 48; or

(j)

the Contractor fails to achieve Take Over of the works by the Longstop

Completion Date; or

(k)

the Adjusted Delay LD Amount equals or exceeds the maximum amount

stated in Sub-Clause 44A.1(b); or

(l)

the liability of the Contractor for Liquidated Damages for performance

equals or exceeds the maximum amount stated in Sub-Clause 44A.1(d); or

(m)

the Adjusted Combined LD Amount equals or exceeds the maximum amount

stated in Sub-Clause 44A.1(d); or

(n)

the EPC Contract is terminated due to an act or omission of the

Contractor; or

(o)

there has been a breach by the Contractor of any of its obligations under

this Contract which materially and adversely affects the fulfilment of the Authority’ [sic] statutory duties; or

(p)

the Contractor wholly suspends or abandons the carrying out of the Works

before completion thereof; or

(q)

the Contractor commits a material breach of this Contract; or

(r)

where the Plant or materials has failed to achieve the Rejection Levels for

any Performance Indicator and the Contractor has failed to remedy the works within a period of twenty (20) Days or such other period as the Purchaser’s Representative may agree as being a reasonable time in which to carry out the remedial works and pass a retest; or

(s)

the Contractor or one of its Subcontractor’s (sic) commits a Prohibited Act;

then, subject to Sub-Clause 43.1A and without prejudice to any other rights or remedies which the Purchaser may possess, the Purchaser may forthwith by notice terminate the employment of the Contractor under the Contract.

43.1A In the case of a default by the Contractor under heads (h), (p) or (q) of Sub-Clause 43.1, the Purchaser may (at its absolute discretion) notify the Contractor of the default and if the Contractor fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days after receipt of notification, the Purchaser may by notice terminate the employment of the Contractor under the Contract.

….”

On 7 July 2015, HZI delivered by hand the letter dated 6 July referred to above, in the following terms:

“HZI gives ICL notice pursuant to Clause 43.1(h) and/or 43.1(q) of the Conditions of Contract (“Conditions”), that HZI hereby forthwith terminates the employment of ICL under Clause 43.1 of the Contract. For the avoidance of doubt, HZI does not exercise its discretion to provide a 7 day period for rectification under Clause 43.1A of the Conditions.”

The letter then proceeded to set out the matters that HZI said entitled it to terminate ICL’s employment. In short, HZI was dissatisfied with ICL’s performance and delay. The letter concluded:

“HZI is entitled to and hereby does terminate the employment of ICL under the Contract on all or any of the grounds set out in this notice. Such termination is without prejudice to any other rights or remedies which HZI may possess under the Contract or at law.

…

In the meantime, all of HZI’s rights and remedies remain fully reserved.”

There was evidence before me that arrangements were then made to make the site safe and remove ICL staff and subcontractors from site. Steps were then taken to prevent ICL’s return to the site. I observe that some or all of these matters are also relied upon by HZI as the acceptance of a repudiatory breach of contract.

By letter dated 20 July 2015, ICL disputed that HZI was entitled to terminate and said, in particular, that it rejected HZI’s allegations that ICL had failed to proceed regularly and diligently with the works and had committed the various material breaches of contract relied upon. ICL said that HZI’s attempted termination was, therefore, a renunciation and/or repudiatory breach of the Contract and continued: “This letter constitutes notice that ICL exercises its common law right to accept HZI’s repudiation of the Contract and accordingly treats the Contract as terminated.” I note that ICL did not expressly raise the issue of absence of a notice under cl. 43.1A.

In April 2016, ICL’s solicitors, Ashurst, wrote letters of claim in respect of proposed Part 7 and Part 8 proceedings. In relation to the Part 8 proceedings, the argument was expressly raised that HZI had not been entitled to terminate without first giving notice under cl. 43.1A. HZI’s solicitors responded by letter dated 31 May 2016. In that letter they advanced the case, in the alternative, that HZI’s letter of 6 July 2015 and/or its conduct on 7 July 2015 amounted to the acceptance of a repudiatory breach of contract.

These proceedings were commenced by ICL in November 2016. In its (unamended) Details of Claim, ICL sought firstly a declaration (declaration no. 1) that:

“It was a condition precedent to HZI having the right to terminate pursuant to Sub-Clauses 43.1(h) and 43.1(q) that HZI first issue a notice pursuant to Sub-Clause 43.1A and allow ICL a seven day period in which to commence and diligently pursue the rectification of the default that was the subject of that notice.”

ICL went on to seek further declarations, on the basis that declaration no. 1 was granted, as to the effect of HZI’s purported termination and as to the effect of ICL’s letter dated 20 July 2017. By the time of the hearing before me, ICL also sought permission to amend to add further declarations which addressed HZI’s alternative case as to acceptance of a repudiatory breach.

HZI contended that all the declarations sought, beyond declaration no.1, were not suitable for Part 8 proceedings and, having heard argument, I decided this issue in HZI’s favour at the outset of the hearing. It follows that further argument was only concerned, and this judgment is only concerned, with declaration no. 1.

The nature of the issues arising in relation to declaration no. 1 is evident from the terms of HZI’s letter dated 6 July 2015:

In my judgment, on this issue, it is ICL’s argument that is right for the reasons I set out below.

The parties have reminded me of the principles of contractual construction as most recently drawn together by Lord Hodge in the case of Wood v Capita [2017] UKSC 24:

“[10] The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to its objective meaning. …

[11] …. Interpretation is, as Lord Clarke stated in Rainy Sky (at [21)], a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense, But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of the drafting of the clause … and it must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest …. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

[12] This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated ….

…

[13] Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyers and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreement may be successfully interpreted principally by textual analysis, for example because of their sophistication or complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example, because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failure of communication, differing drafting practices or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process …. assists the lawyer or judge to ascertain the objective meaning of disputed provisions.”

Although there was no specific evidence to this effect, the Contract was obviously a complex commercial document which I infer was the subject matter of careful consideration and drafting and it was entered into by two sophisticated commercial parties.

Starting with the textual approach and the objective meaning of the words used in clause 43.1, it seems to me that the natural meaning of the words “subject to Sub-Clause 43.1A” is that the right to terminate is “subject to” or conditioned on cl. 43.1A in the sense that, in the instances covered by cl. 43.1A, the right to terminate only arises if cl.43.1A has been operated. HZI is right to submit that the words “subject to” may have different meanings in different contexts (such as “subject to terms and conditions”) but their meaning here seems to me obvious. The effect is that if HZI wishes to give notice to terminate for the reasons specified in sub-clauses (h), (p) and (q) of cl. 43.1, it must first give notice under cl. 43.1A and thus give ICL an opportunity to rectify its default.

This construction receives support from three matters relied on by ICL.

Firstly the words “subject to” are used in the same sense elsewhere in the Contract.

Clause 39 deals with payment. Under clause 39.1 “Payment of the Contract Price shall be made by Milestone Payments in accordance with this Clause 39 and the Milestone Payment Schedule in Schedule 19 …, provided that: ….” Sub-clauses (a) to (h) then set out a series of provisos as to when the Contractor may make applications or when payments become due. For example:

“(d)

the Contractor may not make an application for an Interim Payment Application for a Milestone Payment before all preceding Milestone Events … have been achieved.”

“(g)

the Contractor may make an Interim Payment Application only once per month at the end of the respective month.”

Clause 39.2(a) provides:

“Subject to Sub-Clause 39.1, upon completion of each Milestone Event the Contractor may in respect of each completed Milestone Event make an Interim Payment Application to the Purchaser’s Representative supported by complete and detailed documentary evidence …..”

In this clause, Mr Thomas QC submitted and I accept, the words “subject to” clearly mean that the Contractor’s right to make an interim payment application is “subject to” the provisos in cl. 39.1 in the sense that the Contractor’s entitlement to make an Interim Payment Application under cl. 39.2 is limited by the provisos in cl. 39.1.

Similarly, clause 16B.5 starts with the words “Subject to Sub-Clause 16B.5A”. Clause 16B deals with Compensation Events. Clause 16B.5 provides that, if the Contractor has complied with its obligations under earlier sub-clauses as to the giving of notices of a claim for an extension of time and the provision of information, the Purchaser’s Representative shall grant ”an extension of time for the completion of the impacted Relevant Milestone(s) by such time as shall be reasonable for such a Compensation Event ….”. Clause 16.B5A deals with the position where the Purchaser is in breach of its obligations and that breach is itself a consequence of delay caused by a Force Majeure Event. In those circumstances, the periods of extension of time to which the Contractor would otherwise be entitled are reduced. The entitlement under clause 16B.5 is “subject to” this clause in the sense that the reasonable extension of time that would otherwise be given is to be reduced in line with the latter clause.

In each of these instances the expression “subject to” has the effect that a right under one clause is limited or circumscribed by the provisions of another clause. That is exactly the use of the expression, as argued by ICL, in clause 43.1.

Secondly, it seems to me that HZI’s construction gives no meaning to the words “subject to”. That point can be tested in this way. If the words are omitted from clause 43.1, then there is an entitlement to give notice to terminate forthwith under cl. 43.1 in all the circumstances specified under sub-clauses (a) to (s). Under clause 43.1A, if HZI chooses to give a notice of default and the Contractor fails to comply, HZI may then give a notice to terminate. That is exactly HZI’s position as to the proper construction of clauses 43.1 and 43.1A, so it is apparent that on this construction the words “subject to” are redundant. Although the court may well be wary of “an argument from redundancy”, it seems to me that a construction that fails to give effect to words such as “subject to” is unlikely. As submitted on behalf of ICL a construction that fails to give effect to such words in a bespoke contract is all the more unlikely, as Coulson J observed in Secretary of State for Defence v Turner Estate Solutions Ltd. [2015] EWHC 1150 at [62].

HZI argues that the words serve the purpose of making clear that HZI has an additional right to terminate under clause 43.1A. There are three answers to that argument: it is not the natural meaning of the words “subject to” in this context; it is not how the words are used elsewhere in the Contract; and any additional “right” in clause 43.1A is illusory.

That last point leads me to the further matter that supports ICL’s construction, namely that HZI could always, and without the need for express words in the contract, require rectification of a default and put ICL on notice that if the default were not remedied, HZI would serve a notice under clause 43.1. Again this would, on HZI’s construction, make the “subject to” wording in clause 43.1 pointless and is the reason any additional right is illusory.

Mr Thomas QC also argued that there was a distinction to be drawn between the circumstances in sub-clauses (h), (p) and (q) and the other sub-clauses of clause 43.1, in that the other sub-clauses all involved matters that were either not capable of being remedied or where there was already a time period by which default could be judged within the relevant clause of the Contract. For example, an insolvency event within sub-clause (a) or the termination of the EPC Contract (sub-clause (n)) were all or nothing events not capable of being remedied; a persistent breach under clause 48 (sub-clause (i)) would itself involve breach over a specified period of time and failure to remedy that breach. The distinction which Mr Thomas QC sought to draw is not a perfect one: it does not seem to work, at least, for sub-clause (o) and, as Mr Streatfeild-James QC pointed out, clause 3.9 (referred to in sub-clause (c)) itself contemplates, following failure to maintain a Performance Bond, the obtaining of a suitable replacement. The distinction ICL seeks to draw gives some support to the commercial sense of its construction in that there is commercial sense in ICL having the opportunity to remedy breaches that are less readily identifiable and involve some evaluation of ICL’s performance by HZI. But that is not the basis on which I determine the issue.

In answer to these points, Mr Streatfeild-James QC on behalf of HZI characterised ICL’s case as being that ICL had the right to commence rectification, and diligently pursue rectification, of its default before any termination could take place. That, he argued, exposed the fundamental difficulty with ICL’s case because cl. 43.1A did not create such a right: cl. 43.1A did not create such a right because the commencement and pursuing of rectification depended on the giving of the notice under clause 43.1A and HZI was not required to give such a notice.

That argument, in my view, mis-characterises ICL’s case. ICL’s case is not about its rights but about those of HZI. If HZI wished to terminate for one of the reasons in sub-clauses (h), (p) and (q), then HZI’s right to do so depended on the issue of a notice under clause 43.1A, but whether or not to embark on this course was up to HZI.

The counter-argument for HZI, therefore, seems to me to turn on the words “at its absolute discretion” in clause 43.1A. In short, HZI say that if the operation of clause 43.1A is treated as a condition precedent to the right to give a notice to terminate under clause 43.1(h), (p) and (q), then there is no meaning in the absolute discretion given to HZI in clause 43.1A. That argument does not, in my view, reflect the purpose of those words in clause 43.1A. What the words do is emphasise that whether to give such a notice and commence the termination process is a matter for HZI and that failure to do so will not have adverse consequences, such as an argument that the absence of a notice evidences the absence of default or the waiver of its right to rely on the default.

The words “at its absolute discretion” or “in its absolute discretion” are also used elsewhere in the Contract. I set out some of the examples identified by ICL in its submissions:

In each of these instances the use of the wording “in its absolute discretion” or “at its absolute discretion” emphasises that whether to do something is the Purchaser’s choice not obligation and, in some instances expressly, that the Purchaser’s acts do not have any adverse consequences such as the waiver of rights. In both instances they provide emphasis or clarification and avoid argument, rather than adding to the Purchaser’s rights. Although clause 43.1A does not deploy the express wording set out in these clauses about choice or waiver, the use of the words “at its absolute discretion” in this clause is entirely consistent with the manner in which those words are used elsewhere in the Contract.

HZI also relies on the fact that ICL’s reliance on this argument as to the construction of clause 43.1 is something of an afterthought, the issue not having been expressly raised in ICL’s letter dated 20 July 2015. That, it is said, indicates that both parties had construed the clause in the same way and that in itself is some objective evidence of the intention of the parties. It is plain that the parties in July 2015 were both focussed on the dispute as to responsibility for delay. It does not seem to me that I can infer from that any agreement as to the interpretation of the Contract and certainly not one that would displace what, in my judgment, is the natural meaning of the words used.

I will therefore grant the declaration sought by ICL that it was a condition precedent to HZI having the right to terminate pursuant to Sub-Clause 43.1(h) and 43.1(q) that HZI first issue a notice pursuant to Sub-Clause 43.1A and allow ICL a seven day period in which to commence and diligently pursue the rectification of the default that was the subject of the notice.

I grant no further declarations.