Assignment, novation and contribution

In particular, the case looks at whether an assignment can amount to a novation and the assignor’s remedies against the assignee, including the application of the principles of ‘same damage’ under the Civil Liability (Contribution) Act 1978 (“the Act”).

Background

The facts involved the design and testing of a power plant by High Tech, capable of processing fuel from various types of waste under an EPC contract with Energy Works. Subcontractors, Outotec were appointed at the same time to supply key elements of the power plant and the usual collateral warranties were put in place in favour of Energy Works.

Subsequently, Energy Works sought to terminate the contract by reason of contractor default and High Tech assigned is sub-contract with Outotec to Energy Works. Proceedings were issued against High Tech by Energy Works claiming £133 million in damages for the costs of rectifying defects, delay damages and associated losses. A counterclaim was advanced by High Tech for £46.7 million based upon the contractual provisions for payment following termination of convenience. It also sought to pass on its potential liability to Outotec as an additional claim.

Issues

The TCC was concerned with two preliminary issues. These were the legal effect of the assignment and whether or not High Tech could make a direct claim against Outotec or whether it was limited to a claim for contribution under the Act.

Decision

Assignment or novation?

The question considered was whether High Tech retained the benefits of accrued rights under the sub-contract or not. If not, whether the assignment took effect as an assignment of both the benefit and burden of the sub-contract (or a novation).

Energy Works had given notice to High Tech that it required an assignment of the sub-contract but the terms of a Deed of Assignment were not agreed between the parties. As a consequence, High Tech assigned the sub-contract by way of notices issued to both Energy Works and Outotec. 

In reaching its decision as to whether or not there had been an assignment of all benefits, the Court revisited the question of contract construction. It outlined a number principles, including that consideration must be given to the words used in the relevant contract and notices, adopting their natural and ordinary meaning. Importantly, it said “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix. It is not for the Court to re-write contractual arrangements entered into by the parties or to impose what it considers would be an equitable and fair commercial bargain by reference to the events that have unfolded.”

The Court considered whether there had been a novation of the sub-contract. Novation occurs when the original contract is extinguished and a new contract is created.  It requires the consent of all the parties to the original contract and the new one. Novation involves the transfer of both rights and obligations to the new party. In contrast, with an assignment, the assignor retains obligations under the original contract.

In the present case, the Court found that there had been an assignment of the sub-contract, the Court having been persuaded by the use of the words “assign the Sub-Contract” in both the main contract, the sub-contract and in High Tech’s correspondence giving notice. It considered this against the factual matrix and found nothing persuasive to demonstrate that the parties had meant anything other than an assignment. 

As a result of the Court’s finding, High Tech had no right to seek a direct remedy from Outotec, any accrued and future rights under the sub-contract having passed to Energy Works. As there had been no novation, however, High Tech retained obligations under the sub-contract.

Contribution

The Court also assessed the extent to which Outotec were liable to Energy Works for the same damage as High Tech in respect of (i) delay; (ii) termination losses and (iii) defects.

“Damage” in the context of the Act has been held to mean “harm” not damages meaning compensation. Applying the relevant principles, the Court reached the following conclusions:

1. High Tech and Outotec were liable for the same damage in respect of delay because it concerned the same type of harm – late completion of the project – despite being subject to different contractual regimes;
2. The harm suffered in respect of the termination losses were the additional costs of completing the works and any associated losses. High Tech’s liability to Energy Works was in respect of its contractual entitlement to terminate for delay exceeding the contractual cap.  In contrast, High Tech’s claim against Outotec was based on defects which it alleged caused the delays giving rise to the entitlement to terminate. As Outotec had no liability to the Claimant for these losses under the main contract, there was no common harm and therefore no same damage.
3. The parties were liable to Energy Works for the same damage in relation to defects because each element of the claim as between the three parties was based on a failure to perform their respective contractual obligations leading to defective plant ie the same damage.

Comment

It is clear from this judgment that the Courts remain reluctant to interfere with the commercial negotiations and contractual arrangements agreed between the parties. It also reaffirms that the language used by the parties is key and that the natural and ordinary meaning of words, and their usual meaning in the commercial context, is unlikely to be departed from. 

Furthermore, the principles of determining the ability of a party to make a claim under the Act are fact specific and turn on a consideration of ‘harm’ caused as opposed to “damages” claimed, meaning compensation.