In a recent decision, the Technology and Construction Court (TCC) held that a contractor under a sub-contract (which incorporated standard LOGIC conditions) could not claim liquidated damages when a contractual milestone was not met, due to an amendment which had replaced the absolute obligation for the sub-contractor to achieve that milestone by a particular date with an obligation to use “fullest endeavours”: HSM Offshore SV v Aker Offshore Partner Ltd  EWHC 2979 (TCC).
This case demonstrates the risks, where liquidated damages are available, of making amendments to absolute obligations, or otherwise using vague wording which makes it more difficult to establish a breach of contract. This may jeopardise the ability to claim liquidated damages.
The decision also considers when estoppel principles will (or will not) apply in relation to the interim payment of invoices. The sub-contractor was unsuccessful in arguing that the employer’s approval and payment of monthly invoices on a “without prejudice” basis prevented the employer seeking to claw back sums it subsequently argued were not properly payable. This is likely to provide some comfort to customers and employers that making interim or stage payments (which the judge noted are common to almost all building and manufacturing contracts) is unlikely to prevent subsequent attempts to claw back sums which it can be shown are not properly due and payable, where there are contractual rights to do so. Expressly making such payments “without prejudice” is likely to be of assistance in this regard.
Rachel Lidgate, a partner in our disputes team, and James Doe, a partner in our construction team, consider the decision further below.
This case concerned a dispute arising from a sub-contract for the fabrication of processing modules which were ultimately to be installed on the Clyde Platform in the North Sea. The claimant in the proceedings, HSM, is a specialist fabricator for such modules and the defendant, Aker, a services provider to the oil and gas industry.
The parties had entered into a sub-contract (incorporating LOGIC standard conditions) dated 11 April 2014, which envisaged a Ready for Sail Away (“RfSA”) date of 10 May 2015. When it became apparent that this date would not be met, the parties entered into a Memorandum of Understanding (“MoU”) dated 18 May 2015. This did not expressly provide for a new date for RfSA, but instead stated that HSM should use its “fullest endeavours” to achieve Mechanical Completion on or before 1 July 2015.
The sub-contract provided for Aker to pay invoices monthly. HSM would send a draft invoice to Aker for review and approval, following which the approved amounts were invoiced by HSM and certified and paid by Aker.
After Sail Away occurred, HSM sought additional payment of sums it alleged were outstanding. Aker disputed those claims and counterclaimed for liquidated damages and in respect of alleged defects. HSM relied on estoppel arguments to advance a case that, due to approval of interim invoices on behalf of Aker (by its on-site quantity surveyor), Aker was estopped by convention from seeking to claw back sums at the final account stage which it then said were not properly payable (other than in respect of any arithmetical errors).
The TCC (Coulson J) rejected Aker’s counterclaim for liquidated damages, as well as HSM’s case that Aker’s approval of invoices gave rise to an estoppel by convention.
Counterclaim for liquidated damages – effect of the “fullest endeavours” amendment
Aker’s counterclaim for liquidated damages was based on a standard LOGIC liquidated damages clause. Under the original sub-contract, HSM was obliged to achieve RfSA on 10 May 2015, and if it breached that obligation it was liable to pay liquidated damages. A new RfSA date was not included in the MoU which amended the sub-contract and there was no mention of liquidated damages in the MoU. The MoU replaced the obligation to complete by a specific date with an obligation on HSM to utilise its “fullest endeavours” to achieve Mechanical Completion on or before 1 July 2015. Therefore, provided HSM used their fullest endeavours, it would not be in breach of contract, whatever the actual dates for Mechanical Completion or RfSA.
Applying the same reasoning as HHJ Bowsher in Midland Land Reclamation Limited v Warren Energy Limited  Technology EWHC 375 (at para 92), Coulson J considered that the obligation on HSM to use “fullest endeavours” to achieve Mechanical Completion by 1 July 2015 was not an absolute obligation. Because the absolute obligation to meet a particular date had been replaced by something different in the MoU, he considered that the claim for liquidated damages (which depended on the breach of the absolute obligation) must fail.
Claim for estoppel by convention based on payment of interim invoices
Coulson J rejected HSM’s arguments that Aker was estopped by convention from contending that sums which had been approved and paid were not fully due and payable, for a number of reasons including the following:
- On a proper construction of the sub-contract as amended by the MoU, and in particular in view of the LOGIC standard sub-contract terms, the payment of an individual invoice did not constitute the settlement of a dispute or otherwise waive or affect Aker’s right to say that such sum was incorrect or not properly payable. This provision was not expressly or impliedly modified by the MoU. The waiver and retention of rights provisions in the sub-contract were also a complete answer to the alleged estoppel by convention.
- The payments were made by Aker on a “without prejudice” basis. Coulson J interpreted this to mean that the payment was made without the loss of any existing rights (of the payer or payee). There was no doubt that the payments were made without prejudice, because there was convincing evidence that everyone knew that the payments were made on the basis they could be reviewed later and the payments were expressly described as “without prejudice” in contemporaneous correspondence.
- Coulson J noted that HSM’s argument was a “one way street”, in that it was inherent in its case that it could add claims to its monthly invoices as and when that suited it.
- The judge also commented extensively on the general facts and circumstances. He concluded in particular that: “It would be an astonishing development for the construction engineering industry worldwide, if it were thought that an agreement to pay an individual invoice by the on-site QS was somehow an agreement to be bound to accept the validity for all time of the claims that it contained merely because the opposite was somehow not made plain.”
It is understood that Aker is seeking to appeal the findings in relation to estoppel by convention