Yorkshire Water Services Ltd. v Taylor Woodrow Construction Northern Ltd.

A performance contract must be construed as a whole, giving effect to its language and commercial purpose. Under contractual “absolute guarantees”, recovery of “actual costs incurred” requires expenditure by the purchaser; future or anticipated costs are not recoverable. Costs incurred in order to achieve specified performance standards may nevertheless be recoverable before complete performance testing, provided the contractual conditions are met. A reimbursement clause requiring the purchaser to have made good a defect does not permit recovery for merely partial remedial works. A requirement that a six-basin plant operate with one basin out of service permits temporary maintenance or repair operations. It does not require an indefinitely operating five-basin plant.

The claimant engaged the defendant under a design and build process-plant contract incorporating the IChemE Red Book. The works included a six-basin sequencing batch reactor at Knostrop sewage treatment works. After operational problems arose, the claimant alleged that the plant lacked capacity, had inadequate selector capability, failed to achieve effluent standards and could not operate with one basin out of service.

The claimant abandoned its original claim for general damages and pursued contractual financial relief, liquidated damages and declarations under clauses 34.8, 35.10, 36.7, 36.11 and Schedule 10. No contractual performance tests had been carried out on the plant as originally designed and installed. The central questions concerned the construction of the contractual remedies and whether the claimant had proved that the defendant was unable to meet the Schedule 7 requirements.

1. Contractual remedies. The claim for liquidated damages under clause 35.10 failed because no performance tests had been carried out. Schedule 10 nevertheless permitted recovery under the absolute guarantees where the claimant proved, by other means, that the contractor was unable to meet the relevant requirements.
2. The expression “actual costs incurred” in Schedule 10 required the claimant to have expended the costs. It excluded future or anticipated costs. However, “to achieve” meant “in order to achieve”. Appropriate remedial costs could therefore be recoverable before complete performance testing, even though the full standards had not yet been achieved.
3. Clause 36.7 required the defect to have been made good before reimbursement arose. Partial remediation was insufficient. Clause 36.11 was capable of covering prospective costs of latent-defect remediation, but no recoverable claim under that provision had been proved. Clause 34.8 covered actual or prospective costs of work identified as incomplete on the Take-Over Certificate.
4. The requirement for operation “with one basin out of service” concerned temporary periods needed for maintenance and repair. It did not require a six-basin plant to operate indefinitely as a five-basin plant. The contract also did not specifically require installation of the proprietary IDSC manifold; design responsibility rested with the contractor under the performance contract.
5. The claimant failed to prove that the original SBR was incapable of satisfying Schedule 7. Poor performance resulted from operational difficulties, abnormal and variable influent characteristics, high suspended-solids loads, control errors and other factors, rather than a fundamental design defect. The plant had adequate selector and treatment capacity and would probably have passed the performance tests if properly operated.
6. The main claim for financial relief, liquidated damages and declarations was dismissed. The dependent Part 20 claims were dismissed. Taylor Woodrow succeeded on its counterclaim for agreed account sums, post-takeover assistance, delay-related claims and a Final Certificate. Further submissions were directed on the effect of the settlement agreement on Elga’s counterclaim.

First-instance decision. No appellate history was stated in the judgment.