Decoma UK Ltd v Haden Drysys International Ltd

In a bespoke commercial contract, liability caps and exclusion clauses are construed by reference to the words used and the contract as a whole. A party’s breach does not prevent it relying on a clear agreed cap merely because the breach caused the contractual completion stage not to occur. Before Final Acceptance, liquidated damages were the exclusive remedy for loss caused by delay in achieving completion. Claims for non-delay defects remained available under the general performance obligations, but were subject to the agreed cap. Warranty remedies and the related procedure applied only after Final Acceptance. A rectification-cost mechanism covered direct costs of the remedial works, not consequential losses such as loss of production or profit. A general indemnity could not be construed to override the carefully negotiated limitations elsewhere in the contract.

Decoma claimed more than £18 million from Haden for defects in a bespoke waterborne paint-spraying system designed, constructed and installed for Decoma’s facility. The preliminary issues concerned the construction and interaction of contractual provisions governing performance obligations, warranties, liquidated damages, exclusion clauses, liability caps and indemnities.

The assumed facts were that Haden had failed to complete the plant, the contractual performance tests had not been passed, and Final Acceptance had never occurred. Decoma nevertheless operated the system and advanced nine heads of claim, including rectification costs, loss of production, loss of use and lost profit. The court determined the legal availability and contractual limits of those claims before the main trial.

1. Contractual construction. The presumption that a party cannot take advantage of its own wrong is principally a rule of construction. It cannot displace clear contractual language. Commercial exclusion and cap clauses require clear words, but clear words must be applied even if the resulting allocation of risk benefits the party in breach.
2. Pre-Final Acceptance claims. Before Final Acceptance, Decoma could claim liquidated damages under Article 12.3 for delay and could bring non-delay claims for breach of Articles 3.1 and 3.2. The liquidated damages machinery was the exclusive remedy for loss of use or profit caused by delayed completion. Claims for breach of Articles 3.1 and 3.2, taken with liquidated damages, were subject to the aggregate 5% cap in the second part of Article 12.4.
3. Warranties and rectification. Article 11.1 warranties were not actionable before Final Acceptance. Article 11.3 was parasitic upon those warranties and therefore was also unavailable before Final Acceptance. If applicable, Article 11.3 required notification, a qualifying failure by Haden within 48 hours, a decision by Decoma to undertake or procure remedial work, and an invoice for estimated or actual reasonable direct costs. The work need not already have been completed. Direct costs meant the costs of the rectification works themselves, not consequential losses.
4. Indirect losses. Loss of production, loss of use and lost profit fell within Article 12.3A. They were unavailable before Final Acceptance, were generally excluded by Article 12.4, and in any event were subject to the Article 12.3A cap and trigger mechanism.
5. Indemnity. Article 15.1(v) concerned specific indemnity protection, principally for confidentiality-related warranties or agreements and third-party liabilities. It did not provide a general route around Articles 11 and 12, and Article 15.1 expressly preserved the Article 12.4 limitations.
6. The preliminary issues were answered accordingly. Heads 1, 2, 3 and 7 were capable in principle of being rectification-cost claims but were subject to the 5% cap. Heads 4, 5, 6, 8 and 9 were excluded or limited as loss of use, loss of production or profit claims. Article 15.1(v) did not override the exclusions or caps.

First-instance determination of six preliminary contractual issues in proceedings brought before the main trial. The judgment records that the preliminary issue hearing had been ordered by His Honour Judge Seymour QC and was heard by His Honour Judge Peter Coulson QC following reassignment.