Bluewater Energy Services BV v Mercon Steel Structures BV & Ors

A contractual termination clause making remedial action subjectively satisfactory to one party is subject to implied limits of honesty, good faith, genuineness, and the absence of arbitrariness, capriciousness, perversity or irrationality. Where a contract requires a contractor to commence and continuously pursue satisfactory remedial action, failure to act on one identified default may justify termination, even where several defaults are listed. Contractual notice provisions giving the employer a discretion to forfeit claims for variations must be exercised consistently with those limits. A delay and variation mechanism covering acts, decisions and instructions of the employer prevents time becoming at large. Liquidated damages accruing before lawful termination remain recoverable, subject to the contractual cap.

The claimant engaged the defendants under a sub-contract for fabrication and assembly of a tower-based soft yoke mooring system. The contract divided payment between lump-sum, remeasurement and reimbursable work, and contained provisions governing instructions, variations, extensions of time, liquidated damages and termination.

The claimant served a notice of default followed by a notice terminating the contract. The defendants contended that the termination was invalid, that the claimant had repudiated the contract, and that they were entitled to extensions of time and payment under various contractual mechanisms. The claimant sought substantial deductions, liquidated damages, completion costs and other losses. The central issues included whether termination was valid, whether time was at large, how the contract price and variation account should be valued, and what sums remained payable.

1. Termination. The contract required the contractor, after a notice of default, immediately to commence and continuously pursue action satisfactory to the claimant to remedy the identified default. The phrase imposed a subjective standard, but the claimant’s decision was constrained by honesty, good faith, genuineness and the absence of arbitrariness, capriciousness, perversity or irrationality. The contractor’s failure to take any effective action in relation to weighing, painting and shotblasting, installation of the Yoke Hinge and other identified work justified termination. The contract was validly terminated on or about 3 February 2009.
2. An instruction under the variation clause did not require a particular form. It was sufficient if, objectively read in its factual context, the document clearly operated as an instruction under the relevant clause. The letter of 6 January 2009 therefore instructed the contractor to complete the specified work.
3. Extensions of time and time at large. The variation mechanism permitted adjustment of the Contract Price and Schedule of Key Dates for an instruction, decision or act of the claimant. It therefore covered prevention events and prevented time becoming at large. The defendants failed to establish that delay was caused by matters for which the claimant was responsible, and no extension of time was granted.
4. Liquidated damages. The liquidated damages clause operated in two stages. Liability accrued as individual milestones became late; final calculation at the last milestone disregarded earlier milestone delays. Lawful termination did not extinguish accrued rights. The claimant recovered €1,596,909.70 for late delivery, limited by the seven per cent contractual cap, together with €150,000 for unauthorised replacement of key personnel.
5. Contract valuation. Interim remeasurement did not create a binding agreement before final agreement. Abatement was available for defective performance of lump-sum preliminary work, but not merely because the claimant chose not to require work or because work was incorrectly performed where the proper remedy was the cost of rectification. The court assessed the remeasurement, reimbursable work, variation account, discounts, completion costs, NCRs and VAT in accordance with the contractual allocation of work and payment.
6. Notice provisions. The variation notice provisions were not to be ignored because of poor drafting. However, the claimant’s discretion to forfeit rights for late or incomplete notices had to be exercised properly. Mere lateness or missing information, without consideration of whether the omission affected the claimant’s ability to assess the adjustment, was insufficient.
7. The contractual definition of consequential loss expressly included loss of profit, whether direct or indirect. It therefore excluded the contractor’s claim for lost profit following the alleged wrongful termination, even if the termination had been repudiatory.
8. The final balance due to the claimant was €961,324.66.

First-instance judgment in the Technology and Construction Court. The judgment records that the proceedings had been commenced in the Commercial Court and were transferred to the Technology and Construction Court on 29 November 2010.