Unaoil Ltd v Leighton Offshore Offshore Pte Ltd (Rev 1)

A contractual advance payment may remain payable even where the claimant is not approved by the project client, unless the contract makes approval a condition of payment. Express provisions addressing client objection should be given effect rather than supplemented by an implied approval condition. A payment clause must be assessed as a penalty at the date of the contract as amended. A clause which becomes extravagant and unconscionable after a material price reduction may be unenforceable. Where loss is certain but difficult to quantify, the court may make a fair assessment using the available evidence, while retaining caution and requiring a proper evidential basis.

Unaoil claimed sums under a memorandum of agreement under which it had been appointed as Leighton Offshore’s sub-contractor for onshore works on an Iraqi oil pipeline project. It claimed advance payments, US$40 million under a liquidated damages clause, and damages for repudiatory breach.

Leighton Offshore argued that the agreement was conditional on Unaoil’s approval by the project client, that the advance payment provisions had ceased to operate after a contractual price variation, and that the liquidated damages clause was penal. The court also had to assess the recoverable loss arising from the repudiation.

1. Advance payments. The agreement appointed Unaoil as sub-contractor and prevented Leighton Offshore from appointing another party in its place. It contained no express or implied condition that Unaoil had to obtain the client’s approval before becoming entitled to payment. The provision dealing expressly with a client objection identified the agreed consequences and did not support an additional approval condition.
2. The later variation replacing the original fixed price did not destroy the advance payment obligation. Once the contractual price became ascertainable, it operated as the new fixed lump sum by reference to which the advances were calculated. The advances were expressly non-refundable and were distinct from progress payments payable against actual progress. The debt claim therefore succeeded in the sum of US$12,577,500.
3. The minutes showed non-approval, but non-approval was distinct from a written objection for the purposes of Exhibit 3 clause 5. In any event, Unaoil was not shown to have breached any obligation to seek and obtain approval.
4. Penalty. The penalty question had to be assessed at the date of the relevant amended contract. Even assuming that US$40 million was not originally penal, the substantial reduction in the contract price made the unchanged clause extravagant and unconscionable, with a predominant deterrent function and no sufficient commercial justification. The liquidated damages claim therefore failed.
5. Damages. Leighton Offshore’s repudiatory breach was established. The normal measure was the contract price less the cost of performing the work. Group overheads and contingency were properly included in the construction costs. For the support-services element, the court could not simply treat the contractual fee as profit. It made the best assessment available, applying a heavy discount, and awarded US$5.8 million for loss of profits, subject to credit for the advance payments.
6. Counsel were directed to prepare a draft order and agree consequential matters, including interest and costs.