Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd

Under an NEC3 construction contract, the employer could not impose a more stringent welding and testing standard than the parties had agreed. Defects had to be assessed by reference to the contractual specification and agreed inspection regime. An employer-appointed employee or parent-company employee could not act as the contractual decision-maker where the contract structure required an independent third-party Project Manager and no express term permitted that appointment. Contractual termination provisions did not automatically equate to acceptance of repudiation. Where the employer repudiated the contract, accrued contractual rights survived, including the right to recover interim overpayments and the contractor’s obligation to remedy defects. The proper measure for defective work was the cost that the contractor would have incurred in carrying out the repairs.

Imperial Chemical Industries Ltd contracted with Merit Merrell Technology Ltd for engineering and pipework works at a paint-manufacturing facility. The contract used NEC3 terms and was substantially expanded by Project Manager’s Instruction 03.

Disputes arose concerning the required non-destructive testing, alleged defective welding, project documentation, the appointment of a replacement Project Manager, repudiation and termination, recovery of interim payments, and the cost of remedial works. ICI instructed MMT to leave site on 17 February 2015, asserting that MMT had repudiated the contract. MMT contended that ICI had itself repudiated the contract.

The trial determined liability and the legal principles governing the subsequent quantum exercise.

1. Testing regime and defects. The parties had agreed that MMT would use visual inspection and dye-penetrant testing of 10% of welds, rather than radiography. Table 5 of BS 4677 had no application to defect characteristics which could only be detected by radiography. MMT could not be held to a higher standard which ICI had expressly declined to purchase. The court assessed the maximum defective welding at 5% of the relevant stainless-steel welds.

2. Project Manager. Applying Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd [2006] EWHC 89 (TCC), the contractual decision-maker had to exercise professional judgment independently, impartially, fairly and honestly. The employer and decision-maker were intended to be separate. Neither ICI nor an AkzoNobel employee could validly replace PROJEN without an express contractual term. Mr Boerboom’s purported appointment was ineffective and itself constituted a breach by ICI.

3. Repudiation and termination. None of ICI’s five alleged breaches by MMT was established. The letter of 17 February 2015 was not an exercise of the NEC3 termination machinery. The contractual termination provisions had different triggers and financial consequences and could not be treated as equivalent to acceptance of repudiation. Stocznia Gdynia SA v Gearbulk Holdings [2009] EWCA Civ 75 depended on the contract’s language and did not compel a different conclusion. ICI repudiated the contract; MMT did not.

4. Overpayments and accrued rights. Repudiation ended future performance but did not destroy accrued contractual rights. Interim assessments were not final valuations. ICI could therefore challenge the value of MMT’s work and recover any overpayment. The court declined to treat ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) as authority for the wider proposition advanced by MMT, noting the contrary or qualifying reasoning in MJ Harding Contractors v Paice and Springall [2015] EWCA Civ 1231 and Brown v Complete Building Solutions Ltd [2016] EWCA Civ 1.

5. Remedial costs and documents. ICI could recover the cost MMT would have incurred in repairing the defects, rather than the cost of employing an alternative contractor. The contractual licence and associated right to production of Contractor’s Documents survived repudiation, but no effective request had been made before 17 February 2015. MMT was not in breach by failing to comply with an unrealistic same-day request.

The agreed liability issues were answered accordingly. MMT was entitled in principle to damages for ICI’s repudiation, with quantum to be determined separately.