Construction project — Subcontractor — Heads of agreement — Supplemental agreement — Whether supplemental agreement superseding original agreement — Whether supplemental agreement compromising present and future claims — Whether main contractor in repudiatory breach of contract — Whether main contractor having claim for abatement — Preliminary issues determined
The claimant company was the main contractor for the new Wembley stadium. The first defendant, a subcontractor appointed to design, fabricate, supply, deliver and erect the steelwork for the stadium, was a member of a group of which the second defendant was the holding company.
Problems arose at an early stage because the design of the stadium was incomplete. That, in turn meant that the first defendant was unable to design and fabricate the individual pieces of steel that were required. In correspondence, the claimant and the first defendant both parties expressed concern about the delays and, in February 2004, they signed a document entitled “Heads of Agreement” in order to resolve their dispute. This provided for a supplemental agreement, to be concluded by the end of February 2004, formally adjusting the contract with effect from 15 February 2004.
The supplemental agreement was not agreed until June 2004, when it was expressed to be in full and final settlement of disputes existing on or before 15 February 2004. However, clause 2.2 precluded its application to any claims by the claimant in respect of design workmanship or of materials that did not accord with the subcontract.
Disputes arose when the claimant issued certificates for payment of amounts that were lower than had been claimed by the first defendant. Following adjudication, those sums were increased, but neither party treated the adjudicator’s decision as being the final resolution of their disputes. The first defendant eventually stopped work and both parties commenced proceedings claiming damages for breach of contract.
The court was asked to decide a number of preliminary issues including whether: (i) the supplemental agreement superseded the heads of agreement; (ii) the claimant was precluded from making claims in respect of design, workmanship or materials in relation to matters of which it was aware on 15 February 2004; (iii) it was in repudiatory breach of contract; and (iv) it could rely upon the defence of abatement and, if so, what was the proper measure of that abatement.
Held: The preliminary issues were determined.
(1) Construction industry contracts such as the present were frequently intended to have retrospective effect where parties carried out the building project while the formalities were being dealt with. In this case, the two agreements were so closely linked that the parties had obviously intended that the supplemental agreement should replace the corresponding terms of the heads of agreement. Accordingly, the general principle applied that where a preliminary contract was intended to be superseded by one of a superior character, the later contract prevailed: Greswolde-Williams v Barneby (1900) 83 LT 708 applied; Trollope & Colls Ltd v Atomic Power Constructions Ltd [1963] 1 WLR 333 referred to.
(2) On its proper construction, the supplemental agreement was in full and final settlement of all present and future claims, including variations. Although the words “may have” in compromise agreements had previously been held to embrace future claims, in the present case the words “might have” were clearly used to denote any present or future claims. Clause 2.2 was reserving claims, not releasing them, and contained no restriction to future or unknown claims: Kitchen Design & Advice Ltd v Lea Valley Water Co [1989] 2 Lloyd’s Rep 221 and Line Trust Corp Ltd v Fielding unreported 26 July 1999 distinguished.
(3) The claimant was not in repudiatory breach of contract in operating the dispute resolution procedure in the way that it had on professional advice. The claimant had adopted the ruthless but lawful strategy of issuing certificates in the lowest sums it believed it could properly defend in arbitration and abided by the outcome of that arbitration. Although it had breached the contract by failing to consult the first defendant before issuing the certificates, that breach had no practical consequence and caused no loss.
(4) In a contract for the provision of labour and materials, where performance had been defective, the employer was entitled at common law to maintain a defence of abatement. The measure of abatement was the amount by which the product of the contractor’s endeavours had been diminished in value as a result of that performance and the method of assessing diminution in value would depend upon the facts and circumstances of each case. However, the measure of damages could never exceed the sum that would otherwise be due to the contractor as payment and abatement was not available as a defence to a claim for payment in respect of professional services: Gilbert-Ashe (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, Hutchinson v Harris [1978] 10 BLR 19 and Mellowes Archital Ltd v Bell Projects Ltd [1997] 87 BLR 26 considered.
Roger Stewart QC and Paul Buckingham (instructed by Clifford Chance LLP) appeared for the claimant; Hugh Tomlinson QC, Simon Hargreaves and Thomas Grant (instructed by Walker Morris) represented the defendants.
Eileen O’Grady, barrister
