Subcontract – Amended term – Interpretation – Parties limiting sub-contractor’s liability – Whether cap on liability extending to subcontractor’s liability in all circumstances – Claim allowed
In 2002, TFL engaged the claimant to refurbish part of the Blackwall Tunnel in east London. Some of the work was subcontracted to the defendant. Those works were significantly delayed and the claimant also alleged that they were incomplete and defective. The claimant’s total claims against the defendant amounted to £19m, of which the two principal components were £7.7m for delay losses and £9m in respect of incomplete and defective work.
One of the main issues between the parties concerned the relevant terms and conditions of the standard Civil Engineering Contractors Association (CECA) subcontract. Clause 3(4), in its unamended form, provided: “The sub-contractor hereby acknowledges that any breach by him of the sub-contract may result in the contractor’s committing breaches of and becoming liable in damages under the main contract and other contracts made by him in connection with the main works and may occasion further loss or expense to the contractor in connection with the main works and all such damages loss and expense are hereby agreed to be within the contemplation of the parties as being probable results of any such breach by the sub-contractor.”
Following discussions, a limitation was placed upon the defendant’s liability, under that clause, up to a maximum of 25% of the subcontract value.
The defendant contended that if it were in breach of the subcontract, so that its work was deficient and required extensive remedial work, it was liable to pay the claimant only 25% of the subcontract value. The claimant argued that clause 3(4) was designed to (and did only) relate to its liabilities to the employer and to the other subcontractors. It maintained that the cap was irrelevant to the claimant’s own claims for damages under the sub-contract as a result of the defendant’s poor performance.
Held: The claim was allowed.
The factual matrix had to be considered in any dispute concerning the construction of contractual terms, even if the wording could be regarded as being unambiguous and sensible. However, balance should be retained between the factual background and the words used. If the words gave a clear conclusion, one had to pause before deciding that the draftsman had used words with a meaning that did not fit the objective that he or she sought to obtain: Investors Compensation Scheme v West Bromwich Building Society (No 1) [1998] 1 WLR 896 and Martin v David Wilson Homes Ltd [2004] EWCA Civ 1027; [2004] 3 EGLR 77 ; [2004] 39 EG 134 considered.
Although the discussions between the parties focussed on liquidated damages, it would not be correct to construe clause 3(4) as relating only to such damages. However, that focus indicated that the parties perceived clause 3(4) as concerning the claimant’s liabilities to others incurred as a result of the defendant’s breach, in particular, the claimant’s liability to pay liquidated damages to TFL under the main contract. The written material did not suggest that the defendant required the cap to apply to the claimant’s liabilities to the third parties or to such direct losses as the claimant would suffer as a result of the defendant’s breaches of the sub-contract
Accordingly, the cap in clause 3(4) applied to all claims against the defendant in which the claimant sought to pass on its liability for damages to the employer under the main contract or to any other subcontractor under any other subcontract where such liability had been caused by the defendant’s breach of that subcontract. Furthermore, it applied to any loss and expense incurred by the claimant that was “further” to such third-party claims (that is, where the loss and expense was parasitical or consequential upon the third-party claims). “Loss and expense” meant loss suffered or expense incurred as a result of delay or disruption. However, the cap did not apply to any claims by the claimant against the defendant for damages arising out of the defendant’s failure to carry out and complete the subcontract works properly or at all; nor did it apply to any claim by the claimant to be reimbursed its reasonable costs under the contract.
Bernard Livesey QC and Paul Sutherland (instructed by Maxwell Winward LLP) appeared for the claimant; David Thomas QC and Jonathan Lee (instructed by Cobbetts LLP, of Birmingham) appeared for the defendant.
Eileen O’Grady, barrister
