Contract – Compromise — Rescission – Disputes arising when building works delayed – Parties reaching compromise agreement – Defendant rescinding agreement – Whether restrictions on claims surviving rescission of agreement – Issue decided in favour of claimant
The claimant and the defendant entered into a building contract, under which the claimant was to design and construct an 11-storey development comprising 46 residential flats and a ground-floor commercial unit in Glasgow.
Disputes arose between the parties when the works were not completed on time. The claimant claimed sums in respect of the valuation of measures works and payment for loss and expense under the building contract. The defendant disputed those claims and sought liquidated damages for delay. The parties reached a compromise in a minute of agreement that included an agreed schedule of works. Further difficulties arose and the defendant purported to terminate the minute on the basis that the claimant had broken that contract by failing to complete the outstanding works timeously. The claimant did not accept that the defendant’s termination was valid and contended that, by so acting, the defendant had repudiated the compromise agreement. The claimant continued to work on the site but subsequently purported to terminate the minute contending that it accepted the defendant’s rescission.
The claimant: (i) sought damages for breach of the compromise agreement; (ii) made a claim for unjustified enrichment on the hypothesis that the defendant had validly terminated the compromise agreement; and (iii) pursued a fall-back claim under the building contract. The defendant cross-claimed on the premise that the compromise agreement had no continuing effect. The principal issue between the parties was whether their surrender of rights in the minute and the correlative rights conferred thereby had survived the rescission.
Held: The issue was decided in favour of the claimant.
A material breach of contract would entitle the innocent party to rescind the contract and would thereby absolve both parties from future performance of their primary obligations. The contract did not come to an end, but the parties might use it to support claims for damages and also to enforce provisions that they intended would survive rescission. Such provisions could include ancillary clauses, such as arbitration clauses and those conferring jurisdiction or specifying the proper law of the contract, and exclusion clauses and clauses limiting liability or regulating claims for damages, such as liquidated damages clauses. Rescission did not absolve parties from performing the primary obligations that were due to be performed at the date of rescission (so-called accrued rights). Thus, a party could enforce the payment of debts or arrears unconditionally due under the contract at the time of rescission. It was necessary in all cases to consider the terms of the contract so as to ascertain the parties’ intention when determining whether a particular clause had effect after rescission: Lloyds Bank v Bamberger 1993 SC 570 applied.
The fundamental question of construction was what the parties had intended to achieve by the compromise agreement. In the instant case, the minute contained an intention to waive the claimant’s claims for payment for measured sums and for loss and expense as well as the defendant’s claims for liquidated and ascertained damages (LADs). That was achieved by defining the date of practical completion, fixing the claimant’s financial entitlements under the building contract and the defendant’s surrender of certain of its claims. Thereafter, the claimant had to complete and the defendant had to pay for the scheduled works.
There was nothing in the wording of the minute that made the defendant’s waiver of past claims for delay, their agreement of the date of practical completion and their surrender of the right to claim LADs conditional on the claimant’s timeous performance of its obligation, under the minute, to complete the scheduled works. Similarly, there was nothing to suggest that if the defendant failed timeously to pay to the claimant one of the tranches as agreed, the claimant would be released from the cap on its entitlement under the minute.
Had the parties wanted to make their mutual surrender of claims dependent on future performance, they could readily have said so but they did not. By the compromise agreement, the parties had resolved the difficult problems that had arisen under the building contract and created a new and limited entitlement to payment for the claimant and a restricted entitlement on the part of the defendant to enforce the building contract. It was consistent with that approach that the limitation of the claimant’s right to payment and the restrictions on the defendant’s remedies under the building contract survived the rescission of the minute.
Sean Smith (instructed by MacRoberts) appeared for the claimant; Garry Borland (instructed by Anderson Strathern LLP) appeared for the defendant.
Eileen O’Grady, barrister
