You can’t always get what you want

The operation of the sort of complex contractual arrangements for risk allocation that are typical of PFI projects came under close scrutiny recently after an incident involving a fire which delayed completion of the construction phase of a major project.

Leicester council entered into a PFI contract with Biffa Leicester for a domestic waste recycling plant. Biffa Leicester engaged Biffa Waste to construct the plant, and it subcontracted the design and construction to MEH. MEH also entered into a direct warranty agreement with Biffa Leicester in which it undertook to comply with its duties under the subcontract.

As usual with this sort of project, key elements of the work were passed further down the contractual chain. It was a sub-subcontractor of MEH that was responsible for providing what is known as a ball mill, the purpose of which is to break down waste.

During the commissioning of the plant supplied by MEH, it was discovered that the ball mill required modifications. While that was being done, a fire broke out that caused substantial damage to the plant and delayed when it could be put into operation.

Biffa Leicester and Biffa Waste brought proceedings in the Technology and Construction Court against, among others, MEH. The parties’ experts were unanimous that the fire had been caused by welding or grinding sparks igniting combustible material near to where the modifications were being carried out. The judge considered that two of the parties further down the contract chain were culpable for the incident. Nevertheless, so far as Biffa Leicester and Biffa Waste were concerned, it was MEH that was contractually responsible for their default.

Biffa Waste’s contract with MEH included a typical provision entitling it to claim liquidated damages at a fixed rate in the event that MEH failed to complete on time. It stated that any damages payable would be “the only monies” due from MEH in the event of late completion. It also went on to provide that Biffa Waste’s right to damages was without prejudice to any other remedy that it might have under the contract.

The judge dismissed the distinction between ‘simple’ and other delay. It would, he said, make a commercial nonsense of the liquidated damages provision

MEH’s warranty to Biffa Leicester provided it with a parallel claim against MEH but it stated that MEH’s liability under the warranty should be no greater than it would have been had it been named in the subcontract instead of Biffa Waste.

Clearly, the losses suffered by Biffa Leicester and/or Biffa Waste exceeded the amount of any damages recoverable under the subcontract. Accordingly, Biffa Waste sued MEH to recover such additional losses attributable to the delay caused by the fire as general unliquidated damages.

In its defence, MEH relied upon the wording in the damages provision stating that any damages due would be the only money recoverable. Biffa Waste sought to sidestep this by seeking to distinguish between “simple” delay, meaning delay caused exclusively by the failure to complete on time, and delay that results at least in part from breach by the contractor of another of its obligations. It submitted that it was entitled to recover unliquidated damages where the latter type of delay occurred.

That position was supported, it claimed, where, as here, the contract expressly stated that entitlement to liquidated damages was to be without prejudice to any other remedy under the subcontract.

Mr Justice Ramsey was unimpressed. First, he held that “the only monies due” meant what it said. He dismissed the distinction that Biffa Waste had sought to draw between “simple” and other delay, commenting that if such a distinction were to be valid it would make a commercial nonsense of the liquidated damages provision and would fly in the face of the principle that they represent an exclusive remedy for delay. Finally, he made it clear that the provision regarding other remedies meant non-financial ones, such as termination.

The judge also considered MEH’s exposure under the direct warranty in favour of Biffa Leicester. He was satisfied that a direct warranty agreement could not be used to achieve a double recovery from the party in breach. Furthermore, the wording referred to above meant that Biffa Leicester would in any event have been unable to recover anything more than Biffa Waste could itself have done under the subcontract.