Ruthless but lawful

In his judgment on the Wembley Stadium case, Mr Justice Jackson ruled that Multiplex’s alleged “Armageddon” strategy, which Cleveland Bridge (CBUK) claimed was a plan to bankrupt it and force it off the site, was not unlawful. The Judge found that there was no plan to put CBUK out of business, but that Multiplex was entitled to have a plan to enable it to dismiss a sub-contractor it “rightly or wrongly saw as incompetent” and “to claw back monies which, rightly or wrongly, Multiplex believed it had overpaid...”

The facts

In September 2002, CBUK entered into a £60m lump sum contract to design, fabricate, deliver and erect the structural steelwork at Wembley Stadium including the bowl and huge steel arch. By November 2003, the relationship between the parties had deteriorated as each blamed the other for increasing delays to the steelwork on the project. CBUK said it was suffering losses it could not sustain and sought a substantial payment for variations or alternatively a switch to a cost plus contract.

By February 2004 a financial deal was done, which was recorded in a heads of agreement and a supplementary agreement was signed on 16 June 2004. One of the terms was that the parties would consult before the issue of further payment certificates. In an attempt to agree the valuation, an oral agreement to pay CBUK £32.66m was arrived at. Multiplex treated this as an interim valuation and proceeded to apply contra-charges and deductions in respect of its claims that CBUK had negligently constructed the arch and failed to raise it on time. CBUK said it was an agreed settlement. By July 2004, Multiplex had served withholding notices and was seeking to recover money paid. On 2 August 2004, CBUK left site.

Each side alleged that the other was in repudiatory breach of contract – meaning that the other did not intend to honour its obligations under the contract thereby entitling the innocent party to end the contract. Multiplex referred the disputes in respect of the monies withheld to adjudication but lost and was ordered to pay CBUK £5,952194, which it duly did. The matter ended up in court.

Repudiatory breach of contract

The courts will expect the parties to work through the contract’s dispute resolution procedures in order to resolve differences

On the key issue of repudiation, Mr Justice Jackson said that despite Multiplex’s hard-line attitude, the firm had not been guilty of a repudiatory breach of contract:

• Although Multiplex had substantially reduced an interim valuation in two subsequent interim certificates, the interim valuations were not final and binding.

•The subcontract contained a dispute resolution procedure for dealing with disputed valuations. Multiplex operated it and referred the disputed valuations to adjudication.

• Multiplex had set-off against payments due to CBUK amounts which it said were in respect of Cleveland Bridge’s breaches of contract. When the adjudicator determined that Multiplex was only entitled to deduct 15%, not 50%, Multiplex duly paid the outstanding balance.

• Multiplex was, in principle, entitled to make a deduction for inefficient working. Although its calculation which resulted in the 50% deduction was “not impressive”, Multiplex had taken professional advice and believed it could defend this deduction in adjudication.

As a result, the Judge concluded that CBUK had acted unlawfully by walking off the project. He decided that although Multiplex had been in breach of the supplemental agreement, as it had not adequately consulted CBUK before issuing payment certificates for amounts lower than those claimed by CBUK in July 2004, this breach was not serious enough to be considered repudiatory.

Oral agreements need to be properly documented to ensure that they are contractually binding

The Judge said: “Multiplex issued certificates at the lowest valuations it believed it could defend. This strategy, although ruthless, was lawful.”

The Judge found that this strategy was lawful even though the reductions it had made were, in one instance, five times greater than the amount the adjudicator subsequently determined was appropriate. Mr Jackson’s conclusion was clearly heavily influenced by his finding that Multiplex’s strategy was not to deliberately take steps to put Cleveland Bridge out of business and that Multiplex had complied with the dispute resolution procedure in the subcontract.

Lessons to be learnt

•The case demonstrates how difficult it is for a contractor successfully to argue that an employer’s under-certification amounts to a repudiatory breach.

• If there are payment disputes during the construction phase of the project, the courts will expect the parties to work through the contract’s dispute resolution procedures to resolve their differences.

•Oral agreements need to be properly documented to ensure that they are contractually binding.