| Date | 28 March 2001 |
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| Judgment | Chiemgauer Membran Und Zeltbau GmbH (formerly Koch Hightex) -v- New Millennium Experience Company 15 December 2000 |
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| The Issue | Claims for loss of profit following termination of contract. |
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| Implication |
A contractual entitlement to direct loss and/or damage following termination will include any profit that the claimant can prove it would have made from the contract. In assessing such entitlement to loss of profit, the court will assume that the innocent party would have been able to perform its contract notwithstanding that parties' insolvency following the date of termination. |
printIt is perhaps no surprise that a project of the scale and complexity of the Millennium Dome has been reported somewhere in the courts. An early and highly publicised conflict concerning the project involved the proposed supplier for the fabric skin for the dome itself, when the client chose to cancel an order it had placed with a German company called Koch Hightex. Koch had submitted bids for both a Polymer Coated Polyester (PVC) structure and a Teflon Coated Fibreglass (PTFE) structure. The client, the New Millennium Experience Company, had notified Koch in May 1997 of its intention to award the contract for the PVC roof, and instructed Koch to commence works. It was intended that this instruction would be superseded by a formal contract to be entered between the parties. Works commenced and in June 1997 the client sent to Koch a trade contract, supplemental agreements and contract drawings for signature. Koch executed these documents in early July 1997. In August 1997, however, NMEC terminated the employment of Koch under the express terms of the contract. This termination appears to have been brought about because NMEC had changed its mind about the suitability of the PVC covering for such a prestigious project. The decision seems to have been prompted by representations made by environmental pressure groups. Had NMEC complied with the Public Works Contract Regulations, it is possible that Koch would then have been awarded the contract for the PTFE roof. This did not however happen, and the works were placed with another supplier. In consequence, Koch submitted a claim for a figure in excess of £2.2m. NMEC had first applied to the court for the case to be dismissed, on the basis that Koch had failed to provide a performance bond and guarantee in accordance with the terms of the contract. In November 1999, the Court of Appeal had dismissed that defence. In December 2000 the matter came before the courts again for further guidance upon the manner in which the contract should be interpreted. The cancellation of the order by NMEC had been effected under a "no fault" termination clause of the contract. This provided that should the contract be terminated without fault on the part of Koch, Koch would be entitled to claim the direct loss and/or damage caused by the determination. The parties sought guidance on two points of principle. Firstly, whether the term "direct and/or damage" under the contract could embrace the loss of profits which Koch might prove that it would have made had the contract not been terminated. Secondly, whether in assessing such direct loss and/or damage, the court must assume that Koch would have been able to perform the contract but for the termination. As to the first of these issues, NMEC argued that a loss of profit could never be a direct loss, because it necessarily depended upon future events. The court rejected that proposition, and citing Hadley v Baxendale, confirmed that a loss of profit does indeed arise "naturally and in the ordinary course of things" from the termination of a contract in such circumstances. Providing Koch can in due course establish that it would have made a profit from the performance of the contract had it not been terminated, it will be entitled to recover that lost profit under the terms of the contract. The second question concerned whether Koch would in any event have been able to complete the works had the contract not been terminated. Shortly before NMEC had terminated the contract, Koch had been awarded an extremely large contract to supply a PTFE membrane in Saudi Arabia. This contract was for the Muna Valley Project for the erection of 2.5 million square metres of PTFE structures for the use of pilgrims to Mecca. Koch had completed the first of three phases and was experiencing payment difficulties. This Saudi Ministry had sought to revise the terms of the agreement upon which Koch had contracted and, believing these terms to be improper, Koch had refused to implement them. As a result, the Saudi Ministry had called Koch's performance bond reported by the court to have been in the staggering sum of about £400m. The shock wave of the calling of the bond lead to Koch filing for bankruptcy in Germany in August 1998. NMEC argued that these events, which were unconnected with the Millennium Dome, demonstrated that Koch would not have been able to complete the contract for the Dome had it not been terminated. NMEC argued this should be taken into account in assessing Koch's entitlement to direct loss and/or damage under the contract. The court noted that had the contract been repudiated by NMEC, the law would require it to be assumed that the contract would have otherwise been performed by Koch according to its terms. The fact that NMEC had not repudiated the contract, but had instead terminated it according to its express terms, made no difference. According to the evidence, NMEC could not establish that Koch's insolvency was inevitable at the date of the termination of the contract for the Dome. Accordingly, it would not be possible as a matter of law for Koch's damages to be reduced or obliterated because of its subsequent insolvency.
CJ-0112
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