| Date | 20 October 2004 |
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| Judgment | North Sea Ventilation Ltd v Consafe Engineering (UK) Ltd, TCC 20 July 2004 |
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| The Issue | Variation of contract and liquidated damages provisions. |
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| Implication |
A failure to rely strictly on the provisions of a contract will not necessarily amount to a wavier of rights. A liquidated damage clause providing for graduated sums according to the seriousness of the breach will generally be enforceable. |
printConsafe Engineering (UK) entered into a contract with British Nuclear Fuels for the design, fabrication, installation and commissioning of a retrieval system for plutonium chemical waste at its Drigg site, near Sellafield in Cumbria. The retrieval system required heating, ventilation and air-conditioning equipment and Consafe subcontracted with North Sea Ventilation to supply this equipment for the sum of approximately £900,000. Disputes arose between North Sea and Consafe concerning the extent of additional works which North Sea claimed it had carried out amounting to almost £700,000. Consafe in return applied a cross claim for liquidated and ascertained damages for late completion of the subcontract works. In an attempt to simplify the trial of these matters in court, the parties agreed to put a series of preliminary issues in front of His Honour Judge Cockroft. The first of these concerned the mechanisms contained within the subcontract for ordering and valuing variations. Consafe denied that they were liable for the additional variations claimed by North Sea, contending that many of those variations were for work contained within the original scope of the subcontract. In addition Consafe argued that the subcontract contained a protocol within Clause GC35 which had to be followed in the event that an instruction from Consafe varying the work gave rise to a claim for additional payment. Clause GC35 required that any changes in the work could only be directed by written instruction. It required that if North Sea determined that an instruction changed the scope of work, contract price or programme, it was required to submit a proposal for performing the change within 10 days. The clause stated that if the contractor proceeded without Consafe's written approval of its proposal, or written instructions to proceed, it was deemed that the instruction would not constitute a change to the scope of work, contract price or programme. In this event, North Sea was to be conclusively barred from seeking extra payment at a later date. North Sea argued that Clause GC35 was not incorporated into the subcontract agreement, or alternatively that the parties had varied the agreement subsequently, such that written notice of any change in the scope of work was no longer required from either party. Judge Cockroft remarked that on his first reading of these papers, he had to confess that it was easy to form the view that North Sea had performed substantial extra work for which Consafe were seeking to avoid payment by resorting to the strict written terms of the contract which neither party had adopted during the course of the works. Had this been a mere pretext to avoid payment, Judge Cockroft considered that he would have given it a short shrift. However, there was clearly more to the case than a simple reliance upon Clause GC35. Only one of the 32 disputed variation items was disputed on the grounds of lack of notification under GC35 alone. Moreover, a number of variations had already been paid for by Consafe. GC35 was simply one of many factors, perhaps not even the most important, determining whether Consafe paid a variation order or not. The onus was on North Sea to prove that the contract had been varied to exclude the operation of Clause GC35 in its entirety and this North Sea had failed to do. Judge Cockcroft noted that he was looking for clear, cogent and consistent positive conduct to show that the written terms were displaced. A variation could not be spelt out of inactivity or silence or failure invariably to insist on strict compliance to the letter with the written clause. A second preliminary issue concerned whether the liquidated and ascertained damages provisions of the subcontract operated as a penalty. Following the 1915 case of Dunlop Pneumatic Tyre Co v New Garage and Motor Co, Judge Cockroft noted that a penalty is an extravagant and unconscionable clause in comparison with the greatest loss that could result from the breach, whereas a liquidated damages clause is a genuine covenanted pre-estimate of loss. Judge Cockroft also noted the case in 1993 of Philips Hong Kong v The Attorney General of Hong Kong in which it was said that striking down a penalty clause is a blatant interference with freedom of contract which can only be justified where there is oppression. The subcontract between the parties provided for graduated sums increasing in proportion to the seriousness of the breach. This was entirely characteristic of a liquidated damages clause which Judge Cockroft commented was commonplace in commercial contracts. Again the onus was on North Sea to prove that the liquidated damages provision of the subcontract amounted to a penalty clause. Judge Cockroft was satisfied that there was no oppression in the contract provision and that the clause was enforceable.
CJ-0442
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