| Date | 19 October 2005 |
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| Judgment | Decoma UK Ltd v Haden Drysys International Ltd, TCC 27 July 2005 |
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| The Issue | Whether a contractor can take advantage of its own breach of contract to rely upon a contractual provision for the capping of damages. |
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| Implication |
A
presumption that a party cannot take advantage of its own wrong is
capable of being rebutted by the clear words of the contract. |
printIn October 1999 Haden Drysys entered into a contract with Decoma to design, construct, install and commission a "turnkey" paint finishing system to be installed at Decoma's facility at Halewood on Merseyside. The contract value was approximately £8.75 million. The contract was a bespoke one specifically negotiated between the parties, but in many respects incorporated familiar terms for contracts of this type. The contractor undertook to complete the works in a timely, efficient and workmanlike manner and to do everything necessary for the proper execution and completion of the works in conformity with all relevant standards and the equipment performance specifications contained within the contract. Under Article 11 of the contract the contractor warranted that upon final completion, the material and equipment supplied and installed by him would operate in accordance with the equipment performance specifications. Article 12 of the contract provided for liquidated and ascertained damages. Such damages were payable if Haden failed to achieve the final completion date and the sum ascended on a rising scale to a maximum amount of 5% of the contract price. The paint finishing system had been taken over and operated by Decoma for some years before complaints concerning Haden's performance came to court in proceedings where Decoma claimed sums in excess of £18 million from Haden. The court was asked to accept certain assumptions concerning Haden's performance in order to examine the relevant contract provisions in a series of preliminary issues. Those included that Haden had had considerable difficulty with the installation of the plant and equipment and had been unable to install all of the equipment in accordance with the specification so that performance testing was never completed and thus the final acceptance test was never satisfied. In answer to the claims made by Decoma, Haden argued that it was entitled to rely on the conditions of contract in various ways in order to limit or exclude its liability for damages. If Haden's contentions were correct, Decoma's entitlement to recovery would be severely restricted, in all probability to just 5% of the original contract price. Central to the analysis of the contract was that in common with many contracts of this type, the contract differentiated between the parties' rights and liabilities prior to Final Acceptance and after Final Acceptance of the spray painting system. Prior to Final Acceptance, Haden were bound to complete the paint spraying system such that it passed a Final Acceptance Test by the relevant contractual date for completion. If Haden failed to meet this primary obligation in the period prior to Final Acceptance, Decoma's principal claim would be for liquidated damages as a consequence of Haden's delay in completing the system to the contractual standards. This was capped at 5% of the contract price. Of course the delays might have been so extensive that Decoma's claims for loss of profit or loss of use would be greater than the liquidated damages capped at a maximum of 5%. However that possibility was plainly in the contemplation of the parties at the time they had agreed to the terms of the contract. The cap was simply a part of the general allocation of commercial risk between the parties. The difficulty in this present case was that the delays in completion of the paint spraying system were assumed to be the result of a deep rooted failure on the part of Haden to comply with the various technical requirements. Decoma argued that the contract should be interpreted on a presumption that a party could not take advantage of its own wrong. It argued that the parties did not imagine the situation where the paint spraying system would not have achieved Final Acceptance so long after the Final Completion date and therefore it was unfair as a matter of principle to apply contractual provisions which limited the damages applicable. His Honour Judge Peter Coulson was unconvinced by such argument. He commented that "cap" clauses which are a common feature of commercial contracts, reflect an agreement between the parties that, in the event of a breach, the wrongdoer's liability will be fixed at a preset maximum level. In one sense of course, the wrongdoer who seeks to rely on such a clause is seeking to take advantage of his own wrong because the cap clause in question can only be triggered by his breach of contract in the first place. However, in Judge Coulson's opinion it would be absurd to suggest that if the capped clause was clear, the wrongdoer could not rely on such a provision to limit his liability. Judge Coulson was satisfied that prior to Final Acceptance, Decoma's claims were limited to liquidated damages and subject to the capped 5%. This entitlement was an exclusive remedy for all claims arising out of Decoma's inability to use and make a profit out of the paint spraying system. If there had been a dispute as to whether or not Haden were complying with the contract terms, Decoma could have terminated the contract. The reasons for the delay and the nature and extent of Haden's breaches of contract which may have caused the failure to achieve Final Acceptance were irrelevant to the proper construction of the contract. The warranties given by Haden in respect of the proper functioning of the plant only took effect once Final Acceptance had been achieved, and thus Decoma's claims were limited to 5% of the contract price.
CJ-0541
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