Jordan ... reminder of the need to be careful in use of contractual terminology.
Assign subcontracts with caution
STUART JORDAN* discusses the problems a contractor can have if required to assign subcontracts at termination of the main contract.
01 December 2020
Many forms of main construction contract require the contractor to assign to the owner (employer) all subcontracts (or those the owner wants) on termination of the main contract. The usual reason is, of course, to help completion of the works with the minimum extra cost and delay following the termination.
At the same time, termination rarely extinguishes either party’s rights, liabilities and remedies accrued up to the point of termination, from a pre-existing breach of the contract. So the main contractor could remain liable for defects in the works or for other breaches of the main contract which might be the responsibility of a subcontractor whose subcontract has been assigned to the owner. Those breaches might even have been the grounds for the termination of the main contract – and yet the main contractor may have assigned away the right to pursue that subcontractor in order to cover that liability.
That’s a tricky position to be in, but is it realistic? Can parties actually be held to have agreed to this seemingly unjust outcome? The short answer, from a recent court decision, is – yes. And it is another reminder of the need to be careful in our use of contractual terminology.
That decision arises from a design-construct contract for an energy-from-waste power plant. The project went wrong and the parties fell out in familiar ways. The owner – Energy Works (Hull) Ltd - eventually terminated the contract, citing defects and delays to commissioning; and claiming the additional costs to correct the defects and to complete the works by other means. The contractor – MW High Tech Projects UK Ltd – disputed the grounds of termination, citing out-of-specification feedstock as the reason for the delays.
Those core issues remain to be decided, but the court was asked to decide preliminary issues arising from the contractor’s obligation to assign its subcontracts to the owner. The contractor sought to recover any liability from its subcontractor, Outotec, despite having assigned that subcontract to the owner pursuant to an obligation to “assign any subcontract” after termination of the contractor’s employment under the main contract. The contractor faced the “tricky position” outlined above and argued, amongst other things, that:
- The assignment was limited to future rights and obligations, so that the contractor could still recover for subcontractor breaches pre-assignment; or
- Alternatively, if (as both the owner and subcontractor argued) this was an assignment of both past and future rights under the subcontract, then it was also an assignment of past and future obligations; and was effectively a novation.
The judge rejected the contractor’s arguments, finding that this was an assignment of both existing and future rights, and it was not a novation. Noting the contractor’s argument that it would not have been a plausible or commercial intention that they should give up rights to recover but keep equivalent liabilities, the judge commented that the parties could have added words to clarify that intention but did not.
In particular, the judge noted that assignment and novation are very different concepts, and there was no evidence from the contracts or from contemporaneous correspondence that the parties intended a novation. They freely agreed to assignment only.
This judgment is based on the ordinary and natural meaning of assignment, which is a feature of just about every contract. However, most contracts (as with the above contract) speak simply of “assignment of [the/a] contract” rather than assignment of a party’s interests in a contract. The “assign the contract” wording was criticised in a well-known English court decision as implying that “the contract” as a whole – both benefit and burden – can be assigned. In fact (the judgment continued), “The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation.”
This is about terminology: “assignment” technically can refer only to rights, not obligations, so in fact, we could criticise this judgment itself for implying that there can ever be an assignment of burden, with or without consent. It goes to show how easy it is to go wrong in this area!
In practice, there is no rule against the parties agreeing whatever they want in respect of the transfer of rights and obligations. A party can assign its rights without counterparty consent, unless the contract restricts it. And a party can transfer its obligations also if the counterparty agrees – as they commonly do in construction contracts.
Finally, to note for our industry in the Gulf: assignment and novation are just some of the numerous examples of terms with specific meanings in English Law, but which are commonly used in contracts under other governing law. So added care is needed.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
