A waste of energy? Assignment, novation and contribution

Energy Works, the purchaser, and MW High Tech, the main contractor, signed an EPC contract relating to a “fluidised bed gasification power plant, capable of processing refuse derived fuel”. The contractor entered into a subcontract with the subcontractor, Outotec. Following defects and delay (which were assumed for the purposes of resolving preliminary issues), the purchaser terminated the main contract and required the contractor to assign the subcontract in the purchaser’s favour. The purchaser then sued the contractor for damages for defects, delay and other termination losses. The contractor sought to pass on its liability to the subcontractor.

The court resolved two preliminary issues: (1) did the contractor’s assignment of the subcontract transfer all benefits (ie accrued and future rights), and if it transferred all benefits, did it also transfer all obligations to amount to a novation; and (2) could the contractor recover a contribution from the subcontractor based on (a) its accrued rights under the subcontract, or (b) under the 1978 Act.

To resolve issue (1), the judge considered the old chestnut of “assignment versus novation”, noting that interpretation of assignment provisions must include consideration of the words used against the factual and contractual matrix, including any common commercial purpose of the provisions. The court held that an assignment of the contractor’s future and accrued rights had occurred, and made the following observations:

• The use of “assignment/assign” in contractual documents strongly suggests that the parties intend to transfer the benefit (ie both accrued and future rights, but not the burden). It is possible to assign future – without accrued – rights, but a clear contrary intention is needed to displace the status quo, and no such intention was evident.
• The principle of “conditional benefits” (whereby a positive obligation can be transferred under an assignment when it is inextricably linked to the benefit assigned) did not assist the contractor either. The principle’s operation is a question of contractual construction, and the contractor failed to show an inextricable link between any positive obligation or benefit. In any event, this wouldn’t amount to a novation.
• Novation would mean that the original subcontract would be extinguished and a new contract (burden and all) between the purchaser and subcontractor would arise, provided that due consideration was provided. This requires the subcontractor’s consent, which was not overtly forthcoming. Nor had the subcontractor given advance consent to novation.
• The contractor assumed a commercial risk in giving up its right under the subcontract to pass on to the subcontractor claims for which the contractor retained responsibility to the purchaser under the main contract, and it is not for the court to re-write that contractual arrangement.

For issue (2), as there was an effective assignment of the contractor’s accrued and future rights, it had no contractual right to seek a contribution from the subcontractor. Any claim for a contribution must arise under the 1978 Act. One condition for a contribution under the Act is that the contractor and subcontractor are potentially liable to the purchaser for the “same damage” (meaning the same loss or harm not the same damages). There is a glimmer of hope for the contractor, as on the assumed facts, the court found that subcontractor was at least partially liable for the delay and defects, but not for the termination losses under the main contract, as the purchaser was not shown to be able to recover those losses from the subcontractor.