Bluewater Energy Services BV v Mercon Steel Structures BV and Others

[2014] EWHC 2132 (TCC)

One of the many cases Mr Justice Ramsey had to consider was whether or not Mercon had failed to comply with the notice requirements in clause 14 in respect of any claimed variations. The relevant clauses stated as follows:

“14.3 (a) If the CONTRACTOR considers that an occurrence has taken place for which it is entitled to receive a VARIATION, the CONTRACTOR shall request without delay in writing that BLUEWATER issue a VARIATION...

(b) If the CONTRACTOR fails to submit requests for VARIATIONS in accordance with Clause 14.3 (a) when it considers or should reasonably have considered that an occurrence has taken place for which it is entitled to receive a VARIATION and/or fails to provide supporting estimates in accordance with Clause 14.1, the CONTRACTOR shall, at the sole discretion of BLUEWATER, forfeit any right to receive such VARIATIONS and any rights concerning adjustment to the CONTRACT PRICE and/or SCHEDULE OF KEY DATES.”

Bluewater argued that compliance with clause 14 was a condition precedent to recovery in respect of the disputed VORs. It was for Mercon to prove that, in respect of each disputed VOR, it complied with the requirements for notice or that, in respect of that particular VOR, Bluewater exercised its discretion unequivocally to consider the VOR in any event. Mercon raised a number of defences including that compliance with the administrative provisions of clause 14 was not a condition precedent.

Further, Mercon said that a refusal to consider a VOR only because there was a procedural defect in making it would not be a proper exercise of discretion and that the courts readily uphold notices that have achieved their purpose, even if there is some technical flaw. If a party’s rights under a contract are contingent upon performance of an obligation, that obligation must be clearly set out. If there was any genuine ambiguity in the wording as to whether the notice requirement was a condition precedent, then it should not be construed as being a condition precedent.

Mercon also submitted that if it failed to submit a request or provide supporting estimates in due time, then it did not lose its rights to extra time or money but rather at the sole discretion of Bluewater, it would lose any right to receive such Variations and any rights concerning adjustment to the Contract Price and/or Schedule of Key Dates. The loss of rights for non-compliance with clause 14 was not automatic but a matter for Bluewater’s discretion and Bluewater did not say that it was entitled to and was exercising its discretion or that, it had any or any proper basis for so doing. Such a contractual discretion must be exercised for the proper purposes of the contract as noted by LJ Rix in Socimer International Bank Ltd v Standard Bank London Ltd.

Looking at clause 14 as a whole, the Judge considered that variations were a matter for Bluewater to issue, instruct or authorise. Clause 14.3(b) referred to Mercon failing to submit requests in accordance with clause 14.3(a) “when it considers or should reasonably have considered that an occurrence has taken place” or failed to provide supporting estimates in accordance with clause 14.4. However, the provisions as to the forfeiture of rights were subject to the qualification that the rights shall “at the sole discretion of Bluewater” be forfeit. The Judge agreed with Mercon that LJ Rix’s decision about contractual discretion in Socimer therefore applied. The underlying purpose is that the discretion should not be abused. Rather, Bluewater’s exercise of the discretion was limited, as a matter of necessary implication, by concepts such as honesty and the need for the absence of arbitrariness.

Here, the notice provisions were necessary, in the context of making adjustments to the Contract Price and Schedule of Key Dates, so that Bluewater as the decision maker had information in a timely manner so that it could properly assess those adjustments. In the view of the Judge:

“In such circumstances the absence of information given at a particular time may have no effect on Bluewater’s ability to make those adjustments. It would clearly be an abuse for Bluewater to reject a request for a Variation or to seek to forfeit Mercon’s rights to additional payment or an extension of time, merely because the information was not given “without delay” or some information was missing. To do so would mean that Bluewater was entitled to have work carried out for which Mercon would receive no payment and for Bluewater to cause delay and then also recover liquidated damages for that delay. No clearer case of abuse can be made out and would be contrary to the limitations on Bluewater’s discretion in terms of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.”

Bluewater had not sought to justify any exercise of its discretion to forfeit Mercon’s rights. It merely said that it was for Mercon to establish that it complied with the contract provisions. That was not sufficient. Bluewater should have decided whether to exercise its discretion to forfeit Mercon’s rights to an adjustment. Mere lateness or lack of some information was not an adequate basis for doing so under the Contract.

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