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The Perils of Poor Planning

Interserve Construction Limited v Hitachi Inova Ag [2017] EWHC 2633

The claim arose out of the construction of an energy from waste plant in Worcestershire. The defendant, Hitachi, was the main EPC contractor and entered into a Design & Build sub-contract with the claimant, Interserve Construction. By way of letter dated 6 July 2015, Hitachi sought to terminate Interserve’s employment.

The relevant clause in the contract upon which Hitachi relied to terminate read:

43.1 If [specified terminating events occur] then, subject to sub-clause 43.1A (…) the purchaser [H] may forthwith by notice terminate the employment (…).

Sub-clause 43.1A In the case of a default by [I] under [specified terminating events], [H] may (at its absolute discretion) notify [I] of the default and if [I] fails to commence and diligently pursue rectification (…) within a period of seven days (…) [H] may by notice terminate the employment (…).

Within its termination notice, Hitachi stated that it did not wish to exercise its discretion under sub-clause 43.1A.

Interserve sought a declaration arguing that the two clauses together were to be read as denying Hitachi the right to terminate without first giving notice under 43.1A and the seven day rectification period expiring. Interserve argued that, on a true construction of clause 43.1, a notice to terminate its employment may only be served if Hitachi have first served a notice under clause 43.1A (and the seven day rectification period has expired).

Hitachi argued that the giving of notice under clause 43.1A is ‘at its absolute discretion’ and that the giving of notice under clause 43.1A is not a condition precedent to the giving of a notice to terminate under 43.1. To put it another way, if Hitachi chose to give notice under clause 43.1A then it may give notice to terminate ‘if the Contractor fails to commence and diligently pursue the rectification of the defaults within a period of seven days’, but, if it chose not to give notice under clause 43.1A, then it may simply give notice to terminate forthwith under clause 43.1.

The Court considered that the contract was a complex commercial document which, the Court inferred, had been carefully considered and had been entered into by two sophisticated commercial parties.

The Court agreed with Interserve that the natural meaning of the words ‘subject to clause 43.1A’ is that the right to terminate is ‘subject to’, or conditioned on, clause 43.1A. As such, the right to terminate only arises if clause 43.1A has been operated.

The Court considered that Hitachi was right to submit that the words ‘subject to’ may have different meanings in a different context. However, the Court decided that, in the context of this contract, the meaning of the words was obvious. Weight was given to this because ‘subject to’ had been used throughout the contract and elsewhere in the contract the expression had the effect that a right under one clause is limited by the provisions of another clause. This was exactly the use of the expression as argued by Interserve in clause 43.1.

Further, the Court found that Hitachi’s construction gave no meaning to the words ‘subject to’. The Court tested the point by omitting the words from the clause, which resulted in there being entitlement to give notice to terminate forthwith in all circumstances. The Court considered that it may well be wary of an argument from redundancy, however, it seemed that a construction that fails to give effect to words such as ‘subject to’ is unlikely, particularly in a bespoke contract.

Hitachi’s counter argument turned on the words ‘at its absolute discretion’ in clause 43.1A.

The Court disagreed with Hitachi’s argument that, if the operation of clause 43.1A is treated as a condition precedent to the right to give notice to terminate, then there is no reason for ‘the absolute discretion’ given to it in clause 43.1A. The Court considered that the purpose of the words was to emphasise that whether to give such notice and commence the termination process is a matter for Hitachi and that failure to do so would not have adverse consequences, such as an argument that the absence of a notice evidences the absence of a default or the waiver of its right to rely on the default.

Practice points

  • Think carefully about subordinating clauses to others yet at the same time trying to retain some power or discretion in the main clause.
  • A power of a contracting party cannot be both ‘at its absolute discretion’ and ‘subject to’ a different term in the contract without one of those clauses giving way.
  • Where an event entitling one party to terminate occurs, it is always in the party’s absolute discretion whether to terminate, unless that discretion has been limited expressly in the contract.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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