RELEVANT CONTRACT PROVISIONS

Neutral Citation Number: [2018] EWHC 2866 (Comm) 

Claim No LM-2016-000101 

IN THE HIGH COURT OF JUSTICE 

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES 

LONDON CIRCUIT COMMERCIAL COURT (QBD) 

 1) GPP BIG FIELD LLP  (2) GPP LANGSTONE LLP  Claimants 

– and – 

SOLAR EPC SOLUTIONS SL 

(formerly known as PROSOLIA SIGLIO XXI) 

 Background: 

The primary claim of GPP, the Employer and first claimant, under the Hamptworth contract is for liquidated damages amounting to £631,759 due from SOLAR EPC, the contractor, for failing to commission the plant by the specified date, resulting in a delay of 254 days.

SOLAR EPC defends this claim by arguing that the liquidated damages clause is unenforceable as a penalty and that force majeure events relieved them of their obligation to achieve commissioning by the contractual date.

GPP’s alternative claim seeks damages at common law, countered by SOLAR EPC asserting a lack of adequate proof of relevant losses.

Additionally, SOLAR EPC presents defenses related to its liability as a guarantor, including arguments about discharge due to failure of disclosure by GPP, and a change in the agreed cabling route affecting liability. However, GPP disputes these defenses, emphasizing SOLAR EPC’s indemnity obligation rather than a guarantor role.

Issues:

– Is clause 21.5 (Delay Damages)  an unenforceable penalty?

– Was any part of the relevant delay caused by force majeure?

– Is clause 6.2 a guarantee or indemnity?

– Does the doctrine of “unusual features” and/or the rule in Holme v Brunskill apply to contracts of indemnity

1. Contractual construction Clause 21.5 Delay Damages

This contract encompassed the turnkey delivery of the PV Project, including all necessary permits and agreed ROO-FIT tariffs of £0.089/kWh for 25 years. It outlined the project site, confirmed receipt of necessary permits and licenses, and formalized the agreement for executing all works and services. Parties to the contract included the Contractor, the first claimant, the Guarantor, and GPP K/S, with the Guarantor and GPP K/S guaranteeing the obligations of the Contractor and the first claimant, respectively. A draft “Independent Engineer Technical Report” produced in May 2012 by OST Energy, commissioned by GPP, served as a technical due diligence document for the Hamptworth Estate project. This report represented the project’s purchaser’s interests post-Provisional Acceptance Certificate issuance and focused on technical risks post-construction, including data room analysis, site visits, and stakeholder discussions. The Contractor, with Lark Energy handling construction and Enerparc managing design, assumed overall EPC responsibility. The contract addressed modifications to project services and highlighted the transition from Temporary to Permanent Connection for grid access, reflecting the project’s connection strategy.

Two options for grid connection are outlined: a “Permanent Connection” and a “Temporary Connection.” While the former involves connection to the grid at Redlynch Primary Substation, the latter aims for a temporary connection closer to the site. 

OST Energy highlighted concerns regarding the feasibility of the Temporary Connection, emphasizing the importance of ensuring FIT eligibility due to the limited export capacity of 1000 kVA and the need for full plant commissioning before the FIT deadline. Clauses 25.1 to 25.5 detailed “Provisional Acceptance Tests,” leading to the issuance of a “Provisional Acceptance Certificate” after connection to the Grid via the Permanent Connection. Final Acceptance Tests under clauses 25.10 and following were to lead to the issue of a Final Acceptance Certificate after a warranty period. Clause 18.1 specified a lump sum price inclusive of all costs until the start of grid injection, with Clause 18.6 allowing for the first claimant to set off any proven financial loss against the price. Clause 19.1 outlined payment terms, with 35% payable upon contract signature, a further 32% upon completion of main component procurement, and the remaining 33% paid in instalments upon achieving milestones, including tariff confirmation, evidence by Ofgem, Provisional Acceptance, and Permanent Connection. Additionally, Clause 21 established penalty provisions for delays exceeding fifteen calendar days from the commissioning date, with compensation for loss of production starting from July 1, 2012, outlined based on Technical Due Diligence and the applicable project tariff.

In assessing whether clause 21.5 of the Hamptworth contract constitutes an unenforceable penalty, the court considered various factors outlined by Lords Neuberger, Sumption, Mance, and Hodge in prior judgments. These factors include the balance between the legitimate interests of both parties and the proportionality of the remedy to the breach. Solar argued that clause 21.5 imposes a penalty, pointing to its fixed amount and alleged lack of genuine pre-estimate of loss. However, the court found Solar’s evidence unconvincing and concluded that the clause was likely not extensively negotiated.

Despite this, the court deemed clause 21.5 enforceable, noting its common occurrence in construction contracts and the parties’ equal bargaining power and experience. The court also evaluated the penalty amount, considering it reasonable given the importance of timely performance and the difficulty in precisely estimating losses. The court emphasized that as long as the penalty was not extravagant or unconscionable compared to expected losses, it could be enforceable.

Furthermore, the court observed that while the term “penalty” was used, the reference to “Delay Damages” introduced ambiguity, necessitating examination of the clause’s substance. Ultimately, the court concluded that clause 21.5 did not constitute an unenforceable penalty under the circumstances.

2.Delay Damages: Unenforceable penalty? 

4. The terms of the Guarantee

Solar asserts that it has been discharged from any liability it might have had under the Hamptworth contract clauses 6.1 and 6.2, which relate to guarantees and indemnities. Clause 6.1 stipulates that Solar guarantees the due performance of the Contractor’s duties, while clause 6.2 outlines Solar’s obligation to indemnify the first claimant against losses incurred due to the Contractor’s failure to fulfill its obligations.

Solar argues that it has been discharged from liability due to the first claimant’s failure to disclose certain “unusual features” before Solar entered into its guarantee. Additionally, Solar claims discharge based on the agreement between the Contractor and the first claimant to change the route of the cabling.

However, the first claimant refutes these assertions, arguing that Solar’s liability under clause 6.2 is that of an indemnifier, not a guarantor. Therefore, the doctrines of guarantee law relied upon by Solar to discharge its liability do not apply to contracts of indemnity.

To determine whether clause 6.2 constitutes a guarantee or indemnity, the court considers the nature of the obligations created by the clause. A guarantee entails secondary liability, whereas an indemnity involves primary liability independent of any other obligor. Clauses 6.1 and 6.2 of the Hamptworth contract contain elements of both directions.

While the use of the word “indemnity” in clause 6.2 is a pointer towards an indemnity, it is not conclusive. However, the language used in clause 6.2, describing it as “a separate and independent obligation and liability” and promising to “indemnify” without set-off or deduction, aligns more closely with an indemnity. Therefore, the court concludes that clause 6.2 is properly characterized as an indemnity rather than a guarantee.

Solar’s defenses, specific to its liability as a guarantor, rely on two principles of guarantee law: the obligation of the creditor to disclose any changes in the debtor’s position that might affect the surety, and the rule in Holme v Brunskill, which discharges a guarantor if the underlying contract is varied without their consent.

However, the question arises as to whether these defenses apply to contracts of indemnity. There are authoritative dicta suggesting that these principles do not apply to indemnity contracts. Lord Selborne LC, in Duncan, Fox & Co v North and South Wales Bank, indicated that such principles do not apply when the party sought to be made liable is considered a principal rather than a surety.

Regarding the rule in Holme v Brunskill, opinions are divided. While the case of Webster v Petre suggests that the rule might apply to indemnity contracts, it is not unequivocal authority. More recent opinions, as cited in Associated British Ports v Ferryways NV and Vossloh AG v Alpha Trains (UK) Ltd, indicate that the rule may not apply to indemnities. In these cases, it was recognized that indemnity contracts involve primary and independent obligations, which may not be discharged or affected by variations in the underlying transaction between the creditor and the principal debtor.

Therefore, it appears that the defenses relied upon by Solar, based on principles of guarantee law, may not necessarily apply to contracts of indemnity.

The dicta in the cases of Marubeni Hong Kong and South China Ltd v Mongolian Government and CIMC Raffles Offshore (Singapore) Limited v Schahin Holdings SA present somewhat mixed views on the applicability of the rule in Holme v Brunskill to contracts of indemnity.

In Marubeni Hong Kong and South China Ltd v Mongolian Government, Cresswell J’s observation suggests that if the defendant undertook a primary liability, the principles underlying the rule in Holme v Brunskill might still apply. However, the Court of Appeal did not specifically address this comment, leaving it open to interpretation.

Similarly, in CIMC Raffles Offshore (Singapore) Limited v Schahin Holdings SA, the case involved procedural complexities, and the outcome did not provide a clear ruling on the point of law. Blair J at first instance considered the possibility that an instrument imposing primary liability might not necessarily negate the rule in Holme v Brunskill, but the Court of Appeal opted for a trial, indicating that the issues presented difficulties of analysis and the jurisprudence was somewhat opaque.

However, there is commentary suggesting that even in the context of primary liability instruments, the rule in Holme v Brunskill may still apply. A case comment cited by Sir Bernard Rix in CIMC Raffles Offshore’s case highlights the importance of equity in preventing parties from altering their arrangements to the detriment of a third party, even in the case of primary liability instruments. The comment suggests that the justification for the rule in Holme v Brunskill might be heightened in such cases, given the more onerous nature of primary liability on the part of the guarantor.

Overall, while there is no clear decision definitively establishing whether the rule in Holme v Brunskill applies to contracts of indemnity, the commentary and observations in these cases suggest that the applicability of the rule may depend on various factors, including the nature of the instrument and the equities involved.

• Rule in Holme v Brunskill: The overwhelming consensus from the cases and textbooks cited is that the rule in Holme v Brunskill does not apply to contracts of indemnity. This principle has been supported by various modern cases and authoritative commentary. The reasoning behind this conclusion lies in the distinction between contracts of guarantee and contracts of indemnity. The rule in Holme v Brunskill, which discharges a guarantor upon any variation not deemed obviously insubstantial, is seen as favoring the guarantor excessively and causing uncertainty for creditors. Extending this rule to contracts of indemnity would further complicate matters without significant justification, as the law already offers remedies for misrepresentation and unfair terms.
• Limited duty of disclosure: Similarly, the duty of disclosure imposed upon creditors for the benefit of guarantors is not considered applicable to contracts of indemnity. The decision in Deutsche Bank AG v Unitech Global Ltd establishes that this duty does not extend to indemnities with broad wording. Extending this duty beyond established authority would undermine legal certainty without providing significant benefits.

Ultimately, the judgment rejects Solar’s defenses based on the rule in Holme v Brunskill and the doctrine of “unusual features,” affirming that these equitable protections apply only to contracts properly characterized as guarantees, not indemnities. This decision is supported by considerations of legal certainty and policy.

5. Unusual features

Solar’s defense relies on the doctrine of “unusual features,” asserting that the first claimant failed to disclose critical information regarding the completion date of the project, which could impact Solar’s liability under the guarantee. However, upon examination of the pleaded allegations, it becomes apparent that they fail to establish a case of breach by the first claimant of the limited duty of disclosure imposed by law.

Firstly, the evidence demonstrates that the information in question was indeed disclosed to Solar before it provided the guarantee. Both the email from Gary Gay of G2 Energy and the Ostenergy advice were made available to Solar prior to signing the contract.

Secondly, even if there were any non-disclosure, the matters complained of do not fall within the scope of what the law requires to be disclosed. They consist of opinions expressed in documents received from third parties and do not constitute contracts or dealings between the first claimant and the Contractor.

Despite attempts to refine and extend Solar’s case, the re-formulated allegations do not provide proper grounds for defense under the principle of guarantee law. The assertion that the differing views between the first claimant and the Contractor regarding the completion date constitute “unusual features” does not hold up under scrutiny.

Moreover, the claim that Mr. Garcia, representing the Contractor, expected Mr. Gaarn-Larssen, representing the first claimant, to negotiate a commercial compromise in the event of a missed deadline is unsupported by evidence. While Mr. Garcia may have expected such an outcome, there is no indication that Mr. Gaarn-Larssen had a settled intention not to uphold the contractual terms.

Even if Solar’s case on this point were established, an intention to adhere to the strict terms of the principal contract would not constitute an “unusual feature” warranting disclosure under the law, except in exceptional circumstances not present in this case.

Additionally, Solar’s reliance on Recital IV of the Hamptworth contract as a representation by the first claimant regarding the existence of necessary permits and licenses cannot support a defense of non-disclosure. The evidence shows that Mr. Gay’s email, which contradicted this representation, was indeed conveyed to Solar before signing the contract.

In conclusion, Solar’s defense based on the doctrine of “unusual features” fails to establish a valid ground for defense under guarantee law, and the allegations made do not justify a finding of non-disclosure by the first claimant.

Paragraph 5C.7 of Solar’s defense alleges that it was misrepresented to Solar that the dates set out in the Hamptworth EPC Contract were legally and practically achievable. However, Mr. Walford wisely chose not to pursue this line of argument in closing, recognizing that the pleaded representation is not a statement of present fact and therefore not false. Although his opening submissions relied on Recital IV of the Hamptworth contract as a representation of fact by the first claimant, subsequent examination revealed that this assertion was unfounded.

The context of the transaction and the ownership structure of the first claimant, which was owned by Solar until the completion of the transaction on May 14, 2012, make it improbable that Recital IV was intended as a promise by the first claimant to the Contractor regarding the status of permits and licenses. Instead, it is more likely that the statements in Recital IV were intended to provide assurance from the Contractor and/or Solar to the first claimant, which was investing in the project. This interpretation aligns with the natural meaning of the words used in Recital IV.

Consequently, the words in Recital IV do not constitute a representation by the first claimant, and even if they did, Solar, being aware of the true position from Mr. Gay’s email, cannot plausibly argue that it relied on those words as a representation of the true position. Mr. Walford’s argument that Recital IV gives rise to an estoppel binding only the first claimant also does not advance Solar’s case.

In Solar’s alternative defense, it argues that its guarantee has been discharged due to a variation in the Hamptworth contract without its consent. Initially, Solar pointed to an alleged oral agreement made in August 2012 to vary the cable route and forego claiming Delay Damages. However, this dating was corrected during the trial to November or December 2012. Despite this correction, Solar’s counsel, Mr. Walford, acknowledged that this alleged oral agreement could not be relied upon as a legally binding variation of the contract due to the provisions of the contract and recent legal precedent.

Mr. Walford contended that even though the variation was not legally binding, there was still a departure from the original terms of the contract to which Solar did not consent, thereby triggering the rule in Holme v Brunskill. However, Mr. Parker, representing the claimant, argued that for the rule to apply, the variation must be legally binding, citing the case of Egbert v National Crown Bank. While there are conflicting authorities on this point, Mr. Walford’s argument was based on the assertion that any consensual agreement to alter the principal contract should discharge the guarantor, regardless of its legal enforceability.

However, the court found that the change in the cable route did not constitute a departure from the contractual obligations of the contractor. Instead, it was a change in the method by which the contractor intended to fulfill its existing obligations. This change was expressly contemplated by the principal contract, thus not discharging Solar from its obligations under the guarantee.

Moreover, Mr. Parker argued that even if there was a consensual departure from the original terms of the contract, Solar had effectively consented to it. While both Solar and the claimant were informed of the change by Mr. Garcia, Solar did not communicate its objection or lack of consent directly to the claimant.

Ultimately, the court rejected Solar’s defense, ruling that Solar had not been discharged from its obligations under the Hamptworth contract.

In its counterclaim, Solar asserts that it is entitled to the balance owing to the Contractor under the Hamptworth contract, amounting to £430,628.48. Solar claims that this balance has been assigned to it pursuant to a written assignment agreement dated 12 September 2016. While the assignment agreement and notice were in evidence, their authenticity was not challenged, allowing Solar to claim as the assignee from the Contractor.

Solar’s calculation of the balance owed under the Hamptworth contract is based on the premise of an alleged agreement between the first claimant and the Contractor in November 2014 to reduce the price due to missed contractual tariffs. However, the court found that no such agreement existed. Nonetheless, it was acknowledged that not all amounts due under the contract’s payment milestones were paid.

Regarding the fourth milestone, “Provisional Acceptance,” Solar argued that the Contractor was obligated to issue a Provisional Acceptance Certificate within three business days of passing the Provisional Acceptance Test, regardless of outstanding matters. However, the court disagreed, noting that the outstanding matters were significant and not merely minor. Additionally, the contract provided a mechanism for the Contractor to challenge the refusal to issue the certificate, which was not invoked in this case.

Ultimately, the court found that Solar’s counterclaim for outstanding payments under the Hamptworth contract failed in its entirety due to the lack of agreement on price reduction and the failure to meet contractual milestones.

Cases quoted as a reference:

• • Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis
  • ZCCM Investments Holdings plc v Konkola Copper Mines plc
  • Donaldson J said in General Surety and Guarantee Co Ltd v Francis Parker Ltd19
  • Holme v Brunskill 1878 For a modern summary of the rule, its origins and its scope, see Hackney Empire Ltd v Aviva Insurance Ltd [2012]
  • Duncan, Fox & Co v North and South Wales Bank (contrat of indemnity)
  • Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd4