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Last year the Technology and Construction Court passed down its judgment on Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Ors [2022] EWHC 3275 (TCC). This was just part one of the claim. Part one dealt with the major heads of the claim and was influential in setting out several points of law. Part two of the matter would deal with the "more modest defect claims and counterclaims" and was decided at the TCC last month in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others (No. 2) [2023] EWHC 1142 (TCC).

As background, the employer, Energy Works (Hull) Limited (“EWH”) and the main contractor, MW High Tech Projects UK Limited (“M+W”) had agreed settlement on 16 December 2022 by which the M+W companies agreed to make a payment in full and final settlement of EWH's claims. The settlement occurred after the trial had ended and just before judgment was handed down. M+W then continued to pursue contribution claims, relying on the defence of abatement on their subcontractor Outotec (USA) Inc. ("Outotec"). Outotec disagreed, arguing that this settlement had "utterly changed the landscape."

What is abatement?

Abatement is a common law right of defence to a claim for payment under a contract by asserting that the work is defective. If it is successful, the payment will be reduced by the amount by which the product of the contractor's endeavours has been diminished in value as a result of that defective performance. Generally diminution in value may be determined by comparing the market value of that which has been constructed against what it should have been without the defects. 

M+W sought to reduce the payments requested by Outotec by relying on abatement. Outotec submitted that the proper legal analysis was that M+W could not now recover any sums upon its contribution claim and could not rely upon the defence of abatement unless it could prove that the settlement was reasonable; the settlement included specific sums attributable to Outotec’s breaches of contract; and those specific sums are themselves reasonable. Outotec contended that M+W ought to have pleaded an amendment to reframe its case on the basis of the settlement but had failed to do so.

The settlement

Following settlement, a main contractor may pursue a claim against a subcontractor to recover the sums paid pursuant to a settlement agreement. To do so, Mr Justice Pepperall identified at paragraph 6 a line of authorities where the main contractor should prove:

  1. "that the employer’s claim was not so weak that no reasonable party would take it sufficiently seriously to negotiate any settlement that involved making a payment;
  2. that the amount paid in settlement was reasonable having regard to the strength of the claim in the sense of being within the range of settlements which reasonable parties in the position of the main contractor might have made having regard to all the circumstances;
  3. that the subcontractor’s breach of duty caused the loss incurred in satisfying the settlement; and
  4. that - as will generally be the case where a subcontractor is in breach of contract and a claim by the employer is in the reasonable contemplation of the parties - the possibility of a reasonable settlement of such claim was also within the reasonable contemplation of the parties to the subcontract."

To satisfy the first limb, M+W would have to show that the claim was sufficiently serious that negotiating a settlement was an appropriate action. As the dispute between EWH and M+W had already been taken all the way to trial, it was clear that the claim was sufficiently serious that it was reasonable to negotiate a settlement - satisfying the first limb.

As for the second limb, the leading case of Biggin v. Permanite [1954] 2 K.B. 314, CA set out that the reasonableness of the settlement should be considered rather than providing strict proof. As in this case there had already been a trial and therefore it was "not proportionate to require the matter to be reopened and proved on a different basis because of a post-trial settlement", Mr Justice Pepperall posited that had the settlement been found to be excessive by the court, why should the plaintiffs not recover the lesser sum from the subcontractor?

While Outotec argued that in the original case M+W did not plead or argue its case on the basis of settlement, the argument was quite rightly rejected as they could not have made a pleading on a settlement that took place after trial.

Overall, "At trial, it was essential for EWH to prove M+W’s liability for breaches of the main contract and the loss that flowed from such breaches; and then for M+W in turn to prove Outotec’s liability for breach of the subcontract… it is not appropriate now to reopen matters and require M+W to prove its contribution claim on the basis of the reasonableness of the post-trial settlement." As a result M+W were entitled to rely on abatement.

Abatement applied

In his first judgment concerning the dispute between these parties the judge concluded that M+W was entitled in principle to a defence of abatement by reference to Outotec's defective works. Multiplex Constructions (UK) Ltd v. Cleveland Bridge UK Ltd [2006] EWHC 1341 (TCC), (2006) 107 ConLR 1 set out seven legal principles for applying abatement. The court heard "Outotec's submissions that the true measure of abatement is the diminution in value of the subcontract plant. Equally, M+W is right to contend that such diminution in value can sometimes be ascertained by considering the cost of remedial works" however M+W failed to prove its defence of abatement with adequate evidence on all defects except for defect 28. Defect 28 concerned noise issues and while the costs could have been assessed by looking at power plants where the noise levels were higher than in Hull, Mr Justice Pepperall decided on the balance of probabilities to assess the onsite noise issues by considering the remedial costs of modifying these bespoke items. 

In conclusion a settlement between an employer and contractor generally won’t stop the defence of abatement, especially if it follows pleadings in the TCC. However, as illustrated by this judgment, in order to succeed abatement must always be substantiated.