England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
OFFICIAL REFEREES' BUSINESS
HIS HONOUR JUDGE HUMPHREY LLOYD QC
IN CHAMBERS

		29 July 1997

JUDGMENT

The plaintiffs apply for the determination of two issues of law under RSC Order 14A. The parties have agreed an admirably succinct schedule of assumed facts for the purposes of the issues, but it is necessary to elaborate it a little mainly by drawing on the documents referred to in it. The plaintiffs are a joint venture known as the LMK Joint Venture (LMK). They entered into a contract with Glaxo Group Research Ltd (Glaxo) in connection with the construction of a medical research establishment at Stevenage, Hertfordshire. The value of the project was about £700m. The contract was dated 9 October 1990. (It is a typically mid-Atlantic form of contract.) Recital 2.00 recorded that Glaxo had agreed to engage LMK "to provide and to be personally responsible for the management, organisation, supervision, coordination and integration of the construction service described in section 4.00 hereto (hereinafter called the execution specification) and caused to be provided all details, construction information necessary for the construction of the work ...". Under clause 11 LMK were required to

"subcontract all field construction work except for minor labour services. Notwithstanding the above, the contractor shall not subcontract the whole of the Works nor shall it subcontract any part of the work without the prior written consent of the employer ... regardless of any approval by the Employer, all work undertaken by subcontractors (including design work and preparation of builders' work, shop, fabrication or installation drawings) shall be in accordance with the terms of the subcontract and the contractor shall be fully responsible for the acts and omissions of its subcontractors and of persons either directly or indirectly employed by them in the performance of the Work subject always to the provisions of clause 6.22, hereof. All Works subcontracted by the contractor shall be in accordance with this clause."

Clause 11.3 provided^[1]:

"Each subcontract awarded by the CONTRACTOR related to the performance of the WORK shall include, but not be limited, to the following provisions:

11.3.1. Each SUBCONTRACTOR shall agree to assume and be bound by all the obligations, duties, and responsibilities which the CONTRACTOR owes the EMPLOYER under the CONTRACT FOR CONSTRUCTION in respect of the portions of the WORK to be performed by the SUBCONTRACTOR with the express exclusion of the provisions of Clause 3.2 hereof.

11.3.2 Each SUBCONTRACTOR shall enter into an agreement to waive its rights to contend that the CONTRACTOR has incurred no damage, loss or expense in respect of a breach of its subcontract, where such damage, loss or expense is occasioned to the EMPLOYER and is caused by reason of the SUBCONTRACTOR'S negligence, acts, omissions or default.

11.3.3 Each SUBCONTRACTOR and SUPPLIER shall undertake to enter into a direct warranty agreement with the EMPLOYER in the form set out in Exhibit B hereto.

11.3.4 Each SUBCONTRACTOR and SUPPLIER shall and shall procure that each of their respective employees shall enter into a non disclosure undertaking in the form set out in Exhibit B hereto.

11.3.5 Each SUBCONTRACTOR shall agree to an assignment by the CONTRACTOR to the EMPLOYER, at the EMPLOYER'S option, of any and all rights of the CONTRACTOR in and to the subcontract. Said assignment shall include, but not be limited to, assignment in the event of termination of the CONTRACT FOR CONSTRUCTION."

Clause 11.7 stated:

"Notwithstanding anything contained in the CONTRACT FOR CONSTRUCTION or any subcontract awarded by the CONTRACTOR hereunder, nothing shall be construed to create or establish a contractual relationship between any SUBCONTRACTOR, or other persons performing the WORK, and either the EMPLOYER or the ARCHITECT-ENGINEER except to the extent as expressly defined in the direct warranty agreement undertaken in accordance with Clause 11.3.3."

(The Contract for Construction was the main contract itself and not another contract.) Clause 6.22 (which was referred to in clause 11.1) stated as follows:

"6.22 Notwithstanding anything else expressed or implied, but subject to the CONTRACTOR having fulfilled all its obligations and having fully discharged its responsibility and duties to perform all in accordance with the CONTRACT FOR CONSTRUCTION, the CONTRACTOR shall not be deemed liable for damages or claims in respect of SUBCONTRACTORS, SUPPLIERS, or SUBCONTRACT works except to the extent that such damages or claims were occasioned or contributed to by the CONTRACTORS negligence, omission, action or default or have been or could have been recovered by the CONTRACTOR from defaulting SUBCONTRACTORS or SUPPLIERS. The CONTRACTOR shall be reimbursed the reasonable costs which it incurs in respect of default by SUBCONTRACTORS or SUPPLIERS including, but not limited to the costs of litigation which may be undertaken."

LMK obtained the consent and approval of Glaxo to a subcontract being placed with MF Kent Services Ltd (which subsequently changed its name to Kentz C & M (UK) Ltd (Kentz)) for the installation of mechanical works in the biology building and central research support facility. The subcontract was dated 9 February 1993. It contained the following provisions:

"6.17 The SUBCONTRACTOR having notice of the CONTRACT FOR CONSTRUCTION shall waive its rights to contend, whether in proceedings or otherwise, that the CONTRACTOR has suffered or incurred no damage, loss or expense or that its liability to the CONTRACTOR should be in any way reduced or extinguished by reason of Clause 6.22 of the CONTRACT FOR CONSTRUCTION."

"20 - TERMINATION

20.1 The CONTRACTOR at any time may, in addition to any other power enabling it to terminate this SUBCONTRACT or the employment of the SUBCONTRACTOR hereunder, forthwith terminate this SUBCONTRACT or the employment of the SUBCONTRACTOR hereunder.

20.2 Without prejudice to any other legal or equitable right or remedy which the CONTRACTOR would otherwise possess hereunder or as a matter of LAW, the CONTRACTOR -shall be entitled to terminate ail or part of the SUBCONTRACT WORK at any time for any of the following reasons, specifying the date and extent to which the SUBCONTRACT WORK is terminated:

20.2.1 If the SUBCONTRACTOR becomes insolvent, commits any act of bankruptcy, makes a general assignment for the benefit of creditors, or becomes the subject of any proceedings commenced under any LAW for the relief of debtors.

20.2.2 If a receiver, administrative receiver, trustee, or liquidator of any of the property or income of the SUBCONTRACTOR is appointed.

20.2.4 If the SUBCONTRACTOR fails to ensure the carrying out of the SUBCONTRACT WORK, or any part thereof, with the diligence necessary to ensure its progress and achieving completion within the time set forth in the SUBCONTRACT, and fails to take such steps to remedy any material deficiency or default after notice thereof from the CONTRACTOR.

20.2.5 If the SUBCONTRACTOR or its SUB-SUBCONTRACTORS or SUPPLIERS persistently or repeatedly refuse to supply enough properly skilled workers or proper materials.

20.2.6 If the SUBCONTRACTOR or its SUB-SUB CONTRACTORS or SUPPLIERS persistently or repeatedly refuse to fail to remedy deficient work.

20.2.7 If the SUBCONTRACTOR fails to make prompt payment to its SUB-SUBCONTRACTORs and SUPPLIERS for materials or labour.

20.2.8 If the SUBCONTRACTOR or its SUB-SUBCONTRACTORs or SUPPLIERS fail to follow or persistently disregards applicable LAW, or fail to perform their obligations with respect to the safety and health of persons, protection of property, and fire protection,

20.2.9 If the SUBCONTRACTOR otherwise commits a material or substantia! violation of any provision of the SUBCONTRACT.

20.2.10 If in the sole opinion of the CONTRACTOR or the EMPLOYER, the SUBCONTRACTOR or its SUB-SUBCONTRACTORs or SUPPLIERS, is in, or is perceived likely to be in breach of LAW, which breach or perceived breach is considered by the EMPLOYER or the CONTRACTOR likely to impugn or embarrass the reputation of the EMPLOYER or CONTRACTOR or might serve to impact upon the business operations of the EMPLOYER or CONTRACTOR in any way.

20.3 In the event it is subsequently ascertained that the reason for termination pursuant to Clause 20.2 did not exist, then any such termination shall be treated as termination pursuant to Clause 20.4 below.

20.4 Should conditions arise at any time after the SUBCONTRACT WORK has commenced which, in the CONTRACTOR'S opinion, make it advisable or necessary to terminate any part of the SUBCONTRACT WORK for any reason, the CONTRACTOR in its sole discretion, may terminate any such part of the SUBCONTRACT WORK by giving three (3) WORKING DAYS notice to the SUBCONTRACTOR, specifying the date and extent to which that part of the SUBCONTRACT WORK is terminated, and may subsequently employ another subcontractor to undertake such terminated work.

20.5 In the event of termination pursuant to Clauses 20.1, 20.2 or 20.4 the following relative consequences shall apply:

20.5.1 In the event of termination pursuant to Clause 20.1, or Clause 20.4, the CONTRACTOR shall pay the SUBCONTRACTOR for completed SUBCONTRACT WORK not previously invoiced and for all reasonable costs incurred at the CONTRACTOR'S request or with the CONTRACTOR'S prior approval after notice of termination. The CONTRACTOR shall be entitled to take immediate possession of the WORK SITE and of all or part of materials, equipment, tools, construction equipment, and machinery thereon owned or subcontracted by the SUBCONTRACTOR or others and to use the same and to exercise all rights, options, and privileges of the SUBCONTRACTOR under its subcontracts, purchase orders, or otherwise related to the terminated SUBCONTRACT WORK. Upon the CONTRACTOR'S request the SUBCONTRACTOR shall promptly assign such rights, options and privileges to the CONTRACTOR. The CONTRACTOR may decide at its option to complete or not to complete the terminated SUBCONTRACT WORK.

20.5.2 In the event of termination pursuant to Clause 20.2 the CONTRACTOR shall pay the SUBCONTRACTOR for completed SUBCONTRACT WORK not previously invoiced. The CONTRACTOR shall be entitled to take immediate possession of the WORK SITE and of all or part materials, equipment, tools, construction equipment, and machinery thereon owned or subcontracted by the SUBCONTRACTOR or others and to use the same and to exercise all rights, options, and privileges of the SUBCONTRACTOR under its subcontracts, purchase orders, or otherwise related to the terminated SUBCONTRACT WORK. Upon the CONTRACTOR'S request, the SUBCONTRACTOR shall promptly assign such rights, options and privileges to the CONTRACTOR. The CONTRACTOR may decide at its option to complete or not to complete the terminated SUBCONTRACT WORK.

20.6 No cost incurred by the SUBCONTRACTOR or its SUB-SUBCONTRACTORs after the effective date of termination shall be allowable as reimbursable unless authorise in advance by the CONTRACTOR or as it relates to the carrying out of a portion of the SUBCONTRACT WORK not terminated, or relates to the use of tools, construction equipment and machinery used by the CONTRACTOR pursuant to Clause 20.5.1, or is directly related to the SUBCONTRACTOR'S or its SUB-SUBCONTRACTOR's demobilisation activities authorised in advance by the CONTRACTOR.

20.7 Upon termination hereunder, the SUBCONTRACTOR shall immediately and in the most expeditious manner, make safe the WORK SITE, and:

20.7.1 stop the SUBCONTRACT WORK on the date and to the extent specified in the notice of termination

20.7.2 place no further purchase orders or subcontracts for services, equipment, or materials except as may be necessary for completion of such portion of the SUBCONTRACT WORK not terminated

20.7.3 assist the CONTRACTOR in making an inventory of all materials, equipment, and tools in storage at the WORK SITE, en route to the WORK SITE, being manufactured away from the WORK SITE, and on order from a SUPPLIER or fabricator

20.7.4 assign to the EMPLOYER or the CONTRACTOR all subcontracts, purchase orders, and equipment rental agreements as designated and requested by the CONTRACTOR in which case the CONTRACTOR shall have the right to settle or pay any or all claims arising out of the termination of such purchase orders and subcontracts.

20.7.5 remove from the WORK SITE all construction materials, equipment, and tools listed in said inventory which are designated for removal in writing by the CONTRACTOR

20.7.6 terminate all purchase orders and subcontracts to the extent they relate to the performance of the SUBCONTRACT WORK terminated on the request of the CONTRACTOR but not otherwise

20.7.7 with the approval of the CONTRACTOR, settle all outstanding liabilities and all claims arising out of such termination of purchase orders and subcontracts, and

20.7.8 deliver to the CONTRACTOR, when and as directed by the CONTRACTOR, all documents and property which, if the SUBCONTRACT WORK had been completed, the SUBCONTRACTOR would have been required to account for or deliver to the CONTRACTOR, and transfer title to such property to the CONTRACTOR to the extent not already transferred.

20.8 The EMPLOYER'S or CONTRACTOR'S sole liability for termination shall be determined in accordance with this Clause and the SUBCONTRACTOR and all SUBCONTRACTORS or SUPPLIERS shall have no further claim against the EMPLOYER or CONTRACTOR for damage or loss resulting from any termination.

20.10 All termination notices and correspondence related thereto shall be given pursuant to the SUBCONTRACT Agreement.

Kentz were required to provide a bond. Kentz therefore executed the bond in the form annexed to the subcontract with the defendant (Aegon). The bond read as follows:

"BY THIS BOND we M.F.KENT SERVICES LIMITED whose registered office is at Sheraton House, Brooklands Close, Windmill Road, Sunbury-on-Thames, Middlesex TW16 7DX (hereinafter call the "SUBCONTRACTOR"), and AEGON INSURANCE COMPANY (UK) LIMITED whose registered office is at 136 Fenchurch Street, London EC3M 6BL (hereinafter called "the Surety") are held and firmly bound jointly and severally unto Laing Management Limited and Ferguson Morrison-Knudson River Limited (acting together in joint venture as LMK Joint Venture) (hereinafter called the "CONTRACTOR"), in the sum of £738,635 .... for the payment of which sum the SUBCONTRACTOR and the Surety bind themselves their successors and assigns jointly and severally by these present.

WHEREAS the SUBCONTRACTOR by an Agreement made between the CONTRACTOR of the one part and the SUBCONTRACTOR of the other part has entered into a SUBCONTRACT (hereinafter called "the said SUBCONTRACT") for Meca Services Glaxo Group Research Campus Stevenage as therein mentioned in conformity with the provisions of the said SUBCONTRACT. NOW THE CONDITION of the above-written Bond is such that if:

(a) the SUBCONTRACTOR shall duly perform and observe all the terms provisions conditions and stipulations of the said SUBCONTRACT on the SUBCONTRACTOR'S part to be performed and observed according to the true purport intent and meaning thereof or if;

(b) on default by the SUBCONTRACTOR the Surety shall satisfy and discharge the damages sustained by the CONTRACTOR thereby up to the amount of the above-written Bond or if;

(c) on the date named in the notification of completion of making good defects in accordance with clause 21.2.8 of the SUBCONTRACT this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the said SUBCONTRACT made by agreement between the CONTRACTOR and the SUBCONTRACTOR or in the extent or nature of the SUBCONTRACT WORK to be construed, completed and maintained hereunder and no allowance of time by the CONTRACTOR or on his behalf and under the said SUBCONTRACT nor any forbearance or forgiveness in or in respect of any matter or thing concerning the said SUBCONTRACT on the part of the CONTRACTOR shall in any way release the Surety from any liability under the above-written Bond.

The construction, validity and performance of this Bond is subject to English Law and the English Courts shall have jurisdiction over any dispute or difference arising out of or in connection herewith."

Towards the end of 1993 Kentz ran into financial problems and progress on the site was affected. On 19 January 1994 before Kentz had completed the subcontract works, administrative receivers were appointed. On about 21 January 1994 LMK served on Kentz a letter dated 20 January 1994 which stated:

"We refer to the appointment of T.C. Carter and M.E. Mills of Ernst & Young as administrative receivers of Kentz C & M UK Ltd.

In these circumstances please take this letter as notice of termination of the subcontract works with immediate effect pursuant to Clause 20.2.2.

We require that you immediately deliver up to us all materials and equipment relating to the above parcel together with all drawings, designs, calculations and fabrication details.

We shall be in touch with you shortly to make necessary arrangements for collection of the foregoing."

I have been asked also to assume that on 20 January 1994 Kentz was in repudiatory breach of the subcontract as pleaded in the statement of claim in this action which was commenced on 12 February 1996. By paragraphs 11-19 of the statement of claim LMK plead:-

"11. On 19 January 1994 Mr T.C. Carter and Mrs M.E. Mills of Ernst & Young were appointed administrative receivers of Kentz.

12. As a result on the 20 January 1994 LMK were entitled to terminate the Sub-Contract both by the acceptance of Kentz's repudiation and under the express provisions of Clause 20.2. By letter dated 20 January 1994, LMK gave Kentz notice of termination of the sub-contract work pursuant to Clause 20.2.2. Alternatively, LMK had accepted Kentz's repudiation and/or now accepts that repudiation as terminating the Sub-Contract.

13. In addition, Kentz were in further breach of the Sub-Contract in that:

i) The sub-contract works were defective in numerous respects and LMK has paid £245,456.00 as rectification costs, particulars of which are given in Schedule 2 served herewith.

ii) They had made an over application for payment in respect of measured works and were therefore overpaid £255,833.00, particulars of which are given in Schedule 3 served herewith.

14. Accordingly, Kentz had failed duly to perform and observe all the terms, provisions, conditions and stipulations of the Sub-Contract and the Defendant was obliged to LMK in the sum of £738,635.00.

15. By reason of the breaches of contract and repudiatory breaches of contract pleaded in paragraphs 8, 10, 12 and 13 above, Kentz were in default and the Defendant was obliged to satisfy and discharge the loss and damage suffered by LMK. Such loss and damage currently is in the sum of £2,458,025.00, particulars of which are given in Schedule 4 served herewith.

16. By an undated letter sent on or about 15 June 1994, LMK gave notice to Trench Farrow & Partners acting on behalf of the Defendant that Kentz had failed to comply with the terms and conditions of the Sub-Contract and that the failure had caused LMK to incur additional costs and expense which were then calculated in the sum of £986,790.00 up to that date and accordingly LMK requested immediate payment of £738,635.00, being the value of the Bond.

17. Despite the request set out in paragraph 16 above, the Defendant has failed to pay the sum of £738,635.00 in accordance with the terms of the Bond and LMK claims that sum, alternatively damages in the said sum."

I am asked to assume that apart from the letter of 20 January 1994 there was nothing before the service of the statement of claim which LMK contend was an acceptance of Kentz's repudiation.

After 21 January 1994 LMK completed the subcontract works. I am asked to assume that LMK have not and could not have recovered the additional costs of completing the subcontract works from Kentz. I am however asked to consider the issues, particularly the second issue, on the following alternative assumptions:

"(a) LMK have not recovered any of the additional costs of completing the subcontract works from Glaxo; alternatively

(b) LMK have recovered all of that cost from Glaxo".

One of the reasons for these alternatives lies in the terms of the contract with Glaxo since LMK may be entitled to recover the cost of completing LMK's work under, for example, clause 6.22 of under clause 8 which entitles LMK to the reimbursement, including in clause 8.3.2, of "costs properly incurred by the contractor in respect of subcontractors and suppliers for which proper application has been made."

On the basis of the above assumptions the issues for determination under Order 14A have been agreed to be:-

"1. Whether, on the assumed facts set out in the attached schedule, LMK, having terminated the subcontract works under clause 20.2 at a time when Kentz was in repudiatory breach of the subcontract, are entitled to recover the additional cost of completing the subcontract works.

2. Whether, if LMK are entitled to recover the additional costs of completing the subcontract works from Glaxo under the main contract, LMK can recover that cost under the Bond."

The parties have agreed further that the "additional costs of completing the subcontract works" for the purposes of these issues

(1) means the additional cost of completing the subcontract works which are incomplete as at 20 January 1994; and

(2) does not include sums for remedying defects and over payments referred to in paragraphs 13(1) and 13(2) of the statement of claim.

These reservations avoid further argument about whether the sums incurred for remedying defects and over payments would be recoverable under the Bond as they might not be due to any default by Kentz within its meaning. The amounts involved, as compared with the total amount claimed in the statement of claim, also suggest that it might not be necessary to reach a determination about the recoverability about those amounts, e.g. as to whether they are part of the damages sustained by LMK.

The background to the issues appears, at least in part, to stem from the decision of the Court of Appeal in Perar v. General Surety & Guarantee Co Ltd (1994) 66 BLR 72. That case also concerned a claim made on a bond which arose out of the termination of a building contract which incorporated the JCT Conditions, clause 27.2 of which stated:

"In the event of the Contractor .... having an administrative receiver, as defined in the Insolvency Act 1986 appointed, the employment of the Contractor under this Contract shall be forthwith automatically determined but the said employment may be reinstated and continued if the Employer and the Contractor .... [and] receiver ... shall so agree."

On 7 June 1991 the contractor, Trentham, went into administrative receivership. Not surprisingly no further work was done on site and the employer subsequently considered that the contractor had abandoned the contract. On 11 June 1991 the employer notified the administrative receiver that it was not intended to reinstate or continue the contractor's employment. The Court of Appeal held that the employer was not entitled to treat the cessation of work following the automatic termination as an abandonment and repudiation of the contract since once the employment had been terminated the contractor ceased to be under his primary obligation to carry out the works (see Peter Gibson LJ at pages 82 to 83) and that the contract by setting out an exclusive code as to what was to happen in the event of insolvency and the appointment of an administrative receiver precluded the appointment of a receiver being treated as an anticipatory breach of contract or repudiation (see page 85). However Peter Gibson LJ made it clear that his reasoning depended, in part, on the fact that clause 27.2 did not begin with the words "without prejudice to any other rights or remedies which the employer may possess." Staughton LJ added that the appointment of an administrative receiver might in some cases amount to a repudiation or renunciation (see pages 85 to 86).

Although there are marked similarities between the facts of Perar and those of this case, clause 20.2 of the subcontract between LMK and Kentz (unlike clause 27.2 of the JCT form) begins "without prejudice to any other legal or equitable right or remedy which the contractor would otherwise possess hereunder or as a matter of law." Accordingly Mr Vivian Ramsey QC for LMK submitted that ¦ clause 20.2 could not be regarded as an exclusive code. He also submitted, and Mr Timothy Elliott QC for Aegon was disposed to accept, that Perar was not authority for the proposition that the appointment of a receiver could not amount to a repudiation of the contract. This submission is in my judgment correct and I would add only the obvious point that something more is required before the appointment of an administrative receiver can be treated as a discharge of the contract by a renunciation or repudiation since the main purpose of the appointment of an administrative receiver is to enable the company to continue to trade so that the interests of creditors may be protected. The appointment itself therefore may be consistent with the firm intention to continue the contract rather than to abandon it, especially if it is profitable. On the other hand the receivers may decide to accept the inevitable.

It is also material to note that clause 20.2 of the subcontract does not provide for automatic termination. It reads:-

"the CONTRACTOR shall be entitled to terminate all or part of the SUBCONTRACT WORK at any time for any of the following reasons, specifying the date and extent to which the SUBCONTRACT WORK is terminated ...."

Thus action is required on the part of the contractor in order to make it clear whether the whole and

if not, which part of the sub-contract works are being removed from the sub-contractor. The clause

expressly enables the contractor to take some only of the work out of the hands of the subcontractor.

LMK's Case

Issue 1

Mr Ramsey submitted that LMK's letter was an effective termination under clause 20.2.2 and that the true questions raised by this issue were:-

1. Was the letter an affirmation of the contract ?

2. Is the letter also an acceptance of the repudiation?

and that the issue should be answered in the affirmative. First, he argued that LMK were entitled to terminate the subcontract under clause 20 without affecting its entitlement to claim damages for repudiation. Clause 20.2 was prefaced by the words "without prejudice" and accordingly, as a matter of construction, the letter of 20 January 1994 was a termination "without prejudice....." to LMK's other rights and remedies which it might possess, namely to treat the subcontractor's conduct whether before or after the termination as a repudiation of the contract.

Secondly, Mr Ramsey submitted that on the authorities, the exercise of contractual option to terminate was not to be construed as an affirmation of the contract so as to exclude the right to treat it as repudiated by some anticipatory breach but, rather, was to be regarded as any effective acceptance of a repudiation. No further acceptance was required beyond the exercise of the right of termination under the terms of the contract. It is submitted that this was clear from a string of cases mainly hire purchase cases. He referred first to Yeoman Credit Ltd v. Waragowski [1961] 1 WLR 1124 (although largely for historical reasons, as will appear). This was, like other cases, one in which there was a successful attempt to avoid the effect of the terms of the hire purchase agreement which limited compensation to damages for breach resulting from an express contractual termination and certain further sums. The Court of Appeal held that the defendant's failure to pay the instalments due under the agreement was not merely the failure of an obligation to pay money but a refusal to carry out the terms of an agreement to hire the vehicle so that as a result the plaintiff was entitled to recover the difference between the amounts that they would have received under the agreement less the sums paid and the value of the car. In other words, the plaintiff was entitled to treat the hirer's default as a breach notwithstanding that there had been a termination of the hiring.

Yeoman Credit was followed in Overstone Ltd v. Ship way [1962] 1 WLR 117. That appeal arose out of a decision of a County Court judge given in ignorance of the decision in Yeoman Credit v. Waragowski. For present purposes the importance of the case may perhaps best be seen from the judgment of Davies LJ at page 130 where he said that the facts were not distinguishable from Waragowski and went on:-

"It seems to me that if a hirer under a hire purchase agreement is guilty of such a breach or non observance of the terms of the agreement as will satisfy any court, not merely that the hire purchase company had a right to terminate the contract but that, in all the circumstances it would be reasonable to terminate the contract, it cannot thereafter be said on behalf of the hirer: "you exercised your remedy for my breach of contract by terminating the contract, and having done that you cannot claim damages for my non-performance or breach of contract during such period as it had to run thereafter.""

The introduction by Sellers LJ of the concept as to whether it was "reasonable" to terminate the contract and similar observations of Holroyd Pearce LJ in the same case ("Where the hirer is slightly in arrears and does not show that he is not going on with the contract, the seizure of the hired article may not be the reasonable solution of the situation") led to a reconsideration of the position in Financings Ltd v. Baldock [1963] 2 QB 104. By that time Bridge v. Campbell Discount Co Ltd [1962] AC 600 had also been decided. It was therefore necessary to restate the law. Lord Denning MR said at page 110:-

"Undoubtedly the cases in the past give rise to some conflict, and therefore I will try to state the matter on principle. It seems to me that when an agreement of hiring is terminated by virtue of a power contained in it, and the owner retakes the vehicle, he can recover damages for any breach up to the date of termination but not for any breach thereafter, for the simple reason that there are no breaches thereafter. I see no difference in this respect between the letting.of a vehicle on hire and the letting of land on a lease. If a lessor, under a proviso for re-entry, re-enters on the ground of nonpayment of rent or of disrepair, he gets the arrears of rent up to the date of re-entry and damages for want of repair at that date, but he does not get damages for loss of rent thereafter or for breaches of repair thereafter."

At page 112 Lord Denning considered the authorities. Having referred to Yeoman Credit, Overstone

and Bridge he said:-

"Once the hirer repudiated his liability for future rentals, the owners were entitled to treat the repudiation as itself a breach going to the root of the contract: and, on accepting it as such, they were entitled to regard the hiring as at an end and retake the vehicle. The repudiation being itself a breach which took place before the termination, it is within the class of breaches for which the owners can recover damages according to the principle I have already stated. But if there is no repudiation, and simply, as here, a failure to pay one or two instalments (the failure not going to the root of the contract and only giving a right to terminate by virtue of an express stipulation in the contract), the owners can only recover the instalments in arrear with interest and'nothing else: for there was no other breach in existence at the termination of the hiring. The same result can be reached by saying that, on a repudiation, it is "reasonable" for the owners to terminate the hiring: whereas on a mere non-payment of instalments, it is "unreasonable". But I would prefer to ask whether there is a repudiation or not of the obligation to pay future instalments."

Upjohn LJ dealt with the argument that the previous cases seem to introduce a principle whereby damages might vary according to tests as to whether it was reasonable or not to give notice of a termination. At page 117 he said:-

"So to my mind it is clear that where there is a case of repudiation, and the owner retakes possession on the footing that he is accepting this wrongful repudiation as putting an end to the contract, he is entitled to sue at common law for damages for the wrongful repudiation, and so he may properly claim the instalments that would have become payable and would have been paid had the contract run its course, making allowance, of course, for the value of the lorry and other ancillary matters."

Diplock LJ helpfully dealt with the interpretation of the clause in question. It read: "Should the hirer fail to pay the initial instalment direct in full at the time when this agreement is made or to pay any subsequent instalment or other sum payable hereunder in full within 10 days after the same shall have become due or if he shall die or have a receiving order made against him or be made bankrupt ... or if the hirer shall fail to observe or fulfil any term of this agreement ...." then "the owner may by written notice forthwith and for all purposes terminate the hiring." Diplock LJ recorded that the hirer had failed to pay the second instalment so that the owners terminated the contract and retook the lorry with a notice of termination which read:

"As you are in default of payment of monies due under this agreement, we give you notice that in exercise of our powers under this agreement, we now put an end to the hiring, and will forthwith retake possession of our property. You must understand this is entirely without prejudice to our remedies against you for any monies, damages or expenses recoverable from you under this agreement."

Diplock LJ said at page 119 that

"All that clause 8 does is to entitle the owners to terminate the hiring upon the occurrence of any events therein defined, whether amounting to breaches of contract or not, and put an end to the hirer's right to possession of the chattels. This clause does not deal expressly with any other rights, apart from the right to retake possession, which accrued to the owners upon the exercise of the option to terminate the hiring so granted to them. Those are left to be dealt with by other express provisions in the contract, or in so far as the contract is silent or its relevant provisions are unenforceable, by the general principles of the common law of contract."

At page 122 he said of the observations of Holroyd Pearce LJ in Overstone:-

"In referring to "the reasonable solution" the Lord Justice was plainly not intending to lay down some wholly novel proposition of the law of contract peculiar to contracts of hire purchase. Read in its context, I do not think that the phrase "reasonable solution" was intended to refer to anything other than the well settled rule of law that a party to a contract has an option to treat as rescinded a contract which the other party has wrongfully repudiated by conduct which evinces his intention no longer to be bound by the contract. Such conduct is itself a breach of contract, apart from any antecedent breaches there may have been, which entitles the party exercising its option to treat the contract as rescinded, also to recover from the party in default damages for non-performance of his future obligations under the contract."

Then at page 123 he went on to say:-

"I do not regard Davies LJ as expounding any legal doctrine, or as intending to say more than that where one party has done something which the law (which is "the perfection of reason") regards as a wrongful repudiation of the contract and the other party has thereupon determined the contract, whether under an express power contained in the contract or in the exercise of his right to do so under the common law, he is entitled to damages for nonperformance of the contract during the period that it still has to run; but if that party has not done something which the law regards as a wrongful repudiation of the contract, the other party, though he may be entitled under an express power to determine the contract, is not entitled to damages for non-performance of the contract during the period for which it would have continued to run but for such determination. If this be, as I think it is, the true ratio decidendi of the Yeoman Credit case and the Overstone case, it is in accordance with what I have already stated to be my own view of the law."

Mr Ramsey QC therefore submitted that Financings was an authority for the proposition that termination under an express condition of the contract was not an affirmation, for if a party said that he was terminating the contract he was not affirming it and that it was also authority for the proposition that if there was a repudiatory contract by one party then the exercise of a right to terminate under the express terms of the contract could be an acceptance of the repudiation. LMK's letter of termination was not an affirmation of the contract since it was given pursuant to an express contractual provision, which was itself prefaced by the words "without prejudice to any other legal or equitable right or remedy ...." so that the exercise of the power to terminate pursuant to clause 20.2 could not be construed as an intention to relinquish LMK's common law rights. Termination clauses had to be operated by people without necessarily ready access to legal advice and a sensible interpretation should be given to the letter of 20 January 1994.

Mr Ramsey also referred to Brady v. St. Margaret's Trust [1963] 2 QB 494 in which Davies LJ had stated at page 1501 that Qverstone "ought to be considered in the light of what was said in Financings v. Baldock and the interpretation put upon, at any rate, my judgment by Upjohn and Diplock LJJ".

Mr Ramsey also submitted that the principles in Financings had been applied in Charterhouse Credit Co Ltd v. Tollev [1963] 2 QB 684; United Dominions Trust v. Ennis [1968] 1 QB 54 and Capital Finance v. Donati (1977) 121 SJ 270. Lombard North Central Plc v. Butterworth [1987] 1 QB 527 applied Financings. Mr Ramsey submitted that it was of assistance. The defendant who was an accountant had hired a computer from the plaintiff finance company. The defendant did not pay the instalments due on time or at all. The plaintiff therefore sent the defendant a letter recording that he was in arrears and stating:

"Please take notice that pursuant to the terms of the lease our consent to your possession of the goods is now withdrawn and you are now required to make them available for collection. Your liability under the terms of the lease will not cease upon the return of those goods as we are entitled to call upon you to make payment of the balance of the rentals due under the remaining period of the lease."

The plaintiff commenced an action for the amount of the unpaid instalments up to the date of termination, the instalments due after the date of termination less the proceeds of the sale of the computer and an allowance for acceleratory receipt of the money. It was argued that the plaintiff was seeking to recover amounts due pursuant to clause 6 of the agreement but that that clause was to be disregarded because it created a penalty. One of the issues that arose was whether the conduct of the defendant amounted to a wrongful repudiation of the contract and whether the amount claimed was recoverable as damages. Mustill LJ agreed with Nicholls LJ that, applying Financings Ltd v. Baldock, clause 6 was a penalty insofar as it purported to oblige the hirer, regardless of the seriousness or triviality of the breach which led to the owners terminating the agreement by retaking possession of the computer, to make a payment, albeit a discounted payment in respect of rental instalments which had not accrued prior to the termination. Nicolls LJ concluded that the defendant had not envinced an intention not to adhere to and not to be bound by his obligations to pay the instalments and to do so promptly and regularly. However the plaintiffs argued that the time of payment had been made of the essence by clause 2A of the lease by which the defendant agreed to pay to the lessor "punctually and without previous demand the rentals .... punctual payment of each which shall be of the essence of this lease." Nicholls LJ held that time was of the essence and that default in punctual payment was to be regarded as a breach going to the root of the contract. He agreed with Mustill LJ who had delivered his own reasons in relation to this issue so that (they) and (Lawton LJ) all concluded that the letter of termination was an acceptance of a repudiation and entitled the finance company to recover damages for breach of contract, or, as Mr Ramsey put it, the letter did not affect the finance company's ability to obtain damages for a repudiatory breach.

Mr Ramsey therefore invited me to conclude, on the basis of the authorities, that where there has been a repudiatory breach the innocent party may both terminate the contract under its express terms and also claim damages for the breach of contract so that LMK retained its right to damages for a repudiatory breach by Kentz.

Issue 2

Mr Ramsey submitted that this issue ought also to be answered in the affirmative. First, it was to be noted that the obligations of the defendant under the Bond were coextensive, since both the defendants and subcontractor were bound by the terms of the subcontract.

LMK's rights were therefore the same as in the underlying agreement i.e. Aegon was liable to pay LMK the same damages as Kentz was liable to pay. Clause 6.22 did not exempt the subcontractor from liability to pay the contractor as damages for breach of the subcontract such costs of completion as the contractor might have incurred. Clause 6.22 was a provision in the main contract regulating the position thereunder and was conditional upon "the contractor having fulfilled all its obligations and having fully discharged its responsibility and duties to perform all in accordance with the contract of construction ..." In any event clause 6.17 of the subcontract was a clear recognition by the subcontractor that the contractor might incur losses and operated as if it were an estoppel. It therefore follows that if the issue were looked at as between LMK and Kentz then Kentz could not rely upon an argument that the contractor had not suffered any loss under clause 6.22 of the main contract. Even if that were wrong the concluding sentence of clause 6.22 of the main contract indicated that the contractor would first incur costs which it might or might not be reimbursed by Glaxo.

If and in so far as Glaxo had reimbursed LMK such costs, then clause 6.22 was tantamount to an indemnity so that Glaxo would be subrogated to LMK's rights and accordingly Aegon's position would be the same whether or not the costs were ultimately met by LMK or Glaxo. Mr Ramsey relied upon the definition of indemnities in Chitty on Contracts, 27th Ed. at paragraph 42-006:-

"The term "indemnity" is used in the law in several different senses. In the widest sense it means recompense for any loss or liability which one party has incurred, whether the duty to indemnify comes from an agreement or not ...."

Mr Ramsey relied on Morris v. Ford Motor Company [1973] 1 QB 792. In that case the Court of

Appeal had to consider the meaning of a contract between a cleaning company and Fords which

contained an indemnity clause:

"The contractor [the cleaners] shall indemnify the purchaser [Fords] against all losses and claims of whatsoever nature for or in respect of injuries or damage to any person or property howsoever caused arising out of or in connection with the performance of the order ...."

The cleaning company maintained that if it indemnified Fords pursuant to that provision then it would

be subrogated to Fords' rights against the employee whose negligence had caused the plaintiff's

injuries.

The Court of Appeal (Lord Denning MR dissenting) held that the right of subrogation stemmed from

the obligation to indemnify and accordingly the cleaning company would be subrogated to such rights

as Fords might have or have had against the ultimate tortfeasor: see Stamp LJ at page 804 E onwards

and James LJ in particular at page 812F where he said:

"I do not consider that it is a question of implying a term importing a right of subrogation: the right is there in the nature of the contract of indemnity, unless it can be shown that the contract expressly or by implication excludes the right of subrogation either wholly or in part"

Aegon's Case

Issue 1

Mr Timothy Elliott QC first entered some reservations about the plaintiffs' use of the procedure under RSC Order 14A since they required assumptions to be made and both issues raised mixed questions of law and fact. The agreed schedule appeared to me to meet those objections and I consider that the issues are otherwise proper for determination under Order 14A. Mr Elliott agreed with most of Mr Ramsey's analysis of Perar. However he emphasised that the Court of Appeal left open the question as to whether the appointment of an administrative receiver could amount to a repudiation of the contract, as this was expressly envisaged as a possibility by Staughton LJ. Without taking technical points on the pleading, he also drew attention to the fact that paragraph 12 of the statement of claim was pleaded on the basis that the appointment of the administrative receivers was an event which entitled LMK to terminate the subcontract: "As a result on 20 January 1994 LMK were entitled to terminate the subcontract ...". However Mr Elliott accepted that this was a somewhat narrow reading of the pleadings. He submitted that the real issues were whether LMK had accepted the repudiatory breach on 20 January and if not had they been able to do so by paragraph 12 of the statement of claim. Thirdly, in the event that the alleged repudiatory breach was not accepted can LMK nevertheless recover damages for the alleged breaches including the additional costs of completing the subcontract works.

Mr Elliott submitted that if a party decided to treat the other party's conduct as a repudiation or renunciation of the contract then such an acceptance must be communicated to the guilty party by some unequivocal overt act to make it clear that the contract was no longer subsisting as a result of the repudiation or renunciation. If the contract was not treated as discharged but as affirmed then the breach which might otherwise have been a repudiation or renunciation is to be treated as if it were a breach of warranty and the injured party cannot get damages before the time fixed for performance: see Treitel: The Law of Contract. 9th Ed. at page 777:-

"A party who does not accept the breach cannot at common law get damages before the time fixed for performance; meanwhile he runs the risk of losing his right of action altogether. This could, for example, happen if the contract created a contingent right and events occurred to defeat that right between the time of the anticipatory breach and that fixed for performance."

LMK's case was that its letter of 20 January 1994 was an acceptance of Kentz's repudiation. That letter had to be construed in its context, namely that at the time when it was written Kentz were in repudiatory breach. LMK had therefore to elect whether or not to accept the breach or to affirm the contract. The law was clear and of long standing. In Frost v. Knight LR 7 Ex.111 Cockburn CJ had said at pages 112-113:

"The promisee, if he pleases, may treat the notice of intention as inoperative, and await the time when the contract is to be executed, and then hold the other party responsible for all the consequences of non performance: but in that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all his own obligations and liabilities under it, and enables the other party not only to complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage of any superseding circumstance which would justify him in declining to complete it."

That passage had been approved in a number of leading cases, eg Havman v. Darwins Ltd [1942] AC 356 in which at page 361 there were passages to the same effect in the speech of Viscount Simon LC, and in Fercometal SARL v. Mediterranean Shipping Co SA (The "Simona") [1989] 1 AC 788 per Lord Ackner at page 799 (with whose speech all the other members agreed). In that case the House of Lords had to consider the circumstances in which a party might lose the right to treat the breach of the other party as discharging the contract. It had also to decide whether to approve an earlier and difficult decision of the Court of Appeal. At page 805D Lord Ackner said:

"I therefore conclude that the decision in Braithwaite [1905] 2 KB 543 is not an authority for the proposition advanced by the appellants, alternatively if it is, then it is wrong. When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete."

Similarly in Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India ("The Kacheniunga") [1990] 1 Lloyd's Rep 391 at page 398 Lord Goff had emphasised the importance in law of the decision to exercise the right to treat the contract as discharged.

Viewed in those terms the letter of 20 January 1994 was plainly an election to act under clause 20.2.2. LMK might conceivably have elected to terminate for convenience under clause 20.1. LMK might have decided to terminate part rather than the whole of the subcontract works, as provided by clause 20.2. Instead LMK opted to terminate all the subcontract works under clause 20.2.2 and in so doing they invoked the provisions of clause 20.5. They contained important additional rights since they could not be brought into operation on a common law repudiation, e.g. clause 20.5.2 entitled the contractor to take immediate possession of materials, equipment, tools, construction equipment and machinery on the site owned or subcontracted by the subcontractor and to use them and effectively to obtain some automatic assignment from Kentz of its rights, option and privileges under the subcontract. It was therefore not without significance that in the letter of 20 January 1994 LMK required Kentz to "deliver up to use all materials and equipment relating to the above parcel together with all drawings, designs, calculations and fabrication details." This could not have been done if the letter were an acceptance of a repudiation. Similarly the provisions of clause 20.6 would not arise on repudiation. Clauses 20.7.3, 20.7.7 and 20.7.8 all dealt with matters which would not or could not arise on an acceptance of a repudiation. Clause 20.8 was a similarly restrictive provision.

LMK could not, by the same reasoning, have accepted the repudiation by paragraph 12 of the statement of claim since an election to accept or affirm, once made, is irrevocable: see Chitty on Contracts, 27th Ed. paragraph 24-002; Scarf v. Jardine (1882) 7 App.Cas. 345 at page 360 and Lord . Goff in The "Kachenjunga" at page 398. Accordingly even if Kentz had been in repudiatory breach of the subcontract at 20 January 1994 and even if the contract had been terminated contractually at that date that affirmation precluded the subsequent treatment of any prior breaches as a repudiation of the contract.

The opening words of clause 20.2 "without prejudice to any other legal or equitable right or remedy ...." did not have the effect of preserving LMK's right to accept a repudiation but rather made it clear that the parties' agreement to include clause 20.2 in the contract was not to be taken as excluding altogether the common law right to treat a contract as an end in the event of a repudiatory breach: see Sutcliffe v Chippendale & Edmondson 18 BLR 149 at page 160. In other words, clause 20 was not an exclusive remedy for termination. Mr Elliott relied upon a passage to this effect in the commentary on the JCT Form (written by Mr Adrian Williamson) in Keating on Building Contracts. 6th Ed. at page 659:

"It is clear that express reservation [in clause 27.1 ie "without prejudice to any other rights or remedies ..."] to the employer of any other rights or remedy preserves his normal rights of common law against the contractor."

As a matter of law it was not open to the parties to seek to preserve the right to treat a contract as at end after he had elected not to do so.

Thirdly, LMK could not recover damages including the additional cost of completing the subcontract works since their rights and remedies were those set out in the exclusive code of clause 20. If an innocent party such as LMK were to affirm the contract it was then kept alive for the benefit of the other party as well as for himself: see Chitty, volume 1, para. 24.021; Johnstone v. Milling (1886) 16 QBD 460 at page 470 (a reiteration of Frost v. Knight), and The "Simona", to the same effect.

The hire purchase cases relied upon by LMK were not of assistance. First, no claim for damages for repudiation could be made unless the innocent party had relied on and had specifically accepted the repudiatory conduct as discharging the contract. In Financings Ltd v. Baldock Lord Denning MR said at page 112-113:

"Once the hirer repudiated his liability for future rentals, the owners were entitled to treat the repudiation as itself a breach going to the root of the contract: and, on accepting it as such, they were entitled to regard the hiring as at an end and retake the vehicle."

It was therefore necessary, and consistent with the earlier cases that the acceptance of a repudiation should be a clear acceptance as such so as to communicate to the other party the consequences of the election that was being made. Thus Upjohn LJ had said in the same case at page 117:-

"So to my mind it is clear that where there is a case of repudiation, and the owner retakes possession on the footing that he is accepting this wrongful repudiation as putting an end to the contract, he is entitled to sue at common law for damages for the wrongful repudiation …."

At page 122 Diplock LJ referred to the exercise of the option, ie an election. Mr Elliott said that the crucial point in all the cases was that there was a termination of the contract whereas here the work under the subcontract was being terminated. Furthermore the breaches upon which reliance was placed in the hire purchase cases were repudiatory breaches, so the express termination would also operate as an acceptance of a repudiation at law. There had to be a repudiation: see e.g. Brady v. St. Margaret's [1963] 2 QB 494 at page 499, per Lord Denning MR.

The need to accept repudiatory conduct was emphasised in UDT v. Ennis [1968] 1 QB 54. At page 65 Lord Denning MR said:

"There remains the alternative claim for repudiation. It is said that Mr Ennis repudiated the contract. I very much doubt myself whether his letters and conduct should be considered as repudiation. He was simply asking for the agreement to be terminated. He was not repudiating it. But even if it be treated as a repudiation, it is clear that the repudiation was never accepted by the finance company. After receiving his letter, they treated the contract as being still continuing. They claimed under the minimum payment clause, which is a thing they could not possibly have done if there had been an acceptance of repudiation. By so doing they elected to treat it as continuing. Mr Goodenday said that they accepted the repudiation by retaking possession of the car. That was not pleaded. Nor has it ever been suggested hitherto. The County Court Judge said that they accepted the repudiation in November 1963 when they amended their pleadings. That was far too late. They had already evinced an intention to treat the agreement as continuing. I do not think that they can rely upon the alleged repudiation."

Harman LJ said at page 68 C:-

".... a repudiation needs both the expression of such an intention and its acceptance on the other side. There clearly was no acceptance on the other side. The plaintiffs elected not to accept repudiation: they elected to treat the agreement as binding and to sue him under it and not to'Sue him for damages for its breach. Therefore, they cannot rely on repudiation."

Salmon LJ agreed (see page 71 B). Mr Elliott said that Lombard Plc v. Butterworth was

distinguishable since it was clear that it was only by virtue of the contract that a non-repudiatory

breach was treated as a repudiatory breach. Mustill LJ referred to this at page 535 E~F. Nicholls

LJ said at page 545 H that

"... failure to pay any instalment triggers a right for the plaintiff to terminate the agreement by retaking possession of the goods (clause 5), with the expressed consequence that the defendant becomes liable to make payments which assume that the defendant is liable to make payments which assume that the defendant is liable to make good to the plaintiff the loss by them of the whole transaction (clause 6). Given that context, that the "time of the essence" provision seems to me to be intended to bring about the result that default in punctual payment is to be regarded (to use a once fashionable term) as a breach going to the root of the contract and, hence, as giving rise to the consequences in damages that tended upon such a breach. (See also page 546 B).

An example of this type of provision was to be found in Thomas Feather & Co (Bradford) Ltd v. Keishlev Corporation [1953] LGR 30.

So on the facts assumed (and pleaded) although repudiatory conduct is assumed, LMK did not rely upon it to determine the contract i.e. there was no acceptance in fact of the repudiation; the contract itself was not brought to an end but only the work; reliance was instead placed on the contract and new rights arose thereunder (e.g. in clauses 20.5 to 20.10); those rights were inconsistent with the repudiation at common law. In addition action under clause 20.2.2 effectively prevented Kentz from completing the works so that LMK could not recover the additional cost of completion. Issue 1 should be answered in the negative.

Issue 2

Mr Elliott submitted that questions raised by this issue were:

1. Does Aegon's position as surety entitle it to call upon LMK to enforce their right of recovery against Glaxo before seeking to enforce the Bond?

2. Are LMK obliged to seek to enforce their remedy against Glaxo by way of mitigation of damage?

3. Is Aegon to be taken to have executed the Bond on the basis that LMK could recover under it for Glaxo's losses?

Mr Elliott first drew attention to the provisions of the contract between LMK and Glaxo to demonstrate that LMK would not or should not suffer any loss. Under clause 8 they were to be paid the actual cost of the work and under exhibit A "Costs and Fees" the actual costs of the work was defined in broad terms in respect of reimbursable costs and certain fixed rates or costs plus the fee which was to provide for comprehensive reimbursement of the contractor's own costs and profit. Thus clause 1.1.8 allowed for the reimbursement of "the costs of subcontracts awarded in accordance with the contract for construction including subcontracts for construction."

Clause 6.22 was not an indemnity. Its words are to be contrasted with true indemnities e.g. those set out in clause 24. Clause 24.1 and 24.2 contained the usual indemnities against third party claims. Clause 24 also contained provisions for performance bonds in the form set out in exhibit B and bonds from subcontractors in the form set out in attachment D (which was actually executed). He accepted that the bonds would be subject to all the terms and obligations of the subcontract under the provisions of the model bond and that actually used.

Mr Elliott submitted that the contractual scheme required by the main contract placed the risk of default by a subcontractor such as Kentz on Glaxo. Pursuant to clauses 6.22 and 8.1 of the contract with Glaxo LMK were entitled to be paid on a cost plus basis, unless the costs had been caused or contributed by LMK's own default, negligence, action or omission, or when such costs could have been recovered from defaulting subcontractors. There was no default, negligence or omission by LMK and accordingly LMK could not have recovered the costs from Kentz. Glaxo were therefore liable to pay LMK the costs. The contractual scheme also contemplated subcontractors and a subcontract bond. Clause 6.17 of the subcontract precluded the subcontractor taking the "no loss" point but there was no such provision in the requirement form of bond. The bond was a contract of guarantee under which proof of actual loss was a prerequisite to recovery: see Trafalgar House Construction (Regions) Ltd v. General Surety & Guarantee Co Ltd [1996] AC 199 at page 207 B-H, per Lord Jauncey of Tullichettle. Accordingly Aegon's liability to LMK could not be greater than Kentz's liability to LMK.

Furthermore, clause 6.17 did not mean that it could not be contended that LMK has never suffered damage loss or expense. Since clause 6.17 did not form part of the bond it was open to Aegon under the bond to maintain that LMK should pursue its remedy against Glaxo.

Nevertheless it was a well established principle of law that a surety could require a creditor to pursue first the remedy for the loss which was only open to him. On the assumption made in paragraph 10(a) of the statement of assumed facts, LMK had first to pursue Glaxo to recover the additional costs of completing the subcontract works. The writers were clear that the law will intervene at the behest of the surety to require the creditor to pursue first the remedy for the loss which is open only to him. Thus de Colvar: Law of Guarantees 3rd Edition (1897) stated at page 321, citing Ex p Kendall 17 Ves 514:

"The other matter of equitable defence against a claim under the guarantee requiring notice is the surety's right to compel a creditor having a claim upon two funds, one of which the surety cannot make available, to resort to the latter fund first."

Rowlatt on Principal and Surety 4th Edition (1982), at page 133 says:

"The principle appears to have been that the surety had an equity to compel the creditor to recover the debt from the alternative source." The editors refer to Cottin v. Blane (1795) 2 Anstr. 544, as does McGuiness: The Law of Guarantee (Toronto) (1986), page 196 at footnote 17: "However, where the creditor has a right to recover the debt from a source to which the surety lacks access, it appears that the creditor must look to that source before claiming against the surety."

Phillips and O'Donovan: The Modern Contract of Guarantee 2nd Edition (1992) also refers to Cottin v. Blane at page 461:

"This was not, therefore, a case of a creditor being compelled to seek compensation from the. principal debtor before suing the Guarantor but merely a case where the creditor-owner was compelled to claim first against a fund provided by a third party."

Cottin v Blane was set in the years of the worst excesses of the French Revolution and the Reign of Terror which had taken Louis Capet (formerly known as Louis XVI) and his wife to the guillotine. Prance's aspirations brought about war with many European countries, including Great Britain. American declared its neutrality. Mr Blane was agent for Mr Macauley, an American, who owned a ship which had been chartered to M. Changeur as agent for a French company. The ship had arrived at Bordeaux on 30 August 1793 to load its cargo but because Mr Macauley was an American she became subject to an embargo on all neutral vessels until 23 March 1794. The National Convention decided that the affected foreign owners ought to be compensated and set aside 800,000 livres for that purpose. The plaintiff Cottin had guaranteed the due performance of Changeur's obligations and the charterparty and on Changeur becoming bankrupt was sued by Blane. He therefore sought an order to see whether Macauley had received any money from the French government. Blane denied that either he or the owner had received anything and submitted that therefore was no enforceable obligation to recover from the compensation fund since there had only been a vote that in principle it ought to be set up. The report states, first, an observation semble arguendo:

"MacDonald, Chief Baron. - The case is peculiar. Undoubtedly the injury done by the French to neutral vessels, ought injustice to be repaired by them. They say, they will do so. This promise takes it out of the case of a mere unadmitted claim upon their justice. It strikes me, that a court of equity is to look for the performance of such a promise by the government of France, and not to presume a direct refusal of a right which they admit to exist. But we shall look further into the cases which have been cited."

Then apparently the judgment of 28 February 1795:

"MacDonald, Chief Barou. - As the existing government of France have promised to indemnify the neutral owners, we are to presume that that promise will be fulfilled. Probably it has already been so in part; but whether any compensation either has or can be received, cannot be known till the coming in of Macauley's answer, who alone was capable of claiming it. The injunction must be granted, the plaintiff bringing the money into court."

The authors of Andrews & Millett: Law of Guarantees , 2nd ed. (1995) at paragraph 7.3 (pages 195-196) have commented:-

"It is submitted that the facts of Cottin v. Blane are sufficiently unusual to make it unsafe to assume that it lays down any precedent. Certainly it is difficult to ascertain from the report what legal principles were applied in order to achieve the result, although it may perhaps be viewed as a fairly extreme example of the application of principle that the creditor is obliged to take reasonable steps to mitigate his loss (in this instance, claiming against the fund). However, even on that analysis, the element of compulsion of the creditor is unique: therefore the case should be treated with considerable caution."

However later the same authors say of Cottin v, Blane at page 319:

"However, this decision can be justified on the basis:

(a) that the creditor was not compelled to go against the principal, but an independent fund provided by a third party not as security for the performance of the charter party but as compensation for its nonperformance;

(b) that the fund was personal to the creditor, and the surety could never have had recourse to it even by rights of subrogation; and

(c) that relief was granted only upon the surety paying the debt into Court."

Mr Elliott conceded that he could not rely upon the principle in Cottin v. Blane if Aegon had a right to an indemnity and were thereby subrogated to LMK's rights against Glaxo, for there would then be a fund available to Aegon.

On the assumption made in paragraph 10(b) of the statement of assumed facts, then LMK would have suffered no loss and could make no claim upon the bond. The position of LMK was not the same as the plaintiffs in L/M International Construction Inc. v. The Circle Limited Partnership (1995) 49 Con LR 12, since there the developers were acting as agents and LMK were clearly not acting as agents but as principal and contractors for Glaxo. The situation in that case was unusual, the judgments appear to proceed upon rather different grounds. No assistance could be derived from The"Albuzero" or Linden Gardens. Both made it clear that it was exceptional for a party to recover damages on behalf of a third party. LMK had not contracted on the basis that it could recover Glaxo's losses from Kentz other than as damages for which LMK would be liable under the main contract occasioned by a breach by Kentz of the sub-contract and Aegon did not execute the Bond, which co-extensive with the sub-contract but no wider, on any other basis.

Mr Ramsey in reply submitted that viewed in terms of election then the letter of 20 January 1994 was a clear election to terminate the contract, if one looked at it objectively. Its effect was directly comparable to the letter sent in Lombard Plc v. Butterworth [1987] 1 QB 529 which was set out in the judgment of Mustill LJ at 533 C.

In any event, LMK's reliance on clause 20 did not preclude it exercising its other rights and remedies which had been expressly preserved by the opening words of clause 20.2. As a result the code set out in clause 20 would not prejudice LMK's rights at common law. As previously submitted clause 20 was not an exclusive code of the kind found in the JCT forms of which Perar and Feather were examples. Aegon's no loss argument was wrong. Clause 6.17 was expressly designed to preclude Kentz or Aegon from making that assertion. In any event clause 6.22 of the main contract was concerned only with the position between LMK and Glaxo and the last sentence was concerned with the pursuit of a subcontractor and the costs that might be incurred by LMK in doing so in order to protect Glaxo's interests. The latter part of clause 6.22 was therefore an example of LMK acting as an agent as indeed was clause 11.3.2. If that submission was wrong then Cottin v. Blane was not authority for anything. The court should avoid falling into a legal "black hole".

Decisions

Issue 1

The first question to consider is the effect of the letter of 20 January 1994. The arguments advanced by Mr Ramsey and Mr Elliott, respectively, are nicely balanced. On the one hand there is much attraction in the submission that clause 20.2 ought to be capable of being operated without recourse to legal advice: hence the inclusion in clause 20.2 of the "without prejudice" wording. On this basis the letter should not be treated as an election to affirm the contract and not to treat it as repudiated, for otherwise a writer would be faced with the well-known conundrum which is described in, for example, Keating on Building Contracts at page 162:-

"It is an open question whether an employer, faced with default by the contractor which might both amount to repudiation and entitle the employer to operate a contractual determination clause, can hedge his position so as to avail himself for both opportunities. Logically this may not be possible, since to operate the contract is to affirm it, which is inconsistent with accepting a repudiation. It may, however, depend on the order in which the alternatives are effected. An acceptance of a repudiation followed in the alternative by a contractual determination expressed to be without prejudice to the acceptance of a repudiation might achieve the contractual determination if there was held to have been no repudiation to accept. A single notice which is not framed in the alternative may or may not serve to effect either possibility. A notice explicitly operating a contractual determination clause will not serve in the alternative as an acceptance of repudiation^[2]. A notice expressed neutrally may serve as an acceptance of repudiation if a contractual determination relying on it is held to be ineffective^[3]."

In E R Dyer v. Simon Build/Peter Lind Partnership (1982) 23 BLR 23 which was cited in the footnote to the penultimate sentence of this extract, Nolan J had to consider clause 63 of the ICE Conditions, 4th ed. He said at page 33:

"Did the invocation and exercise by the employer of the powers conferred by clause 63 determine or terminate the contract in this way? Reading the language of the clause I note that the initial power conferred upon the employer was to enter and expel the contractor without thereby avoiding or releasing the contractor from any of his obligations or liabilities under the contract or affecting the rights and powers conferred on the employer or the engineer by the contract; and that the concomitant powers of the employer to complete the work and to use or sell construction plant, temporary works and materials are accompanied by continuing duties owed by the employer to the contractor. Similarly, sub-clauses (2) and (3) provide for the entry and expulsion to be followed by a quantification of amounts due to the contractor and for payment to be made after the expiration of the period of maintenance. I do not see how the invocation by the employer of his rights under clause 63 and the exercise of the continuing powers and acceptance of the continuing duties for which that clause provides can be said to have determined or terminated the contract".

That view was also accepted by the Court of Appeal of Tanzania in Mvita Construction v. Tanzania Harbours Authority (1988) 46 BLR 19 (also referred to in the same footnote) - see the judgment of Nyalali CJ at page 33: "the exercise of powers conferred upon the employer under clause 63(1) of the contract does not have the effect of repudiation or rescission under the common law applicable in this country". (The commentary on this at 46 BLR 22 notes that the Court's decision that nevertheless the employer could not thereafter resort to its common law rights is not easy to follow.) It may be noted that clause 20.3 avoids the result of an ineffective termination under clause 20.2 being treated as a repudiation since it states:

"In the event it is subsequently ascertained that the reason for termination pursuant to Clause 20.2 did not exist, then any such termination shall be treated as termination pursuant to Clause 20.4 below."

On the other hand it is difficult to see how the exercise of the power to terminate could be anything other than an implementation of the contractual terms and as such an affirmation in legal terms.

In my judgment the issue is to be resolved by the application of what I believe to be basic principles. Where, as here, it is assumed that the subcontractor was in repudiatory breach of the subcontract, only an acceptance of that repudiation or renunciation will serve to discharge both parties from the future performance of the contract. Is the exercise of the contractual right to terminate under clause 20.2, on the grounds of the appointment of an administrative receiver to be treated as such an acceptance? In my judgment it is not. Acceptance of a repudiation must be clear and unequivocal. So too must an affirmation. For the decision to elect between the two remedies must be clear and clearly communicated. At paragraph 24.002 the editors of Chitty on Contracts, 27th Ed. state that if there is to be an implied affirmation there must be "some unequivocal act from which it may be inferred that [the innocent party] intends to go on with the contract regardless of the breach or from which it may be inferred that he will not exercise his right to treat the contract as repudiated ..." and at paragraph 24.003:-

"Once the innocent party has elected to affirm the contract and this has been communicated to the other party, then the choice becomes irrevocable."

In my judgment attention was rightly drawn to the helpful observations of Lord Goff in The "Kachenjunga" [1990] 1 Lloyd's Rep 391 at page 398, second column:-

"There are numerous examples of the application of this principle of election in English law. Perhaps the most familiar situation is that which arises where one contracting party repudiates the contract. The effect is that the other contracting party then has a choice whether to accept the repudiation (as it is called) and bring the contract to an end; or to affirm the contract, thereby waiving or abandoning his right to terminate it. If, with knowledge of the facts giving rise to the repudiation, the other parties to the contract act (for example), in a manner consistent only with treating that contract as still alive, he is taken in law to have exercised his election to affirm the contract."

Is it possible to characterise LMK's action in writing the letter of 20 January 1994 as an election not to repudiate the contract and thus an affirmation of it? First, the contractual power that was being exercised was one which had the effect not of terminating the contract (as occurred in many of the hire purchase cases) but of terminating the execution of the works in the hands of Kentz. The contract indeed necessarily remained alive in order that the consequences set out in clause 20.5 and 20.7 could have effect (which are thus similar to parts of clause 63 of the ICE Conditions). Amongst those was the requirement, in clause 20.7.8, to "deliver to the contractor, when and as directed by the contractor, ail documents and property which, if the subcontract work had been completed, the subcontractor would have been required to account for to deliver to the contractor, and transfer title to such property to the contractor to the extent not already transferred" i.e. to hand over the documents mentioned in the letter of 20 January 1994.

Secondly, the rights exercised were rights to terminate the works in and subject to the terms of clause 20 which included that the entitlement to terminate was "without prejudice to any other legal or equitable right or remedy which the contractor would otherwise possess hereunder or as a matter of law." In my judgment it is not possible to characterise LMK's actions as an election not to treat the contract as repudiated when it exercised an express contractual right to terminate performance of the works but without prejudicing any other rights. Accordingly, in my judgment, the commentary by Mr Adrian Williamson on clause 27.1 in Keating on Building Contracts at page 659 is a correct statement of law, and is supported by Nolan J's judgment in Dyer v Simon/Build. LMK's letter of 20 January 1994 is, therefore, no more than a decision to terminate the contract on the grounds of an appointment of an administrative receiver. It says nothing about any decision to treat any repudiatory conduct of Kentz as a renunciation of the contract or not. LMK was not required at that stage to make an election, since it was entitled to terminate under clause 20.2 without prejudice to its rights. Clearly Mr Elliott was right in his submission that as a matter of law it is not open to the parties to seek to preserve the right to treat a contract as at end after there had been an election not to do so, but that proposition presupposed that there had been an election.

Thirdly, the ground upon which the right to terminate was exercised was not one which was or was equivalent to repudiatory conduct. The appointment of an administrative receiver is not as such repudiatory conduct. As Staughton LJ said in Perar it may amount to a repudiation but in that event there would need to be other facts. If LMK had invoked, for example, any of the grounds set out in clauses 20.2.4 - 20.4.10, then if it was also sufficiently grave to be treated as repudiatory conduct, the notice of termination might have sufficed to be an acceptance of such repudiation, but much would turn on its terms, for acceptance must be clear and unequivocal. If, as here, the notice had also required Kentz to perform an obligation only to be found in the remainder of clause 20 then I doubt if it could be read as an election to accept a repudiation as it would be equivocal. No such problems appear to have arisen in the hire-purchase cases and I do not consider that I can gain much assistance from the hire purchase cases. Not only were the contracts different (eg lack of "without prejudice" wording) but the issue before the courts was not precisely the same issue as that before me. Furthermore a number of the cases were largely concerned with explaining earlier decisions. They do of course show that a contractual termination may also be an acceptance of a repudiation in an appropriate case where there is a coincidence between contractual grounds and the common law grounds. That there must be such a coincidence is clear from, for example, the observations of Lord Denning MR in Financings Ltd v. Baidock [1963] 2 QB 104 at page 112 which I have set out above. Diplock LJ at pages 119 and 123 was plainly considering that the exercise of power to terminate was on grounds which were either ones which would entitle a party to treat the contract as repudiated or were by the contract to be treated as such so that the measure of damages would be the same. I do not consider that clause 20 could be treated as elevating the appointment of an administrative receiver into a repudiatory breach so that pace Lombard Plc v Butterworth the notice of termination might serve as an acceptance of some deemed repudiation. Clause 20 is not so worded and is indeed deliberately worded so as to enable only part of the work to be taken away. A contract cannot normally be severed so that one part can be treated as repudiated with the parties' obligations with regard to the'remainder surviving unaffected.

Fourthly, I do not consider this conclusion is "a sort of via media" which was condemned by Lord Ackner in The "Simona". Lord Ackner was there dealing with a type of suspended performance of obligations. The existence of the right to terminate under clause 20.2 does not in my judgment negative the contract being kept alive for the benefit of both parties (as indeed it must if there were only a partial termination of the work). If for example LMK had failed to perform one of its surviving obligations under the code set out in clause 20 and it is was sufficiently serious to be a repudiation then Kentz (or its administrative receivers) could have accepted it as such, although its claims would be limited by clause 20.8.

The next question is whether LMK were entitled to and did validly accept the repudiation by paragraph 12 of the statement of claim. On the facts which I have been asked to assume it is in my view clear that there was no intervening conduct on its part (or on the part of Kentz) which amounted to an affirmation of the contract such that LMK would not be entitled to treat Kentz's conduct as an anticipatory breach evincing an intention no longer to be bound by the contract. It was therefore open to LMK after the service of the letter of 20 January 1994 to terminate the contract which was then subsisting. Clause 20.8 deals only with the consequences of a contractual termination

20.8 The EMPLOYER'S or CONTRACTOR'S sole liability for termination shall be determined in accordance with this Clause and the SUBCONTRACTOR and all SUBCONTRACTORS or SUPPLIERS shall have no further claim against the EMPLOYER or CONTRACTOR for damage or loss resulting from any termination.

If it had been intended that LMK's rights consequent on the acceptance of a common law repudiation were to be limited then clear words would be required. Not only are they not present, but in my judgment they are fully preserved by clause 20.2.

However LMK are not out of the woods yet for the third question that arises under Issue 1 is whether LMK are entitled to recover the additional cost of completing the subcontract works since that cost was (subject to Issue 2 and the assumptions required under paragraph 10 of the statement of assumed facts) incurred prior to the service of the statement of claim when the repudiation may be taken to have been accepted (on the basis that Aegon's liability being coextensive with that of the subcontractor notification of that acceptance is effective even though not given to the subcontractor).

At this point questions of fact and causation loom. Aegon's case is essentially that by terminating the contract Kentz was prevented from completing its work. I do not consider this to be a correct analysis of the situation. On the assumptions which I have been invited to make, Kentz was on 20 January 1994 in repudiatory breach of the subcontract as pleaded in the statement of claim, i.e. for the reasons principally set out in paragraph 10 of the statement of claim, Kentz had evinced an intention no longer to be bound by the terms of the subcontract. It is in my view difficult to see, if Kentz had evinced an intention no longer to be bound by the contract, what type of action would have prevented it from completing it. Paragraph 10 of the statement of claim shows that Kentz were not going to be able to complete the work. In any event if it is assumed that Kentz had some right to complete the subcontract which it was prevented from exercising, it is necessary to examine the nature of that right. It was a right to complete provided that events did not occur which entitled LMK to take some or all of the work out of its hands under clause 20. Some of those events might be neutral. However the appointment of the administrative receivers would not normally be regarded as falling within that description. It appears that it was Kentz's inability to maintain the requisite degree of solvency which led to the appointment of the administrative receivers and, according to the statement of claim, was the reason why they were in repudiatory breach of the subcontract. On any sensible view LMK's action in terminating Kentz's right to carry out the work (but not Kentz's rights under the subcontract, e.g. to be paid the value of outstanding work, which was expressly preserved by clause 20.5.2) could not be said realistically or legally to be a material prevention by LMK since it was a right to continue in the absence of grounds of termination or as modified by any termination..

Nevertheless Mr Elliott is right in his submission that the need to employ others to complete Kentz's work was brought about by the decision to terminate the subcontract work. Those costs clearly do not flow from any acceptance of the repudiation by LMK. But, for the reasons that I have already given, since LMK's action in terminating the subcontract work did not affect its rights under the contract, it follows that Kentz remained in a repudiatory breach of the subcontract. Since the nature of that repudiatory breach was one which evinced an intention no longer to be bound by the subcontract arid since there was no intention to complete the work, the action of LMK in terminating the contract may, in my judgment, be properly viewed as merely clearing the decks to enable LMK to be able to do that which Kentz was not going to do. LMK's action could be viewed indeed, as a reasonable action to mitigate the effect of Kentz's breach; it would be absurd if LMK were obliged to lose the benefits for which they had stipulated in clause 20.5 and driven to accept a repudiation solely so as to recover the costs of completion. On any commercial basis LMK had to secure completion of the subcontract works pursuant to their obligations under the main contract (to which I shall later refer in some detail); they were faced with a subcontractor who was patently not going to do so, on the assumptions that I have been asked to make; they were surely not obliged to wait until completion of the subcontract period before they could act; they were entitled to take the matter out of Kentz's hands and to complete the works.

For these reasons Issue 1 will be answered in the affirmative.

Issue 2

It is necessary to consider this issue under each of the assumptions in paragraph 10 of the statement of assumed facts. First, therefore, I consider it on the basis that LMK have not recovered any of the additional costs of completing the subcontract works from Glaxo.

In order to answer this issue it is necessary, in my view, to examine the nature of the construction management agreement, not least to see whether any justifiable comparisons may be drawn between the position of LMK and that of the plaintiff in L/M International Construction Inc. v. The Circle Limited Partnership (1995) 49 Con. LR 12. That was a case in which site owners created a development company as a vehicle to carry out the development and agreed to pay the company the development costs plus 10%. The developers had no money so in turn under a complex series of arrangements they raised the finance and engaged the plaintiffs to be the construction managers. The Court of Appeal held that the developers were entitled to recover the losses that fell on them in the first instance even though they were acting as agents for the site owners and rejected the construction manager's argument that the developers had not suffered any loss.

I do not consider that LMK is in a position of being an agent for Glaxo so as to enable the same argument to assist LMK. The agreement between Glaxo and LMK of 9 October 1990 appointed LMK for the purposes described in recital 2, which included "to provide and to be personally responsible for the management, organisation, supervision, coordination and integration of the construction service .... and to cause to be provided all detailed construction information necessary for the construction of the work and to secure the carrying out of the work upon and subject to the terms and conditions herein ..." Of these three limbs the latter is perhaps the most important since it is followed through by clause 3 which described the scope of the work. Clause 3.1 stated that LMK were to provide procurement construction services including management of construction etc. Clause 3.2 required LMK to be "personally responsible for exercising all the reasonable skill, care and diligence to be expected of a properly qualified and competent managing contractor, experienced in managing projects of equivalent size, scope and complexity to the project, in ensuring its subcontractors and suppliers diligent adherence to standards of quality as set forth in the Execution Specification ...." and in clause 3.3:-

"The contractor shall be personally responsible for the provision of services comprising the procurement of and the management, organisation, supervision, coordination and integration of the construction and to secure the carrying out of the work."

Thus in clause 4 we find the following:-

"The contractor shall ensure the regular and diligent performance of the work and its completion."

In these provisions it seems that the contractor is responsible, albeit through the appointment of subcontractors, for securing that the work will be properly completed in accordance with the relevant contractual standards. In other words LMK's obligations are not limited to merely management but also to direct responsibility for the procurement of the successful completion of the project. Furthermore and crucially clause 11.7 stated:

11.7 Notwithstanding anything contained in the CONTRACT FOR CONSTRUCTION or any subcontract awarded by the CONTRACTOR hereunder, nothing shall be construed to create or establish a contractual relationship between any ... SUBCONTRACTOR, or other persons performing the WORK, and either the EMPLOYER or the ARCHITECT-ENGINEER except to the extent as expressly defined in the direct warranty agreement undertaken in accordance with Clause 11.3.3.

LMK's relationship with Glaxo was therefore plainly that of an ordinary contractor who contracted as principal with the subcontractors, and not as agent. This conclusion is fortified by other provisions of the contract. For example clause 5 (which begins "In addition to other rights and obligations under the contract for construction or under applicable law, the employer shall have the following rights and obligations") we find that Glaxo reserved, in clause 5.7, "the right to reject any materials, equipment and workmanship which, in its opinion, do not meet or conform to the quality, fitness, performance or other requirements of the contract for construction" and, more importantly, in clause 5.9:-

"The employer shall have the right to take possession of and use for any purpose any partially completed portion of the project. Such taking possession or use shall not be deemed to be the employer's acknowledgment of satisfactory completion of the said portion of the work and shall not limit or waive the contractor's responsibilities, obligations, or duties pursuant to the contract of construction. Further, such taking possession or use shall not be construed as a waiver of any of the employer's rights under the contract for construction or applicable law."

Similarly in clause 25 (insurance) we find that the employer is to obtain "all risks insurance" but the amount insured is to exclude "loss of or damage to or the cost of replacing, repairing or rectifying the work or materials in a defective condition due to a defect in design, plan, specification, material or workmanship ...." (see clause 25.1.1 (3)). Similarly in clause 25.1.3 "The contractor shall not be entitled to any payment in respect of the restoration of work damage, the replacement and repair of any unfixed materials, and the removal and disposal of debris other than the monies received under the aforesaid assurances." I also note that in clause 25.1.4 the employer is to be the agent of the contractor in all matters effecting or arising in connection with any of the assurances so effected including any claims made under the insurances. Clause 25.2 and 25.3 contain the usual provisions whereby the contractor is to indemnify the employer against third party claims. These provisions are in my view consistent with the contractor being responsible, in the usual way, for the completion of the work - a conclusion which is supported by provision such as clause 6.9 "The contractor shall be responsible for construction means, methods, technique, sequences and procedures and for coordinating and controlling all portions of the work."

Against this background it is clear to me that clause 6.22 has a limited application and meaning. Assuming that the words "the contractor shall not be deemed liable for damages or claims" means "the contractor shall not be liable for damages or claims", it thus gives LMK some protection for if is only to Glaxo that LMK will be liable. LMK's liability is in any event limited to the extent that the damages or claims were occasioned or contributed to by LMK's own negligence, omission, action or default. Similarly LMK will not get the benefit of clause 6.22 if the claims either have been or could have been recovered by the contractor from the defaulting subcontractors or suppliers. It is therefore clear from this clause that the contractor will be responsible for ensuring completion of the work and it is only to the extent that Glaxo may suffer damages as a result of defaults on the part of subcontractors that LMK gets a limited degree of protection. It is perfectly true that the payment provision envisaged that Glaxo may be under an obligation to pay for the completion of the work by another subcontractor in the wake of a defaulting subcontractor but that will only mean that Glaxo will only suffer a loss which may be the subject of a claim to be dealt with in accordance with clause 6.22. The last sentence of clause 6.22 does not in my judgment mean that LMK will never suffer a loss because they will always be reimbursed by Glaxo. First, it is inconsistent with the primary part of clause 6.22. Secondly, there are already provisions in the contract whereby the contractor is to be reimbursed for the costs payable to subcontractors and they will apply if a subcontractor's contract is terminated. The subcontractor's contract may be terminated other than for default. Thirdly, the latter part of the sentence is in my view illustrative of the type of reasonable costs. They are costs which are likely to be incurred by LMK itself and which will not otherwise be recoverable under the payments to be made to LMK for its services as set out in clause 8 and exhibit A. The provision that the contractor may be reimbursed for the costs of litigation suggests strongly that the contractor will be pursuing litigation in its own name for it is only if its costs and Glaxo's claims cannot be recovered by the application of the diligence otherwise required of the contractor elsewhere in the contract that Glaxo may ultimately may have to foot the bill.

For these reasons I do not consider that Aegon is right in the assumption implicit in its submissions that LMK will have remedies to enforce against Glaxo before they seek payment on the bond. The words of clause 6.22 in referring to the recoverability of Glaxo's losses and costs must be referring to the recoverability from a defaulting subcontractor including from any surety that the employer may require a subcontractor to provide, as contemplated by clause 24.5:

"The employer may, at its sole option, require the contractor or its subcontractors or suppliers to furnish bonding it considers appropriate ....".

However, if I were wrong in this conclusion, then is Mr Elliott right in his submission that where a creditor may recover the loss from an alternative source he must do so before calling upon a surety to make good that loss? The case of Cottin v. Blane (1795) 2 Anstr 544 is very tersely reported and is not easy to understand. It appears to have been treated as an authority for the proposition contended for in the older textbooks although not without critical commentary and the view being expressed that it is limited to special circumstances (see Halsbury's Laws of England, Guarantee and Indemnity volume 20, para. 194, footnote 11). In my judgment it is merely pragmatic and decides nothing as a matter of principle. It was an application for an interlocutory injunction which was granted on the usual undertaking by Cottin (to bring the money into court) in case anything turned up. It is not at all clear that the court really believed that the revolutionary Government would fulfil its intention or would be perfidious. The court did not decide that if Macauley (who was not represented) were compensated then the claim on the bond would fail or be reduced, only inferentially does it support the proposition that the creditor must as a matter of law pursue all available avenues before claiming on a bond. That proposition conflicts with the nature of a surety's obligation which to make good the loss occasioned by the debtor's default. It has not been apparently considered to be authority by any subsequent court.

If Mr Elliott's proposition is correct then it has to be justified upon the wording of the bond itself rather than upon a general principle of the law relating to guarantees. Aegon's liability under the bond is to "satisfy and discharge the damages sustained by the contractor thereby" i.e. "on default by the subcontractor". In my view it is clear from the decision of the House of Lords in Trafalgar House Construction v. General Surety and Guarantee Co [1996] 1 AC 199 that these words (which are virtually identical) are not apt to exclude the normal legal incidents of suretyship (see Lord Jauncey at page 208) where he said:-

"Indeed the use of the word "damages" is far more consistent with the compensation arrived at after taking into account all sums due to or by [the subcontractor] and [the contractor]. If the parties have intended to produce the results contended for by Mr Beloff it would have been a simple matter to use a form of words such as "the additional expenditure incurred". Instead they have used words which if anything point away from such a result."

What then would be the damages sustainable for which Aegon might be liable under the bond taking into account that its liability under the bond is no greater than the liability of the subcontractor under the subcontract, but is coextensive with that liability. Clause 6.17 of the subcontract not only confirms that Kentz had notice of the terms of the main contract and therefore of LMK's potential liabilities to Glaxo for anything that had been or might be recoverable from a subcontractor, but also that clause makes it clear that the subcontractor recognises that LMK might suffer or incur damage loss or expense, since otherwise there would be no point in the declaration that Kentz waives "its rights to contend, whether in proceedings or otherwise, that the contractor has suffered or incurred no damage loss or expense or that its liability to the contractor should be in any way reduced or extinguished by reason of clause 6.22 of the contract for construction." This clause is widely drafted, particularly since it refers to "in proceedings or otherwise". Aegon stood as surety for Kentz's liabilities including therefore the general statement in clause 6.16:

"The SUBCONTRACTOR agrees to assume and be bound by all the obligations, duties, and responsibilities which the CONTRACTOR owes the EMPLOYER under the CONTRACT FOR CONSTRUCTION in respect of the SUBCONTRACT WORK to be performed by the SUBCONTRACTOR and to co-operate with the CONTRACTOR to ensure, insofar as it is within the SUBCONTRACTOR'S power, that the CONTRACTOR is able to comply with the CONTRACT FOR CONSTRUCTION insofar as his obligations under the CONTRACT FOR CONSTRUCTION relate to the SUBCONTRACT WORKS, provided that nothing in this clause 6.16 shall render the SUBCONTRACTOR or any SUB-SUBCONTRACTOR liable in any way for any liability of the CONTRACTOR under clause 3.2 of the CONTRACT FOR CONSTRUCTION."

In my judgment therefore the damages referred to in the bond will be those which are recoverable from the subcontractor or, if necessary, from Aegon, arising out of any default by Kentz. In my judgment it follows from the decision in Trafalgar House that the damages are those truly recoverable and will not include any that were reasonably avoidable by LMK. If it were established that by applying the ordinary principles relating to the mitigation of damage LMK ought to have recovered the additional costs of completion from Glaxo, then Aegon might be able to resist payment. That course of action would in my judgment be unlikely to succeed, or at best be a risky course, since for the reasons already given Glaxo had no such liability unless and until LMK proved that they were unable to recover the losses from the sub-contractor or the bondsman. Accordingly I cannot see that Aegon can succeed in avoiding payment if LMK has not yet recovered the costs of completion from Glaxo.

I now turn to the next assumption namely that LMK have recovered all the costs of completing the subcontract works from Glaxo. At first sight LMK will not have sustained any damage since it will have effected a full recovery from Glaxo and will therefore have suffered no loss or damages which would be recoverable under the bond. I have already explained why I consider that LMK was a principal and not an agent. Accordingly, unless or until Glaxo make a claim against LMK for the additional cost of completion (for which LMK would be liable subject to clause 6.22 of the main contract) LMK cannot present itself as if it were the plaintiff in L/M International Construction Inc. v. The Circle Limited Partnership.

It also follows that LMK could not pray in aid Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd [1994] 1 AC 85. It is certainly true that Kentz could have foreseen that its default would cause loss to Glaxo and not merely to LMK (see per Lord Browne-Wilkinson at page 114H), but Linden Gardens requires that there must be an exception to the rule so as to provide "a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it", i.e. the rationale of The "Albazero" [1987] AC 774 per Lord Diplock at page 847. That is not the case here. If Glaxo and LMK consider that Aegon should be held to account then Glaxo should make the claim that it undoubtedly is entitled to make under the terms of the main contract whereby LMK will suffer a loss recoverable under the bond. If Glaxo chose or choose not to do so, or cannot do so, I do not see why the surety should be held liable for a loss which LMK will not in fact have sustained.

Nor do I consider that Aegon can be held liable on a fiction that in some way Glaxo are subrogated to LMK's rights. I reject the proposition by clause 6.17 or any other provision of the main contract is to be read as an indemnity in favour of LMK so that Glaxo would on paying LMK have a subrogated right to recover its losses. The words of clause 6.22 of the main contract do not confer any indemnity on Glaxo. The term indemnity is carefully and accurately used elsewhere in the main contract, eg in clauses 24 and 25, and it would do violence to clause 6.22 so to construe it as conferring on Glaxo a right which can only be arrived at by a convoluted process of reasoning. As I have already indicated clause 6,22 is, if anything, designed to hold LMK liable rather than to save it harmless, For these reasons the answer to Issue 2 is: Yes, to the extent that LMK have not recovered any of the additional costs of completing the subcontract works from Glaxo or if LMK have recovered that cost but Glaxo is entitled to and has made or does make a claim against LMK to recover the amount that it has paid.

Note 1   Some extracts from the contract retain the typography of the original but there is no purpose in maintaining the style elsewhere.    [Back]

Note 2   E R Dyer v. Simon Build/Peter Lind Partnership (1982) 23 BLR 23 at page 33 and Mvita Construction v, Tanzania Harbours Authority (1988) 46 BLR 19 at page 33 are referred to in the footnote in Keating    [Back]

Note 3   Architectural Installation Services v, James Gibbons Windows (1989) 56 BLR 91 at page 100 is cited in the relevant footnote)    [Back]