How will a variation be interpreted and does it give rise to an estoppel in respect of rights under the original agreement?

HSM Offshore BV v Aker Offshore Partner Ltd [2017] EWHC 2979 (TCC)

The background

HSM is a specialist fabricator of offshore process modules and Aker is a global provider of products and services to the oil and gas industry. Aker engaged HSM in a standard form LOGIC sub-contract in 2014 to provide two process modules for the Clyde Platform in the North Sea.

After it became clear that the development was unlikely to meet the required date of 10 May 2015, the parties tried to resolve their difficulties with a Memorandum of Understanding (MOU) which amended the original contract. The MOU made a number of changes to how HSM would be paid and it replaced liability for liquidated damages with a duty to use “fullest endeavours”.

The work was eventually completed by 10 August 2015. HSM later commenced proceedings against Aker for sums they claimed were outstanding.

Two of the issues the Court had to consider were whether Aker could bring a counterclaim for liquidated damages and whether Aker were estopped from challenging interim payments which had been made between June and August 2015.

The decision

Coulson J concluded that, on a true construction of the MOU, Aker could have no valid claim for liquidated damages.

Under the original LOGIC sub-contract, HSM was obliged to deliver the work by 10 May 2015. If HSM failed, it would be in breach of contract and would be liable to pay liquidated damages. But the MOU was agreed not only in clear knowledge that the original date would not be achieved, but in response to that fact.

The MOU also replaced the absolute obligation to complete by a specified date with an obligation for HSM to use “fullest endeavours”. Coulson J found that this was not an absolute obligation to complete by a certain date, and so Aker could not counterclaim for liquidated damages.

In relation to the interim payments, Coulson J found that Aker’s “approval” of HSM’s monthly draft invoices did not prevent it from challenging these in the future. This meant that Aker was It not estopped from arguing the sums were not due and payable under the terms of the MOU, read together with the LOGIC sub-contract. The LOGIC sub-contract clearly stated that the payment of an individual invoice, such as those paid to HSM between June and August 2015, did not waive or affect Aker’s right to say that such a sum was incorrect or not properly payable.

Coulson J also noted that his conclusion that no estoppel arose was entirely in accordance with common sense and ordinary business practice. Coulson J also made a wider point regarding contractual interpretation, commenting that: “What matters is the objective meaning of the language, to be derived from the natural or usual meaning of the words used, when seen against the background/context of the contract; where there are rival interpretations, one test is to consider which interpretation is more consistent with business common sense”.

Why is this important?

This case is a good example of the issues that can arise from amendments to contracts and another application of the principles of contractual interpretation. It is also confirms that approval/payment of interim invoices may not, of itself, prevent a party from challenging those invoices/the amount payable in the future.

Any practical tips?

Be careful when preparing variations to agreements – have you identified all of the changes that are needed, including consequential amendments to other parts of the agreement. If the changes are extensive, is it better to have a new agreement (or at least a conformed copy?). Also, does there need to be any settlement or waiver of previous rights or claims if performance obligations are being relaxed?