Imperial loses contract dispute but can recover overpayments

A company was not justified in terminating a contract due to alleged defects in work carried out but that did not remove its right to recover overpayments.

That was the decision of the High Court in a case involving a multi-million-pound contract between Imperial Chemical Industries Ltd and Merit Merrell Technology Ltd.

Merrell had agreed to supply pipes for Imperial’s paint manufacturing plant. Imperial stopped making payments in October 2014. In a letter dated 17 February 2015, it alleged that widespread defects in Merrell’s welding amounted to a repudiatory breach of contract.

It alleged Merrell had committed further repudiatory breaches by failing to provide project documentation and wrongfully removing documents, refusing the project manager access to its fabrication shop and failing to produce a testing and rectification plan.

Following adjudication decisions, Imperial paid Merrell £21m. However, it considered that the works were worth only £10m and sought the return of overpayments.

The court rejected most of the Imperial’s claims about defective work. It held that two of its three witnesses had given unsatisfactory evidence. Imperial had scrapped allegedly defective welding work without the expert witnesses inspecting them.

There were several other defects in Imperial’s submissions that meant its letter alleging and accepting repudiatory breach on Merrell’s part did not amount to contractual termination.

Nevertheless, there were some defects in the work and so Imperial was entitled to recover the cost of necessary repairs. There should therefore be a deduction against Merrell’s account of the amount it would cost to repair the defects, assessed at 5% of welding works.

Please contact Simon Porter if you would like more information about the issues raised in this article or any aspect contract law.