Construction Blog

Legal news and opinion related to construction and engineering law and projects.

Compromise agreement should be clear and comprehensive

Posted by Practical Law Construction on 28th November 2012.

David Sheard, barrister, Keating Chambers:

In Jacobs UK Ltd v Skidmore Owings & Merrill LLP, Coulson J was asked to consider the meaning of an agreement that had been reached between Jacobs and SOM compromising their previous round of litigation.

The case is a salutary warning of the need to ensure that the terms of any such agreement are clear and comprehensive, lest another round of litigation should follow.

Parties’ compromise agreement

The parties had compromised Jacobs’ claim for some £4 million for unpaid fees relating to a project in the Middle East. Part of the compromise agreement provided that:

“Within a period of two years from the date of [the agreement] SOM will award Jacobs or any other subsidiary or affiliate of Jacobs… one or more contracts for the provision of not less than 33500 hours of construction, design and engineering services.”

To the extent that this obligation was not fulfilled, SOM was required to pay Jacobs:

“£15 per hour per every hour of shortfall up to a maximum of 33500 hours.”

Jacobs claimed that SOM had failed to award it the necessary 33,500 hours of work, such that it was entitled to be paid £15 per hour for the shortfall (in total amounting to nearly £500,000).

SOM maintained that it had offered Jacobs contracts worth up to 33,500 hours, so it had fulfilled its obligations under the compromise agreement, even though the contracts had not actually been entered into by Jacobs.

Interpreting the compromise agreement

Coulson J considered the meaning of “award” and “offer” and concluded that the “award” of a contract could not be equated to the mere “offer” of a contract. Unless contracts providing for 33,500 hours of construction, design and engineering services had actually been entered into between Jacobs and SOM, Jacobs was entitled to claim its £15 per hour shortfall payment.

He went on to conclude that a requirement for SOM to “offer” 33,500 hours of labour to Jacobs would be a substantially inferior agreement from Jacobs’ point of view. SOM could have offered contracts that Jacobs did not wish to enter into, thereby either depriving it of the right to 33,500 hours’ worth of work or forcing it to perform contracts which it would not otherwise have chosen to bid for.

In the event, Coulson J therefore felt that, despite SOM’s challenge, the meaning of the agreement was relatively clear. However, more specific wording, which could have directly addressed the need for concluded contracts to be entered into, would have left no room for argument.

Obligations of good faith

Further, it is noteworthy that the compromise agreement was silent with regards to what should happen if a contract had been offered by SOM but refused by Jacobs.

While Coulson J indicated that the agreement would be subject to an implied obligation of good faith, it would be difficult to predict when such an obligation would be breached. When would a refusal to contract be unreasonable? How unreasonable would it have to be to contravene an obligation to act in good faith?

Thankfully that was not in issue in this case, but had this situation arisen, the subsequent dispute would surely have been substantially more complex (and costly). Parties would therefore be well advised to think extremely carefully about the problems that could commonly arise with a compromise such as this, and insofar as possible, to clearly and specifically provide for them within the contract. A failure to do so is likely to mean that, while both sides may be on amicable terms at the time of the compromise, another round of litigation could be just around the corner.

Comment on this post

(by commenting, you accept our terms of use)

Subscribe to comments via RSS