Right to claw back for KPIs compromised by settlement (Family Mosaic v Mears)

First published on LexisPSL Construction on 10/05/2016

Family Mosaic Housing v Mears Ltd [2016] Lexis Citation 47

Recorder Lofthouse QC in the Technology and Construction Court considered a partnering contract for repair and maintenance works, and held that the employer’s right to claw back payment where the contractor failed to meet specified targets had been compromised in a settlement agreement. In reaching its decision, the court considered the natural and ordinary meaning of the words used in, and the background to, the settlement agreement.

What was this case about?

Family Mosaic entered into a term partnering contract with Mears in July 2010, under which Mears agreed to provide responsive repair and maintenance works to Family Mosaic's properties in and around London. The contract was based on the ACA Standard Form of Contract for Term Partnering TPC2005 (amended in 2006), as part of which Mears was to achieve specified key performance indicators (KPIs).

In September 2013, the contract was amended by a settlement agreement which provided a right for Family Mosaic to claw back sums paid to Mears where it failed to meet KPIs.

In December 2014, the contract was further amended by a second settlement agreement, which set out the terms on which the contract was to be terminated. Clause 7.1 of the second settlement agreement provided that, subject to clauses 3 and 4 (and another clause which was not relevant), a sum was to be paid in full and final settlement of all claims arising out of the contract and that the sum was conclusive evidence of sums owed to Mears for the period 1 August 2010 to 5 December 2014.

Under clause 3.2 (to which clause 7.1 was subject), the parties agreed that:

'save in relation to [Family Mosaic's] rights under the Principal Agreement regarding any failure by [Mears] to complete a Task in accordance with the Principal Agreement or failure by [Mears] to complete a Task by the relevant Task Date/Time for Completion, neither Party will be entitled to claim losses relating to the completion of Orders by [Mears]...'

Clause 4 provided for a final account payment following termination.

The court considered, by way of Part 8 proceedings, the extent to which Family Mosaic's right to claw back had been compromised by the second settlement agreement—in particular whether the right fell within the carve out in clause 3.2.

What did the court decide?

The court noted that, in accordance with Rainy Sky v Kookmin and Arnold v Britton, when interpreting a contractual provision the court must identify what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood the language to mean. Applying this, the court held that Family Mosaic's right to claw back had been compromised by clause 7.1.

In its view, the right to claw back did not fall within the natural and ordinary meaning of the clause 3.2 carve out—that clause was more naturally directed at claiming losses for delays and defects in Mears' completion of a task. KPIs, on the other hand, were part of the mechanism for assessing the contract price and therefore distinct from the type of 'claims' for losses with which clause 3.2 was concerned.

The court also noted that the background to the second settlement agreement included a dispute as to Family Mosaic's entitlement to claw back, and thought that if the parties had intended to reserve that entitlement from the agreement (which was a full and final settlement agreement) they would have done so in a way which was clear.

As for clause 4, the existence of the final account mechanism was not inconsistent with the right to claw back having been compromised.

However, the court did find that Family Mosaic was entitled to claw back in relation to work done after 5 December 2014, and that the burden of proving that a KPI had been satisfied lay with Mears.

What should construction lawyers take note of?

The facts of the case demonstrate the importance of clear drafting in settlement agreements. Parties should ensure that it is clear to an objective reader what exactly is and is not being compromised in return for the settlement sum. If there are specific claims that the parties wish to include, or exclude, from the scope of the release, then it is advisable to refer to them expressly.

The case is also an example of the court assessing the meaning of a provision in light of the natural and ordinary meaning of words used. We also see the court take into account the background to relevant provisions ie, in this case, the disputes existing at the time that the second settlement agreement was entered into.

Filed Under: Construction

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