In my experience, one of the most common causes of construction disputes is conflict or ambiguity between contractual documents. This is perhaps hardly surprising, since they are often prepared by different members of the client’s team. Yet it can easily be avoided if the client is willing to invest a little time and effort (and money) in a consistency check.
The dangers of not doing so are amply illustrated in MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another. As Practical Law’s Legal update, Liability when international standard is incorrect (Court of Appeal) highlights, the headline point in this case concerned whether the contractor should be liable for design defects in off-shore wind turbine foundations that arose due to compliance with an established (but incorrect) international design standard (J101). The Court of Appeal held that, on a proper construction of the contract as a whole, the contractor was not under a “fitness for purpose” obligation and had discharged his duty to exercise reasonable skill and care by complying with the J101 standard. That is all very well, but, as is so often the case, the headline does not tell the full story.
Conflicts between contract documents
There seems to be little doubt that, when coming to its decision, the inadequacy of J101 weighed heavily on the court’s mind. It evidently had considerable sympathy for the contractor and was anxious to find in the contractor’s favour if possible.
However, the court would not have been able to do so if the contract documents had clearly pointed in the other direction. It seems as though the contract conditions (at least) were intended to do just that. They included obligations to design, manufacture and complete the Works “so that each item of Plant and the Works as a whole shall be… fit for its purpose as determined in accordance with the Specification” and “so that the design of the Works and the Works when completed… shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement”. The draftsman no doubt assumed (without checking?) that the technical documents would set out the purpose for which the turbine foundations were intended and the performance requirements that they must satisfy. It is true that the contract conditions also included a “due care and diligence” obligation; however, as Edwards-Stuart J had found at first instance, as a matter of drafting, this was clearly separate and could not have been intended to qualify the earlier wording.
The real problems started when the court applied its mind to the technical documents, which it found to be “diffuse” and riddled with inconsistencies and loose wording. This was only to be expected on a project of this size and complexity, especially given the multiple authorship of the contract package. However, it posed a challenge in terms of interpreting what the contract as a whole was really supposed to mean. Back to Rainy Sky: my favourite topic.
Design life and service life
One key problem was that, instead of setting out what the employer really wanted in terms of performance, the documents focused mainly on the need to comply with J101 and achieve a 20 year “design life” with minimal maintenance. As the court noted, the requirement for a 20 year design life will not usually amount to a warranty that the works will actually last that long (although, with sufficiently clear words, it is theoretically possible to achieve that result). Rather, it sets the standard which the contractor must follow, namely to design the works in such a way that they may reasonably be expected to continue to operate for at least the specified period. This feels much more like a “reasonable skill and care” than a “fitness for purpose” obligation, and the Court of Appeal agreed. In short, the contractor had complied with this stipulation by following J101 and did not guarantee the end result.
The court also noted that the technical documents at one point referred to a 20 year “service life”. Without explaining in detail how it came to this conclusion, the court suggested that, had this provision formed an operative part of the contract, it would have taken effect as a full 20-year warranty. However, since the other contract documents required a 20 year design life, it chose to treat this as an aberration and as having no contractual effect. In the court’s words, it was “too slender a thread” on which to hang a finding of liability.
With respect, it isn’t terribly helpful that the Court of Appeal has left this tantalising point open. We will have to wait and see what a future court makes of the argument that “design life” and “service life” are different concepts, one carrying with it a serviceable life guarantee and the other not. Of course, this is ultimately a question of interpretation and will turn on the particular words used in the contract at issue. But the point is now “out there” and will inevitably come up again in a future case.
An expensive mistake for E.ON
I imagine that E.ON must have been surprised at the court’s decision. I can only assume that they did not ask anyone to read the contract conditions alongside the technical documents, to check that they were consistent and properly “fitted” together. In my experience clients all too often miss out this important step, typically to save money and often without realising how serious the consequences can be. In this case it cost E.ON some €26.25m, less the £10 it was awarded on its counterclaim; a Pyrrhic victory if ever there was one.
More generally, clients seem only too ready to view the conditions of contract and the other contract documents as essentially separate animals, rather than as integral parts of the same overall bargain. The idea that the lawyers can (or indeed should) produce the contract conditions in isolation from, and without regard to, the other contract documents is not only illogical, but potentially dangerous. If Højgaard A/S v E.On teaches us anything, it is surely that lawyers should be more vocal in asking to review the so-called technical documents that will form part of the eventual contract, not only for major engineering projects but also for more routine commercial development schemes. After all, they will invariably include a number of quasi-legal elements, such as the preliminaries section of a typical bill of quantities.
A final thought. If they had reviewed the technical requirements in Højgaard A/S v E.On, would most lawyers actually have spotted the problem? Frankly I suspect not. But we would be well advised at least to insist on the right to try.
This article was first published by Practical Law Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. To read more from the series, visit the Practical Law blog.