A construction contract typically comprises a set of contract conditions which are accompanied by technical documents such as the employer's requirements. While each document forming part of a construction contract has a distinct function, it also needs to work consistently with the other contract documents (and vice versa) in order for the contract as a whole to function effectively.
In practice, however, the contract conditions and the technical documents are prepared by multiple authors and sometimes with little or no reference to each other's work. This can inevitably lead to inconsistencies between contract documents, which can, in turn, create difficulties in construing the contract (notwithstanding the existence of a priority of documents clause).
The issue of inconsistencies between contract documents was highlighted in the recent Court of Appeal case of Mt Højgaard v E.On1 . The High Court decision was previously considered in our June 2014 Newsletter and a different aspect of this case concerning the valuation of omitted works was also addressed in our August 2014 Newsletter.
Mt Højgaard v E.On
This was an appeal by Mt Højgaard (the Contractor) against a finding at first instance that it had warranted that the foundation structures which it had designed and installed for an offshore wind farm would have a service life of 20 years.
Summary of background and finding at first instance
The Contractor had been engaged by E.On (the Employer) to design and construct the foundations for offshore wind turbines.
During the tender stage, the Employer issued its Employer's Requirements (ERs) which referred in the technical requirements to a "design life" of 20 years and that "the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement".
The Contractor submitted its tender in accordance with the ERs and a contract was entered into incorporating conditions of contract which provided that those conditions took precedence over the ERs. The contract conditions required the Contractor to design and carry out the works with due care and diligence and so that each item was fit for its purpose as determined in accordance with the specifications.
The ERs required the Contractor to prepare the detailed design of the foundations in accordance with, among others, an international standard known as J101, with which the Contractor complied. Unfortunately, there was an error in an equation contained in J101, as a result of which the foundations failed shortly after completion. The parties therefore sought declarations from the court as to which of them was liable for the cost of remedial works.
The judge at first instance held that the Contractor had warranted that the foundations would have a 20 year service life and found that the Contractor was in breach of that warranty (but not in breach of any other contractual terms) on the basis that the Contractor was required, under the ERs, to achieve a certain result i.e. that the foundations would have a service life of at least 20 years. The Contractor appealed against this finding2 .
The Court of Appeal reversed the first instance decision and held that the contract properly construed did not contain a warranty for 20 years' service life. The Court of Appeal's reasoning can be summarised as follows:
- The court acknowledged that the ERs provided that the foundation design would ensure a lifetime of 20 years and that, at first sight, such provision if incorporated into the contract was a warranty that the foundations would function for 20 years.
- On the other hand, all of the other provisions in the technical requirements were directed towards a "design life". The court went on to say that, if a structure has a design life of 20 years that does not mean that inevitably it will function for 20 years, although it probably will.
- If the contract required an absolute guarantee or warranty of quality, one would expect to see it in the contract conditions, not tucked away in the technical requirements, which came fourth in the order of precedence of contract documents.
- The obligations imposed by the contract conditions were the opposite of guaranteeing an operational life of 20 years; what they required was due care, professional skill, adherence to Good Industry Practice (as defined), compliance with the ERs and so forth. The court also highlighted the fact that the term "fit for purpose" was qualified by the phrase "as determined in accordance with the specification using Good Industry Practice".
- Finally, the court found that the alleged operational life warranty was inconsistent with the remainder of the technical requirements (as well as the contract conditions). The court also noted that if it was intended that the Contractor was required to "go the extra mile" beyond compliance with the specification and tender documentation so as to comply with the alleged warranty, this should have been clearly flagged up in the contract documents.
Mt Højgaard v E.On is a cautionary tale of the dangers of contradictory wording between contract conditions and the relevant technical documents. It is therefore imperative that all those responsible for preparing contract documents work together closely during the contract preparation stage in order to ensure that all elements of the contract are consistent.