Introduction The Court of Appeal recently considered the interpretation of conflicting fitness for purpose and reasonable skill and care provisions in a contract for a large engineering and construction project1.
When negotiating and drafting such contracts, there is often significant discussion relating to the standard to which the works are to be designed and constructed. The owner will typically want the contractor to achieve a specific outcome by imposing “fitness for purpose” obligations. However, a contractor will often look to avoid including such a guarantee, instead couching all of its obligations as being subject to the exercise of reasonable skill and care.
- In interpreting potentially conflicting provisions in a contract, the Court will adopt an “iterative process”, which “involves checking each of the rival meanings against the other contractual provisions and investigating its commercial consequences”.
- In the present case, in adopting this “iterative process” it was held that the contractor was not subject to a fitness for purpose obligation, partly because the obligation relied upon by the employer was in a technical attachment to the contract rather than in the main body of it.
The Court of Appeal’s guidance on the interpretation of such provisions, especially where there are inconsistencies in the contract, should be borne in mind by parties when looking to enter into engineering and construction contracts.
Background The owner under the contract, E.ON Climate and Renewables UK Robin Rigg East Limited and E.ON Climate and Renewables UK Robin Rigg West Limited (collectively “E.ON”), engaged MT Højgaard A/S (“MTH”) to design and install the wind turbine foundations for E.ON’s Robin Rigg offshore wind farm.
Shortly after completion, the grouted connections between the top of the monopile foundations and the bottom of the wind turbine towers started to fail.
At that point, E.ON and MTH worked together to find a practical solution to the failures. Remedial works commenced in 2014. It was only after the approach for the remedial works had been agreed upon that the parties then sought to ascertain who should bear the cost of the works (an approach which the Court of Appeal considered to be “very sensible”).
The first instance decision MTH issued proceedings in the Technology and Construction Court (“TCC”) in London and applied for declarations as to the cost of the remedial works and who should bear it.
The proceedings continued in tandem with the development of the remedial works scheme. In due course, the parties agreed the cost of the remedial works in the sum of €26.25 million, leaving the TCC to decide who should bear it.
MTH contended that it had exercised reasonable skill and care and, in addition, it had complied with its contractual obligations. As a result, MTH should have no liability for the cost of the remedial works.
E.ON argued that MTH had breached a number of contractual provisions, in particular, those set out in the Technical Requirements (a schedule to the contract). These, E.ON argued, obliged MTH to achieve a result, namely, foundations with a service life of 20 years.
One complication is that MTH was also obliged to construct the foundations in accordance with J101, an international standard for the design of offshore wind turbines. J101 contained an error in the calculations which meant that the axial capacity, that is, the ability of the foundation to resist downward load imposed by the turbine on the foundations, was significantly lower than it should have been.
The judge at first instance in the TCC, Mr Justice Edwards-Stuart, held that MTH was in breach of contract, as the design of the foundations and/or the grouted connections was not fit for purpose.
The decision of the Court of Appeal MTH appealed. MTH’s argument was that the contract did not impose a fitness for purpose obligation with regard to the service life of the foundations. Instead, there was only an obligation for the foundations to have a 20-year design life. As MTH had designed the foundations in accordance with relevant international standards, including J101, MTH argued that the foundations had the required design life and, therefore, MTH was not in breach.
In addition to contesting the appeal, E.ON cross-appealed on the grounds that MTH had committed two further breaches of contract.
The Court of Appeal agreed with MTH. It was noted that the requirements within the Technical Requirements could be construed as being inconsistent with the requirements within the contract conditions. The latter only obliged MTH to design and install the foundations with the due care and diligence to be expected of an experienced contractor, that is, a reasonable skill and care obligation.
Although in this instance there was an inconsistency, the Court of Appeal noted that this may not always be the case in that contracts can, in some cases, “impose a double obligation upon the contractor”. In such cases, the contractor is obliged to comply with relevant levels of skill and care, and relevant standards, but the contractor must then “take such further steps as are necessary to ensure that he achieves the specified result”.
The Court of Appeal further observed that “if the contract required an absolute warranty of quality, one would expect to see it in clause 8.1, not tucked away in the technical requirements”.
Further, while the Court of Appeal held that MTH had, in fact, been in breach in the two further respects, those breaches had caused no loss, such that E.ON was only entitled to nominal damages of £10.
Concluding remarks The Court of Appeal’s interpretation of the relevant provisions makes interesting reading for lawyers and engineering and construction professionals alike. The approach the Court of Appeal set out for interpreting contractual provisions is an “iterative process”, which “involves checking each of the rival meanings against the other contractual provisions and investigating its commercial consequences”.
On the Court of Appeal’s reading of the various provisions, it would not make sense to regard the obligations with regard to the 20-year design life as overriding all of the other provisions and, thereby, including a 20-year service life guarantee in the contract.
This decision is likely to come as some relief to contractors who have signed up to similar contractual obligations, without pricing for providing an absolute fitness for purpose guarantee. Having said that, time will tell whether this case finds its way to the Supreme Court and, if so, whether the result will be the same.
Ultimately, as ever, parties need to ensure that: the contract is consistent; their intentions are clearly articulated; and the contract conditions and technical obligations match-up.
If a fitness for purpose obligation is required, this should be made explicit. Hiding an obligation away in technical documents, when wording to the contrary is in the contract conditions, makes the obligation less likely to be enforceable.