A brief summary of the principles, recent developments and practical tips relating to interpreting contracts containing inconsistent clauses.
- The courts will not accept that clauses are mutually inconsistent if there is any way of reading them consistently.
- Where a contract contains terms which appear to be mutually incompatible, the court will interpret the contract in a way which accords with the parties’ intentions.
- Where one of two inconsistent clauses is a standard term of one party and the other clause is bespoke drafting, the bespoke drafting will generally be given more weight.
- Where a contract requires something to be produced in accordance with a prescribed design and to meet prescribed criteria, the risk of the prescribed design not meeting the prescribed criteria is a matter of risk allocation between the parties.
- In MT Højgaard (MTH) v E.ON the court had to decide whether a contractor (MTH) was liable for the costs of rectifying the failure of the foundations of two offshore wind farms.
- The judge at first instance (in the Technology and Construction Court) found that the contractor had not been negligent in the design of the foundations but that it was nonetheless responsible for the rectification work because it had breached a "fitness for purpose obligation in the Employer’s Requirements schedule to the contract, which required that the foundations “shall ensure a lifetime of 20 years in every aspect without replacement”.
- In the same schedule, MTH was also required to comply with an international standard of design for such structures known as J101. It transpired that J101 contained a significant error that was not known at the time the parties entered into the contract and which subsequently caused the foundations to fail.
- The Court of Appeal allowed the contractor’s appeal, highlighting an inconsistency between the fitness for purpose obligation and the requirement to comply with J101. It found that the fitness for purpose obligation was “too slender a thread” upon which to find that the contractor had warranted that the foundations were to be designed to have a lifetime of 20 years. It also held that an ordinary person would have known that J101 was the normal standard required in the construction of wind farms and that compliance with that standard was expected, but not guaranteed, to produce a design life of 20 years.
- This decision was then overturned by the Supreme Court where Lord Neuberger held that the "fitness for purpose" obligation was to be given its natural effect and was not inconsistent with other terms of the contract. The effect of the technical requirements was such that, although the contractor might have complied with J101, the contractor was liable for the failure of the wind farms to comply with the required criteria.
What this means
- Parties should take care to make clear the effect of any technical schedules (particularly in construction contracts) on overall contractual obligations and consider which has priority.
- Employers will wish to ensure that, where technical schedules are included, the contractual documentation contains clauses to the effect that such specifications are a minimum standard only, and that the obligation is on the contractor to improve those specifications where it deems necessary (ie where the specifications are defective or do not achieve the desired result).
- While the fault in J101 was unknown and unexpected, contractors should be careful to ensure that contracts are clear on the exact standard the work is to be held to, and should challenge product specifications if they may not achieve the desired result of the employer.