The importance of consistency throughout a contract
What if the main body of a contract appears to say one thing, but the detailed wording of a technical schedule appears to be at odds with that? You might have thought that the main body of the contract would take precedence but a recent Supreme Court ruling suggests otherwise. And in terms of how to respond, the case is likely to create difficulties for both suppliers and customers.
MT Hojgaard v E.ON Climate & Renewables (2017) concerned a dispute over the failure of offshore wind turbines installed by MT Hojgaard. The purchaser, E.ON, argued that the foundations of the turbines were effectively subject to a 20 year warranty set out in paragraph 126.96.36.199 (ii) of the Technical Requirements of the project (which formed part of the agreement).
MT Hojgaard responded that it had constructed the foundations in accordance with the relevant international technical standard, known as J101 but that this standard (which had been developed by a third party) turned out to be flawed. It maintained that, looking at the agreement as a whole and in particular the main body of the contract - it should only be held to be in breach if it had negligently failed to implement J1o1 correctly (which was not the case here). The Court of Appeal agreed with MT Hojgaard, finding that the wording relied upon by E.ON was "too slender a thread upon which to hang a finding that [MT Hojgaard] gave a warranty of 20 years life for the foundations."
Supreme Court ruling
The Supreme Court, however, disagreed with the Court of Appeal and found in favour of E.ON, ruling that the wording in the Technical Requirements was sufficient to impose an obligation on MT Hojgaard to ensure that the foundations lasted 20 years. At first sight, this might seem somewhat harsh, given that MT Hojgaard was not to blame for the errors in J101. However, the Supreme Court noted that, as a general rule, "even if the customer... has specified or approved the design, it is the contractor who can be expected to take the risk" of the design itself being at fault.
MT Hojgaard argued that if the parties had intended there to be an obligation as onerous as a 20 year warranty, it would not have been "tucked away" in a technical document, but would instead have been clearly set out in the main body of the contract. The Supreme Court simply observed that the Technical Requirements document was clearly stated to have contractual effect – and that it could see no reason to depart from this.
How should suppliers respond?
In response to this ruling, there are two main aspects of their contracts that suppliers may wish to review but both have their drawbacks:
- Risk: one possibility would be to make it clear in the contract that no liability is accepted for particular risks (such as, in a case like MT Hojgaard, the risk of the chosen design standard turning out to be flawed). However, this strategy is likely to meet resistance from customers, who may justifiably argue that the supplier is better placed than they are to assess the risk in question. Careful consideration will also need to be given to whether this approach may make limitation of liability clauses more vulnerable to challenge (for example, on the grounds that they are unreasonable under the Unfair Contract Terms Act 1977).
- Order of precedence: another possibility would be to make it clear that the provisions of the main body of the contract take precedence over any potentially conflicting wording in a schedule. However, this can be a double-edged sword because in many situations, the detail of a schedule may protect the supplier more than the customer in which case, it would not be in the supplier's interest to undermine that.
Do customers need to do anything?
On the face of it, this ruling may appear to be good news for customers because it could make it harder for a supplier to argue that breach of a provision contained in a technical schedule (rather than the main body of the agreement) is of limited (or no) effect. However, customers still need to be on the lookout for supplier clauses which:
- seek to limit or exclude liability in respect of matters which, commercially, would normally be regarded as the supplier's responsibility; and/or
- may undermine the effectiveness of important schedules setting out the detail of the supplier's obligations (e.g. by providing that the main body of the contract takes precedence).