Herbert Smith represented Autolink in its recent legal victory against Amey Construction Ltd and others ("Amey") in a contractual dispute arising from the M6 Motorway extension project (Autolink v. Amey [2009] CSIH 14). The dispute was about the legal interpretation of a defects liability clause in a PFI construction contract. Autolink won at first instance in 2007 and Amey appealed. The appellate court in Scotland decided in Autolink's favour again on 24 February 2009.

Defects liability clauses in construction contracts are clauses in which the parties choose to allocate risk. This can be done in many different ways. The Court held that a widely-worded defects liability clause could require the contractor to remedy any shortcomings in quality which could be reasonably expected in the finished construction even if not expressly provided for in the contractual specification. The decision shows that if employers take detailed legal advice they can secure a defects liability clause that furthers their commercial objectives by providing certainty and offloading construction risks to the contractor, which is better placed to manage them.

Autolink (for whom Herbert Smith acted through Scottish Agents) holds a concession to extend the M6 Motorway and operate it for 30 years. This is under a DBFO Agreement with the Scottish Executive. Autolink employed a consortium of contractors including Amey as a contractor to carry out the works to extend the M6 under a separate construction contract. The decision concerns a preliminary legal issue as to the correct interpretation of the defects liability clause within the construction contract.

The Herbert Smith team acting for Autolink, (the claimant) was led by Ann Levin. The case it put forward for Autolink was simple. There was a defect (as defined in the contract) in the road as constructed. The defects clause made the contractor liable to remedy any defects in the works. Autolink was therefore entitled to have the defendant remedy this defect at its own cost. Autolink sought a declaration from the court to this effect.

Under the construction contract, remedial work on defects was to be executed by the contractor at its own cost unless the defect was a direct result of a wilful act or breach of the contract by the claimant employer. "A "defect" was defined as "…any defect howsoever arising including without limitation…any failure of the works to meet the specification". The relevant wording in the clause requiring the contractor to carry out remedial work referred to "all defects (whether arising or manifesting themselves) in the works in so far as notified to the contractor by the employer within 60 months of final completion of … the … works".

Amey, the defendant, had argued unsuccessfully in the court below that the defects clause only applied where it had committed a breach of contract. On appeal, Amey changed tack, and argued that the meaning of "defect" in the relevant clause related only to a breach of the specification for the work and could not be interpreted more widely. Further, the claimant had failed to identify any such breach. It maintained that a defect must be defined by reference to a known standard, not least to allow the contractor to set his price. The claimant maintained that the wording of the clause was wide enough to include any shortcomings in quality even if not expressly provided for in the specification.

The Court preferred the claimant's construction of the clause. The wording "without limitation" indicates that breach of specification was but one example of a failing which might amount to a defect. The clause was really a defects liability clause (albeit with a very long term) and it allocated risk appropriately. If the contractor fixed the defects, but they later turned out to be caused by the wilful act of the claimant then the contractor could be reimbursed. However, the Court concluded that on the words in this contract it was for the defendant to remedy the defect at its own cost in the first place.

The Court noted some factors as confirming its conclusion: First, the specification was detailed but not comprehensive and there were many matters on which it was silent. This tended to confirm the view that something that was not right, but was not specifically mentioned in the specification, could be a "defect". Second, the contract required the contractor in constructing the works to comply with all the requirements of the contract, not just the specification. That included workmanship and the quality of materials and other matters and a defect could arise from them without reference to the specification.

Ann Levin, the Herbert Smith partner in charge of the case commented: "this case simply reflects contractual orthodoxy. The meaning of defects liability clauses will always depend on their precise wording. In this case a suitably and clearly worded clause provided the employer with a considerable commercial advantage during the defects liability period. He was entitled to have remedial works carried out by the contractor, at the contractor's expense and without the need to investigate in detail the cause of the defect and allocate responsibility before carrying out the works."