An essential part of any engineering or construction contract will be the contractor’s warranties as to the quality and standard of the works to be performed. Warranties are contractual assurances that aim to apportion risk and liability between parties, and give rise to a claim for damages if breached. They are often key points of negotiation as the employer pushes for certainty through absolute, or performance-based, objectives, while the contractor seeks to restrict their commitment to exercising reasonable skill and care (as is the limit in standard professional indemnity insurance). To complicate matters further, these warranties will frequently sit alongside a design specification containing details of exactly what is to be constructed and how it should be done.
Where contracts incorporate a range of documents, disputes may arise over the correct standard of performance to be applied. This was illustrated in the recent appeal from the Technology and Construction Court of MT Højgaard A/S v E.ON Climate And Renewables UK Robin Rigg East Ltd [2015].
Facts
The case involved a contract between E.ON Climate and Renewables UK Robin Rigg East LTd and E.ON Climate and Renewables UK Robin Rigg West LTd (collectively ‘E.ON’), as the employer, and MT Højgaard A/S (‘MTH’), as the contractor, for the design, fabrication and installation of the foundations for 60 wind turbine generators. The design of the turbines called for a single pile (monopile) driven into the seabed, with the turbine attached on top by means of a transition piece. This transition piece consisted of a steel cylinder fitted around, and projecting over the top, of the monopile. The gap between the inner surface of the transition piece and the outer surface of the monopile was filled with grout, and the weight of the turbine was to be supported by the friction between the grout and these two steel surfaces.
Following a successful tender process, MTH subcontracted the design of the grouted connection to Rambøll Danmark A/S, who produced it in accordance with international standard DNV-OS-J101 (J101). The turbines were constructed by MTH in accordance with the design and completed in 2009. It later transpired that there was an error in this specification, which meant that the axial capacity of the connection had been substantially overstated. In other words, it was not capable of supporting the weight of the turbines, and thus within a year of completion of the works the transition pieces began to slip down the monopiles.
The parties agreed a scheme of remedial works in the sum of €26.25m and eventually commenced proceedings to determine liability.
The Contract
The agreement between the parties incorporated a range of documents, including the conditions of contract (which further incorporated J101), the list of definitions, and the employer’s requirements (as contained in the original tender documents). These documents placed MTH under concurrent obligations to design the works using due care and diligence, in accordance with internationally recognised standard J101, so that the completed works would be fit for purpose and satisfy any performance requirements of the employer. The agreement provided that in the event of inconsistencies, the conditions of contract and list of definitions were to take precedence over the employer’s requirements.
Clause 8.1 of the conditions of the contract set out the general obligations of the contractor. Sub-clauses (i), (v), and (ix) required MTH to complete the works with ‘due care and diligence…’ and comply with ‘good industry practice.’ The term ‘good industry practice’ was defined in the list of definitions as requiring the exercise of reasonable skill and diligence. So far, it appeared that the overriding obligation of the contractor was merely to comply with J101.
However, sub-clauses (viii), (x) and (xv) stated that the works must comply with the ‘requirements of this agreement…’ be ‘fit for purpose’ and ‘satisfy any performance specifications or requirements of the employer…’ The requirements of the employer referred to the technical requirements (TR) contained within the tender documents. Most of these dictated that the design comply with J101 and thus referred to a ‘design life of 20 years’1, however others demanded that the design would ‘ensure a lifetime of 20 years in every aspect.’
The Court was tasked with determining whether Clause 8.1 of the contract conditions in conjunction with the TR required MTH not only to comply with J101, but also to achieve a performance-based objective, namely to construct foundations with a guaranteed service life of 20 years.
The Decision at First Instance
The judge at first instance, Mr Justice Edwards-Stuart, took guidance from two Canadian cases2 in finding that MTH had given an express warranty of a 20-year service life (and fitness for purpose). He further found that E.ON was entitled to rely upon this notwithstanding that MTH had been required to construct the foundations in accordance with a faulty specification. He also held that MTH was not in breach of any other contractual provisions.
The Appeal
MTH appealed on the grounds that Edwards-Stuart J had erred in his interpretation of the TR and Clause 8.1. E.ON cross-appealed, but we do not consider that appeal here.
Lord Justice Jackson approved the Canadian cases relied upon by the High Court judge, citing in particular the following passage from Greater Vancouver Water District:
‘The general rule is that defects caused by an owner’s specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose, or a warranty can be implied by the owner’s actual reliance on the contractor’s skill and judgment.’
He observed that it was not uncommon for construction and engineering contracts to contain both obligations to comply with particular specifications, and to achieve a particular result. So long as these were worded with sufficient clarity, they would impose a double obligation on the contractor such that:
‘… he must at a minimum comply with the relevant specifications and standards… [and] must also take such further steps as are necessary to ensure that he achieves the specified result. In other words he must ensure that the finished structure conforms with that which he has warranted.’
He then turned to consider the rules of contractual interpretation under English law, and whether in applying those rules it could be said that the contract between MTH and E.ON was of a similar character.
Contractual Interpretation
Both Edwards-Stuart J and Jackson LJ started from the basic position that the courts will consider what a:
‘… reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.’3
This approach was followed in Rainy Sky SA v Kookmin Bank [2011] where the Supreme Court emphasised the importance of commercial considerations when construing a contract. Although where the parties have used unambiguous language the court must apply it, Lord Clarke held that:
‘… if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.’
In considering the tension between the differing provisions in the agreement, Jackson LJ found the approach taken by the Supreme Court in Re Sigma Corp (in administrative receivership) [2009] instructive. Lord Mance held that:
‘… the resolution of an issue of interpretation in a case like the present is an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.’
Lord Collins in the same case observed that:
‘… an over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose.’
Applying these principles to the facts, Jackson LJ found that, although, taken in isolation, the TR obliging MTH to ensure the foundation would have a service life of 20 years amounted to an absolute warranty of the same, they needed to be read in light of the agreement as a whole.
He found that the other TR were, in large part, directed towards compliance with J101 and ensuring a design life of 20 years. Although Edwards-Stuart J had placed great significance on the use of the word ‘minimum’ in reference to that design life, Jackson LJ found that, while this made it clear that any departure from J101 should be an improvement on the contractual requirements, it was insufficient to convert the requirement for a design life into an express warranty of a guaranteed operational life. In short, ‘the whole scheme of the TR and J101 [were] pointing in the opposite direction.’
Jackson LJ then considered the contract conditions which, per the agreement, took precedence over the TR. He observed that it was there that he would expect to see an absolute warranty of quality, and not hidden away in the TR. He found that the:
‘… obligations imposed by clause 8 [were] the opposite of requiring an absolute warranty of quality. What they require[d] [was] due care, professional skill, adherence to good industry practice, compliance with the employer’s requirements and so forth.’
The judge at first instance had viewed sub-clauses (viii), (x) and (xv) as containing freestanding warranties of fitness for purpose similar to those in the Canadian authorities. Jackson LJ disagreed. Sub-clauses (viii) and (xv) in fact obliged MTH to comply with the TR, which, analysed properly, merely called for compliance with J101. Sub-clause (x) required the works to be ‘fit for purpose’ but qualified this by determining that fitness should be ‘in accordance with the specification using good industry practice.’ Furthermore, the phrase ‘fit for purpose’ was defined in the list of definitions by reference to the TR.
The final nail in the coffin was in the consideration of what background information would have been in the minds of the parties. Jackson LJ held that:
‘… a reasonable person in the position of E.ON and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with J101 and that such compliance was expected, but not absolutely guaranteed, to produce a life of 20 years.’
The sections of the TR referring to a service life of 20 years were therefore inconsistent with the rest of the agreement and should not override the other provisions of the contract. MTH’s appeal was allowed.
Comments
Jackson LJ highlighted that he was faced with ‘contractual documents of multiple authorship, which contain much loose wording.’ While consistent drafting can help reduce disputes, the circumstances of this case suggest that the parties did not truly intend for MTH to warrant that the structure would have a service life of 20 years.
However, where a contract contains conflicting provisions, this case provides a helpful reminder to those seeking to determine the intention of the parties. The court must consider what a reasonable person with the background knowledge that would have been available to the parties would have understood each obligation to mean. This will involve checking each of the potential meanings against the rest of the agreement as a whole, and investigating their commercial consequences. The court should be alive to the likelihood that the contract will contain ambiguities and prefer business common sense where provisions conflict. In the case of a warranty, which is an important term of any contract, the court would not expect it to be concealed in supplementary documents.
By Jamie Humphreys, associate, and Nicole Bieber, trainee, Cooley (UK) LLP.
E-mail: jhumphreys@cooley.com; nbieber@cooley.com.