Contract consistency

Words:
Alistair McGrigor

A critical judgement will see a fundamental change in the interpretation of contracts

In an eagerly awaited decision, the Supreme Court in August found a contractor liable to comply with a fitness for purpose type obligation contained in a technical schedule, despite obligations elsewhere in the contract to exercise reasonable skill and care and to comply with an international standard.  The decision will have significant ramifications for the interpretation of construction contracts which incorporate numerous technical schedules and specifications in their terms.

The decision comes after over three years’ litigation, during which the contractor was found liable by the high court, not liable on appeal and finally liable by the Supreme Court.

MT Hojgaard (MTH) was engaged by E.ON Climate & Renewables (E.ON) to design, fabricate and install foundation structures for 60 offshore wind turbines in the Solway Firth. Shortly after completion, connections in the foundation structures failed. The parties agreed a €26 million scheme of remedial works. Litigation began to determine who should bear that cost. 

The key issue lay in just two paragraphs in the technical requirements (TR) section of an employer’s requirements schedule to the contract, which required that the design of the foundations ‘shall ensure a lifetime of 20 years in every aspect without planned replacement’. But there were numerous other less onerous obligations such as a requirement to exercise reasonable skill and care and to comply with J101, an international standard for the design of offshore wind turbines. 

Compliance with J101 was intended to give a service life of 20 years, and MTH reasonably relied on it in preparing its design. Unknown at the time, J101 contained a significant error which meant compliance with it did not provide a design life of 20 years.

The court noted that where a contract imposes inconsistent standards, the more rigorous one must prevail

The Supreme Court ruled that the TR paragraphs were not inconsistent with the balance of the contract, referring to previous decisions where contractors had accepted obligations to achieve certain performance criteria while agreeing to implement a certain design or specification. No inherent inconsistency arises where the performance criteria proves impossible to achieve if the agreed design or specification is to be adhered to. 

The Supreme Court noted that the requirement to comply with J101 was expressed as a minimum requirement and that MTH was obliged to identify any areas where a more rigorous design was needed. It noted that where a contract imposes inconsistent standards, the more rigorous one must prevail.  

The Supreme Court also disagreed that the TR paragraphs were insufficiently prominent to support the more onerous fitness for purpose obligation alleged by E.ON. It was particularly unimpressed by an argument that paragraphs such as these ‘tucked away’ in a technical schedule should not be interpreted as imposing additional onerous obligations above those in the primary contract. The technical schedule, given contractual force by the parties, should be taken at face value.  

This decision will significantly affect the interpretation of construction contracts, which routinely incorporate numerous schedules and technical documentation, often with inadequate harmonisation of the intended legal standards of design and workmanship. 

It also demonstrates courts’ increasing emphasis on the literal meaning of contract provisions.  Interpretations which depend on a reading down of parts of a contract will face an uphill battle. More than ever, parties will be taken to mean what they say in the contract.

Architects should consider making clear in their appointment conditions whether and how any technical schedules are to affect overall obligations as to design. They may wish, for example, to include paramountcy provisions which state that nothing in any schedule to the appointment is to impose a design obligation of a greater standard than reasonable skill and care.

Alistair McGrigor is partner at CMS Cameron McKenna Nabarro Olswang


In Plain English

Quicquid plantatur rule

It’s frowned upon for lawyers to use Latin nowadays, but this old rule still has real relevance in a construction context, determining who owns materials once they are fixed to a building. 

In many other industries, it is a matter of agreement as to when ownership of the completed goods passes to the client (for example, on delivery of, or payment for, the goods). By contrast, construction is by its nature governed by the ‘quicquid plantatur solo, solo cedit’ rule (‘that which is affixed to the land belongs to the land’).  Pursuant to this rule, ownership of goods passes when those goods are fixed to the land (ie incorporated into the building works), regardless of payment. 

As a result, if no payment is received for their work, contractors and subcontractors cannot simply repossess it once it has been incorporated within the building, even if the work is readily identifiable and theoretically removable. Retention of title clauses (stating that ownership doesn’t pass until payment is made) are defeated by this rule so provide no relief.

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