Fitness for Purpose and Contractual Interpretation

By Peter Sheridan, Partner, Sheridan Gold LLP

 

Frequently contract documents have both provisions requiring reasonable skill and care (a lesser obligation than a warranty of a result and often set out in the contract conditions) and other more detailed performance requirements, often set out in more technical specification documents. There can be a tension between these different contract documents; the recent Court of Appeal decision MT Højgaard A/S v E.On (2015) is an illustration. The issue was whether the contractor had warranted that foundation structures for an offshore wind farm would have a service life of 20 years, or whether the contractor was subject to a somewhat less stringent obligation.

The design was done with reasonable skill and care but the service life of 20 years was not achieved.  The contractor had complied with specifications and standards, but one of these (J101, an international standard for the design of offshore wind turbines) contained a significant error. The foundation structures (monopoles driven into the sea bed) which the contractor designed and installed failed shortly after completion.

The Court of Appeal accepted that there are contracts that require a contractor (a) to comply with particular specifications and standards and (b) to achieve a particular result.  The design and build agreement in IBA v EMI (1980) was a contract of that character. There a contractor undertaking design and build was found to be subject to a fitness for purpose obligation. What the Court of Appeal had to address in MT Højgaard was whether the contract there was one of that character. That involved applying the rules of construction to the “diffuse contract documents” in the case (which included conflicting provisions). The case is therefore a recent illustration of the courts’ approach to the interpretation of contracts. The context was a dispute as to whether the contractor was subject to a strict obligation to achieve a result (a fitness for purpose obligation) or a less onerous obligation to design with reasonable skill and care. The contract documents were “of multiple authorship” and contained “much loose wording”. There was accordingly scope for the court to apply the rules of contractual interpretation (considered in the writer’s previous article) to arrive at the correct meaning. Interpretation in this context is an iterative process, which involves checking each of the rival meanings against the other contractual provisions and investigating its commercial consequences.

There undoubtedly was a term of the contract, in the Technical Requirements (TR) which, taken alone, was a warranty of a service life of 20 years, i.e. a strict obligation. All the other terms of the TR, however, suggested that what was required was a design life of 20 years. A design life is not absolute: the structure will not inevitably function for 20 years (although it probably will).

The contract conditions took precedence over other documents and the requirement there was reasonable skill and care. The TR were a detailed were a detailed document which came fourth in the order of precedence. If there were an absolute warranty of quality, one would expect to see it in the contract conditions and not tucked away in the TR.

The factual background was relevant in the following way. A reasonable person in the position of the parties in this case 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.

Adopting an iterative approach to the construction of the strict obligation provisions found in the TR, it did not make sense to regard them as overriding all other provisions of the contract and converting it to one with a guarantee of 20 years life. Put another way, there was inconsistency between those TR provisions on the one hand and all the other contractual provisions on the other hand. Jackson LJ stated that the court must not be led astray by that inconsistency.

The conclusion of the Court of Appeal in this case was that the sub-paragraphs in the TR which indicated the strict obligation were inconsistent with the remainder of the TR and J101 and were too slender a thread on which to hang the warranty of 20 years life for the foundations. The trial judge had reached the opposite conclusion, which illustrates the uncertainties of contractual interpretation of inconsistent documentation.

 

 

For more information, contact Peter Sheridan, Partner at Sheridan Gold LLP

T: 01737 735088

E: psheridan@sheridangold.co.uk

 

 

 

 

 

 

 

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