Interpretation of construction contracts – are your warranty provisions clear enough?

Written on 20 May 2015

The recent Court of Appeal case of MT Hojgaard A/S v (1) E.ON Climate and Renewables UK Robin Rigg East Limited and (2) E.ON Climate and Renewables UK Robin Rigg West Limited [2015] EWCA Civ 407 provides a timely reminder on the perils of imprecise drafting of warranty terms within construction contracts.

Background

MT Hojgaard A/S (“MTH”) was contracted to design and build the Robin Rigg Offshore Wind Farm in the Solway Firth for what was effectively two E.ON entities (together “EON”). The Court had to consider (amongst other issues) whether MTH gave, and therefore breached, a warranty that the foundations for the turbines would function for 20 years without replacement.

A major challenge in wind farm construction is the design of the foundations, in particular the connection between the bottom of the turbine tower to the foundation, which is known as a monopile. A common design solution is use of a transition piece, which is a steel cylinder that fits over the top of the monopile. The gap between the transition piece and the monopile is then filled with grout.

The Technical Requirements (“TRs”) formed part of the Employer’s Requirements and required MTH’s design to accord with various industry standards, including J101 (an international standard for the design of offshore wind turbines).

Shortly after completion the grouted connections began to fail and the transition pieces designed and installed by MTH started to slip down the monopiles.

The parties worked together to resolve the problem, and remedial works commenced in 2014. EON brought proceedings against MTH in 2012 in order to ascertain which party was responsible for the cost of the remedial works.

First instance decision

The Technology and Construction Court (“TCC”) held that MTH’s design of the foundations and/or grouted connections was not fit for purpose; was not wholly in accordance with the requirements of the contract and therefore was a breach of the Employer’s Requirements; and that the problem was a defect within the meaning of the contract.

In coming to its decision, the TCC examined paragraph 3.2.2.2 (2) of the TRs, which stated:

“The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement.”

Paragraph 3b.5.1 of the TRs stated that:

“The design of the structures…shall ensure a lifetime of 20 years in every aspect without planned replacement”.

Further clause 8.1 (x) of the Contract required the contractor to complete the works such that the:

“Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice.”

The TCC found that this required MTH to provide foundations with a service life of 20 years; the failure of the foundations was therefore a breach of contract, including a breach of clause 8.1 (x). There had been no negligence on the part of either party.

The appeal

MTH appealed the TCC’s decision on the basis that the judge had erred in his construction of paragraph 3.2.2.2 (2) of the TRs and clause 8.1 of the contract. E.ON cross-appealed on the ground that the judge should have found that MTH had committed other breaches of contract.

The Court of Appeal (“CA”) identified a conflict between, on the one hand, paragraphs 3.2.2.2 (2) and 3b.5.1, which stated that the foundation design would ensure a lifetime of 20 years, and on the other, all of the other provisions in the TRs, which referred to a design life of 20 years. This subtle distinction is important because a structure with a design life of 20 years is expected to function for 20 years, but this is not inevitable or guaranteed.

The Industry Standard J101 also envisages a design life of 20 years for offshore structures, as opposed to a guaranteed life.

The CA provided a helpful summary of the rules of contractual interpretation in order to determine what the contract between the parties actually required. It cited two key principles:

  • “…that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood…” (quoted from Chartbrook Ltd v Persimmon Homes Ltd [200] UKHL 38 at paragraph 82); and
  • “The resolution of a construction issue is an iterative process. It involves checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences” (paragraph 83).

Applying these principles, the CA overturned the TCC’s decision and held that:

  • If the contract required an absolute warranty of quality, one would expect to find it in clause 8.1, not “tucked away in the Technical Requirements” as paragraphs 3.2.2.2 (2) and 3b.5.1 were.
  • The warranty in clause 8.1 (x) was not an absolute warranty, but was qualified by the phrase “as determined in accordance with the Specification using Good Industry Practice”. This warranty therefore required the use of reasonable skill and care and compliance with J101, but did not impose any form of warranty as to the length of operational life.
  • A reasonable person in the position of EON and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with J101, which would be expected, but not guaranteed, to produce a design life of 20 years. 
  • Taking an iterative approach to paragraphs 3.2.2.2 (2) and 3b.5.1 of the TRs, it would be nonsensical to view them as overriding all the other provisions of the contract in order to convert the obligation to provide a structure with a guaranteed lifetime of 20 years.

Thus, MTH was not liable for the costs of the remedial works.

In deciding EON’s appeal, the CA allowed the appeal on the basis that MTH had breached two other contractual obligations, but on the facts these breaches had not caused loss to EON, so only nominal damages were awarded.

Lessons for parties to construction contracts

Careful attention must be given to the wording of warranties in construction contracts. Parties should take care to ensure that obligations are clear – taking the above example, clarity in drafting could have resolved the tension as to whether the contractor was required to produce a design life of 20 years, or an operational life of 20 years. This requirement is especially critical where the technology is relatively new, as in the case of offshore wind farms. Further, parties should ensure that terminology is used consistently across contract documents, so as to avoid uncertainty as to what an obligation is.

The above CA decision represents a pragmatic interpretation of a contract from the perspective of the “reasonable person”. Parties during the contract negotiation phase should ensure that they understand the nature and scope of a warranty as to quality. That understanding will then allow both employers and contractors to properly price and negotiate the risks in the project accordingly and avoid future uncertainty and cost.

Osborne Clarke’s construction specialists regularly work with clients during both the pre-contract and post-contract stages to ensure that risks, including those related to design warranties, are identified and managed. Clients benefit from Osborne Clarke’s Project Counsel service which provides a tailored ongoing solution to risk management during construction projects with the objective of managing risk and working towards dispute avoidance. For more information contact one of Osborne Clarke’s construction Partners Jonathan Brooks or Matthew Heywood.