[2017] UKSC 59
On appeal from: [2015] EWCA Civ 407
JUDGMENT
MT Højgaard A/S (Respondent) v E.ON Climate
& Renewables UK Robin Rigg East Limited and another (Appellants)
before
Lord Neuberger, President
Lord Mance
Lord Clarke
Lord Sumption
Lord Hodge
JUDGMENT GIVEN ON
3 August 2017
Heard on 20 June 2017
|
Appellants
John Marrin QC
Paul Buckingham
(Instructed by
Gowling WLG (UK) LLP)
|
|
Respondent
David
Streatfeild-James QC
Mark
Chennells
(Instructed by
Fenwick Elliott LLP)
|
LORD NEUBERGER: (with whom
Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge agree)
The background
1.
These proceedings arise from the fact that the foundation structures of
two offshore wind farms at Robin Rigg in the Solway Firth, which were designed
and installed by MT Højgaard A/S (“MTH”), failed shortly after completion of
the project. The specific issue to be determined is whether MTH are liable for
this failure.
2.
As Jackson LJ said in the Court of Appeal, the resolution of that issue
turns on “how the court should construe the somewhat diffuse documents which
constituted, or were incorporated into, the ‘design and build’ contract in this
case”. Accordingly, I turn first to consider the relevant provisions of the
contractual documentation.
The relevant provisions of the Technical Requirements and
J101
3.
In May 2006, the appellants, two companies in the E.ON group (“E.ON”),
sent tender documents to various parties including MTH, who in due course
became the successful bidders. The tender documents included Employer’s Requirements,
Part I of which included the Technical Requirements (“the TR”).
4.
Section 1 of the TR set out the “General Description of Works and Scope
of Supply”. Part 1.6 set out the so-called Key Functional Requirements, which
included this:
“The Works, together with the
interfaces detailed in Section 8, shall be designed to withstand the full range
of operational and environmental conditions with minimal maintenance.
The Works elements shall be
designed for a minimum site specific ‘design life’ of twenty (20) years without
major retrofits or refurbishments; all elements shall be designed to operate
safely and reliably in the environmental conditions that exist on the site for
at least this lifetime.”
5.
Section 3 of the TR was concerned with the “Design Basis (Wind Turbine
Foundations)”. Part 3.1 was entitled “Introduction”, and it included the following
(divided into sub-paragraphs for convenience):
“(i) It is stressed that the
requirements contained in this section and the environmental conditions given
are the MINIMUM requirements of [E.ON] to be taken into account in the design.
(ii) It shall be the
responsibility of [MTH] to identify any areas where the works need to be
designed to any additional or more rigorous requirements or parameters.”
There were other references elsewhere to the stated
requirement being a minimum. Para 3.1.2 of the TR required MTH to submit a
detailed Foundation Design Basis document, which was required to contain, among
other things, a statement as to “the Contractor’s design choices, including,
but not limited to, … departures from, or aspects not covered by, standards, if
any”.
6.
Part 3.2 of the TR was headed “Design Principles”, and para 3.2.2 was
concerned with “General Design Conditions”, para 3.2.2.1 being directed to the
“Tender Stage Design”, and para 3.2.2.2 to the “Detailed Design Stage”. Para
3.2.2.2 is of central importance for present purposes, and, for convenience, I
shall treat it as divided into numbered sub-paragraphs. Para 3.2.2.2(i)
required MTH to prepare the detailed design of the foundations in accordance
with a document known as J101, using the “integrated analysis” method (which
was one of the four methods addressed in J101). Para 3.2.2.2(ii) went on to
state that:
“The design of the foundations
shall ensure a lifetime of 20 years in every aspect without planned
replacement. The choice of structure, materials, corrosion protection system
operation and inspection programme shall be made accordingly.”
7.
J101 was a reference to an international standard for the design of
offshore wind turbines published by Det Norske Veritas (“DNV”), an independent
classification and certification agency based in Norway. J101 included a
statement that its “objectives” included the provision of “an internationally
acceptable level of safety by defining minimum requirements for structures and
structural components”, as well as being “a contractual reference document”,
and a “guideline”. Section 2 of J101 contained design principles which were,
among other things, aimed at limiting the annual probability of failure to be
in the range of one in 10,000 to one in 100,000 - para C201. Section 7 of J101
dealt with the design of steel structures, and para K104 provided:
“The design fatigue life for
structural components should be based on the specified service life of the
structure. If a service life is not specified, 20 years should be used.”
Section 9 of J101 dealt with the design and construction
of grouted connections. Part A included reference to shear keys, which, it was
explained, “can reduce the fatigue strength of the tubular members and of the
grout”. Part B of section 9 set out a number of equations applicable to such a
design, including one (“the Equation”) which showed how the interface shear
strength due to friction is to be calculated, namely:
Precisely what the Equation actually means need not be
spelled out. What is important for present purposes is that it was stated
beneath the Equation that δ should “be taken as 0.00037 Rp for rolled
steel surfaces” (Rp being the outer radius of the pile, and δ being the
height of surface irregularities).
8.
Para 3.2.3.2 of the TR required MTH’s design to accord with
“international and national rules, circulars, EU directives executive orders
and standards applying to the Site” and it went on to state that a defined
“hierarchy of standards shall apply”, as listed. Ignoring those standards which
were irrelevant or not in force, the first in the list was J101. Para 3.2.5
required the contractor to design and construct grouted connections in
accordance with J101. Para 3.2.6 stated that “[a]ll parts of the Works, except
wear parts and consumables, shall be designed for a minimum service life 20
years” (sic).
9.
Section 3b of the TR was headed “Design Basis for Offshore Substations
and Meteorological Mast”. Para 3b.5.1 stated:
“The design of the structures
addressed by this Design Basis shall ensure a lifetime of 20 years in every
aspect without planned replacement. The choice of structure, materials,
corrosion protection system operation and inspection programme shall be made
accordingly.”
Para 3b.5.6 provided that “[a]ll parts of the Works,
except wear parts and consumables shall be designed for a minimum service life
20 years.”
10.
Section 4 of the TR dealt with “Approvals and Certification”. Para 4.4.3
provided that MTH should obtain a Foundation Design Evaluation Conformity
Statement from the Certifying Authority within six months of the commencement
date.
11.
Section 10 of the TR covered “Structural Design and Fabrication” (Wind
Turbine Foundations), and para 10.1.1 required MTH to appoint “an accredited
Certifying Authority … to independently evaluate the adequacy of his foundation
design.” Para 10.5.1 was in these terms:
“The Contractor shall determine
whether to employ shear keys within the grouted connection. If shear keys are
used, the design and detailing shall take due account of their presence for
both strength and fatigue design to the satisfaction of the Certifying
Authority and the Engineer. If shear keys are to be omitted then the Contractor
shall demonstrate with test data that the grouted connection is capable of
transmitting axial loads at the grout/steel interface without dependence upon
flexural (normal) contact pressures, which may not always be present, to the
satisfaction of the Certifying Authority and the Engineer. Such demonstration
shall also account for joint performance under different temperature
conditions.”
12.
Para 10.24.9 of the TR stated that the “recorded potential difference
exceedance” was not so great as to “cause accelerated anode depletion to such
extent that the anode material provided is fully utilised before the end of the
structure operational 20 year life”.
13.
Having been selected as the contractor for the works, MTH duly set about
preparing its tender in accordance with Employer’s Requirements and J101. MTH’s
design provided for (i) monopiles with a diameter of just over four metres,
(ii) transition pieces about eight metres long, weighing approximately 120
tonnes, and (iii) grouted connections without shear keys. MTH explained at the
time that no shear keys were specified because, taking δ as 0.00037 Rp,
application of the Equation indicated that the grouted connections, as
designed, had more than sufficient axial capacity to take the axial load.
14.
After E.ON had accepted MTH’s tender, MTH duly commenced design work,
and in November 2006 it submitted a detailed Foundation Design Basis document,
as required by para 3.1.2 of the TR.
The relevant provisions of the contract
15.
On 20 December 2006 E.ON and MTH entered into a written contract (“the
Contract”) under which MTH agreed to design, fabricate and install the
foundations for the proposed turbines. Part C of the Contract contained a List
of Definitions. “Fit for Purpose” was defined as “fitness for purpose in
accordance with, and as can properly be inferred from, the Employer’s
Requirements”. “Employer’s Requirements” was stated to include the TR, which
were themselves attached as Part I of the Contract. And “Good Industry
Practice” meant “those standards, practices, methods and procedures conforming
to all Legal Requirements to be performed with the exercise of skill, diligence,
prudence and foresight that can ordinarily and reasonably be expected from a
fully skilled contractor who is engaged in a similar type of undertaking or
task in similar circumstances in a manner consistent with recognised
international standards”.
16.
Clause 2.1 of Part D of the Contract provided that any failure by the
Engineer or his Representative to spot defects or mistakes by the contractor
would not exempt the contractor from liability. Clause 5.3 of Part D stated
that in the event of inconsistencies, the order of precedence of the
contractual documents should be as follows:
(a)
the form of agreement;
(b)
the conditions of contact and the List of Definitions;
(c)
the commercial schedules and the schedule of prices, payment profile and
draft programme;
(d)
the Employer’s Requirements;
(e)
the annexes to the Employer’s Requirements;
(f)
volumes 2A, 2B and 3 of the contractor’s tender return.
17.
Clause 8.1 of Part D required MTH “in accordance with this Agreement,
[to] design, manufacture, test, deliver and install and complete the Works” in
accordance with a number of requirements, including
“(iv) in a professional manner
in accordance with modern commercial and engineering, design, project
management and supervisory principles and practices and in accordance with
internationally recognised standards and Good Industry Practice; …
(viii) so that the Works, when
completed, comply with the requirements of this Agreement …;
(ix) so that [MTH] shall
comply at all times with all Legal Requirements and the standards of Good
Industry Practice;
(x) so that each item of
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; …
(xv) so that the design of the
Works and the Works when Completed by [MTH] shall be wholly in accordance with
this Agreement and shall satisfy any performance specifications or requirements
of the Employer as set out in this Agreement. …”
18.
Clause 30 of Part D of the Contract was headed “Defects after taking
over”. Clause 30.2 provided that MTH “shall be responsible for making good any
defect … or damage” arising from “defective materials, workmanship or design”,
“any breach by [MTH] of his obligations under this Agreement” or “Works not
being Fit for Purpose”, “which may appear or occur before or during the Defects
Liability Period”. That period was defined in clause 30.1 as being a period of
24 months from the date E.ON takes over the Works from MTH. Clause 30.3
required E.ON to give notice “forthwith” of any such defects to MTH. Clause
30.4 extended that Period in certain limited circumstances. Clause 30.10
required E.ON to produce a Defects Liability Certificate once the Defects
Liability Period has expired and MTH has satisfied all its obligations under
clause 30.
19.
Clause 33.9 of Part D of the Contract entitled MTH to apply, within 28
days of the issue of a Defects Liability Certificate, for a Final Certificate
of Payment, and to accompany the application with a final account; clause 33.10
provided for the consequential issue of a Final Certificate of Payment; and
clause 33.11 provided the Final Certificate of Payment is conclusive.
20.
Clause 42.3 of Part D of the Contract stated that:
“[E.ON] and [MTH] intend that
their respective rights, obligations and liabilities as provided for in this
Agreement shall alone govern their rights under this Agreement.
Accordingly, the remedies provided
under this Agreement in respect of or in consequence of:
(a) any breach of contract;
or
(b) any negligent act or
omission; or
(c) death or personal
injury; or
(d) loss or damage to any
property,
are, save in the case of …
Misconduct, to be to the exclusion of any other remedy that either may have
against the other under the law governing this Agreement or otherwise.”
Subsequent events
21.
MTH duly proceeded with the design and construction of the two wind
farms (“the Works”), and, on its instructions, Rambøll Danmark A/S supplied in
June 2007 a detailed design for the grouted connections, which did not include
shear keys. Pursuant to para 10.1.1 of the TR, MTH appointed DNV as the
Certifying Authority, and DNV evaluated and approved MTH’s foundation designs.
Pursuant to para 4.4.3 of the TR, DNV issued Foundation Design Evaluation
Conformity Statements for the various phases of the works. MTH began the
installation of foundations in the Solway Firth in December 2007, and completed
the Works in February 2009.
22.
During 2009 a serious problem came to light at Egmond aan Zee wind farm,
where the grouted connections did not have shear keys. Those connections
started to fail, and the transition pieces started to slip down the monopiles.
DNV carried out an internal review during late summer 2009, and discovered that
there was an error in the value given for δ in the note to the Equation
mentioned in para 7 above. It was wrong by a factor of about ten. This meant
that the axial capacity of the grouted connections in wind farm foundations at
various locations including Egmond aan Zee and Robin Rigg had been substantially
over-estimated.
23.
On 28 September 2009, DNV sent a letter to MTH and others in the
industry, alerting them to the situation (and DNV subsequently revised J101 to
correct the error). In April 2010 the grouted connections at Robin Rigg started
to fail, as they had done a year earlier at Egmond aan Zee, and the transition
pieces began to slip down the monopiles. Very sensibly E.ON and MTH deferred
any legal dispute and set about finding a practical solution to the problem. It
was agreed between the parties that E.ON would develop a scheme of remedial
works. Those remedial works were commenced in 2014.
24.
In order to ascertain who should bear the cost of the remedial works,
the parties embarked upon the present proceedings. In very summary terms, the
parties’ respective positions were as follows. MTH contended
that it had exercised reasonable skill and care, and had complied with all its
contractual obligations, and so should have no liability for the cost of the
remedial works. By contrast E.ON contended that MTH had been
negligent and also had been responsible for numerous breaches of contract, and
they claimed declarations to the effect that MTH was liable for the defective
grouted connections. The parties in due course agreed the
cost of the remedial works in the sum of €26.25m, leaving the court to decide
which of them should bear that cost.
25.
The case came before Edwards-Stuart J, and after an eight-day hearing in
November 2013, he gave judgment in April 2014 - [2014] EWHC 1088 (TCC). He
rejected the suggestion that MTH had been negligent, and he also rejected a
number of allegations of breach of contract made by E.ON. However, he found for
E.ON primarily on the ground that (i) clause 8.1(x) of the contract required
the foundations to be fit for purpose, (ii) fitness for purpose was to be determined
by reference to the TR, and (iii) para 3.2.2.2(ii) (and also para 3b.5.1) of
the TR required the foundations to be designed so that they would have a
lifetime of 20 years. He also held that this conclusion was also supported by
clauses 8.1(viii) and (xv).
26.
MTH appealed to the Court of Appeal, and after a two-day hearing in
February 2015, they handed down their decision two months later, allowing the
appeal for reasons given by Jackson LJ, with whom Patten and Underhill LJJ
agreed - [2015] EWCA Civ 407. Jackson LJ accepted that, if one was confined to
the TR, para 3.2.2.2(ii) appeared to be “a warranty [on the part of MTH] that
the foundations will function for 20 years”. However, in the light of the
provisions of the Contract, he said that there was “an inconsistency between
[paras 3.2.2.2(ii) and 3b.5.1 of the TR] on the one hand and all the other
contractual provisions on the other hand”, and that the other contractual
provisions should prevail. He went on to describe paras 3.2.2.2(ii) and 3b.5.1
of the TR as “too slender a thread upon which to hang a finding that MTH gave a
warranty of 20 years life for the foundations”.
The meaning of para 3.2.2.2(ii) of the TR
27.
The central question on this appeal is whether, in the light of para
3.2.2.2(ii) (and para 3b.5.1) of the TR, which refer to ensuring a life for the
foundations (and the Works) of 20 years, MTH was in breach of contract, despite
the fact that it used due care and professional skill, adhered to good industry
practice, and complied with J101. Before turning to that issue, however, it is
appropriate to deal with an argument raised by Mr Streatfeild-James QC in the
course of his excellent submissions on behalf of MTH. He suggested that it was
unlikely that the parties could have intended that there should be what Jackson
LJ characterised as “a warranty that the foundations will function for 20
years”, in the light of those parts of clauses 30, 33 and 42 of the Contract
set out in paras 18 to 20 above. In summary, he argued that (i) the effect of
clause 30 was that, subject to some relatively limited exceptions in clause
30.4, MTH was obliged to rectify any defect in the Works which occurred within
24 months of the Works being handed over, (ii) the effect of clause 42.3 was
that any claim by E.ON in respect of a defect appearing thereafter was barred,
and (iii) the notion that there was no room for claims outside the 24-month
period was reinforced by clauses 33.9 and 33.10.
28.
In my opinion, there is no answer to that analysis so far as it is
directed to the effect of clauses 30, 33 and 42 of the Contract. Clause 42.3
makes it clear that the provisions of clause 30 (and any other contractual term
which provides for remedies after the Works have been handed over to E.ON) are
intended to operate as an exclusive regime. And that conclusion appears to me
to be supported by the terms of clause 33.9 and 33.10, because they tie in very
well with the notion that there should be no claims after the Final
Certificate, which is to be issued very shortly after the 24-month period.
29.
Accordingly, if, as E.ON argue, para 3.2.2.2(ii) of the TR amounts to a
warranty that the foundations will last for 20 years, there would be a tension
between that provision and clauses 30, 33 and 42 of the Contract. However, I do
not consider that the tension would be so problematic as to undermine the
conclusion that para 3.2.2.2(ii) amounted to warranties as described by Jackson
LJ. In the light of the normal give and take of negotiations, and the complex,
diffuse and multi-authored nature of this contract, it is by no means
improbable that MTH could have agreed to a 20-year warranty provided that it
could have the benefit of a two-year limitation period, save where misconduct
was involved. It would simply mean that the rights given to E.ON by paras 3.2.2.2(ii)
were significantly less valuable than at first sight they may appear, because
any claim based on an alleged failure in the foundations which only became
apparent more than two years after the handover of the Works would normally be
barred by clause 42.3. In this case, of course, there is no problem, because
the foundations failed well within the 24-month period.
30.
However, in my view, although it would therefore be possible to give
effect to para 3.2.2.2(ii) of the TR as a 20-year warranty as described by
Jackson LJ, the points canvassed in paras 27 to 29 above justify reconsidering
the effect of para 3.2.2.2(ii). It appears to me that there is a powerful case
for saying that, rather than warranting that the foundations would have a
lifetime of 20 years, para 3.2.2.2(ii) amounted to an agreement that the design
of the foundations was such that they would have a lifetime of 20 years. In
other words, read together with clauses 30 and 42.3 of the Contract, para
3.2.2.2(ii) did not guarantee that the foundations would last 20 years without
replacement, but that they had been designed to last for 20 years without
replacement. That interpretation explains the reference in para 3.2.2.2(ii) to
design, and it obviates any tension between the terms of para 3.2.2.2(ii) and
the terms of clauses 30 and 42.3. Rather than the 20-year warranty being cut
off after 24 months, E.ON had 24 months to discover that the foundations were
not, in fact, designed to last for 20 years. On the basis of that
interpretation, E.ON’s ability to invoke its rights under para 3.2.2.2(ii)
would not depend on E.ON appreciating that the foundations were failing (within
24 months of handover), but on E.ON appreciating (within 24 months of handover)
that the design of the foundations was such that they will not last for 20
years.
31.
That, of course, raises the question as to what, on that reading, was
precisely meant by “ensur[ing] a lifetime of 20 years”, given that the forces
of nature, especially at sea, are such that a lifetime of 20 years, or any
other period, could never in practice be guaranteed. The answer is to be found
in J101. As explained in para 7 above, J101 requires the annual probability of
failure to be in the range of one in 10,000 to one in 100,000, and specifically
provides that, if a service life is not specified in a contract “20 years
should be used”, which ties in with the proposition, agreed between the
parties, that an offshore wind farm is typically designed for a 20-year
lifetime. This aspect could be expanded on substantially by reference to the
detailed terms, requirements and recommendations of J101. In particular, one of
the two so-called “Limit States” in terms of loadbearing requirements, FLS, is
calculated by reference to the design life of the structure in question: hence para
C201 of section 2 and para K104 of section 7 referred to in para 7 above.
However, the simple point is that J101, while concerned with making
recommendations and requirements linked to the intended life of a structure to
which it applies, makes it clear that there is a risk, which it quantifies, of
that life being shortened. That risk is, in my view, the risk which should be
treated as incorporated in para 3.2.2.2(ii) - if it is indeed concerned with
the designed life of the Works.
32.
It is unnecessary to decide whether para 3.2.2.2(ii) is a warranty that
the foundations will have a lifetime of 20 years or a contractual term that the
foundations will be designed to have such a lifetime. The former meaning has
been taken as correct by the parties and by the courts below, but, for the
reasons given in paras 28 to 31 above, I am currently inclined to favour the
latter meaning. On the other hand, as the TR were produced and, to an extent,
acted on before the Contract was agreed, it may be questionable whether it
would be right to interpret the TR by reference to clauses of the Contract.
However, it is clear that, if para 3.2.2.2(ii) is an effective term of the
Contract, it was breached by MTH whichever meaning it has, and therefore the
issue need not be resolved.
33.
I turn then to the central issue on this appeal.
The enforceability of para 3.2.2.2(ii) according to its
terms: introductory
34.
E.ON’s case is that para 3.2.2.2(ii) of the TR is incorporated into the
Contract, because (i) clause 8.1(x) of the Contract required the Works to be
fit for purpose, (ii) Part C of the Contract equated fitness for purpose with
compliance with the Employer’s Requirements, (iii) Part C also defined
Employer’s Requirements as including the contents of the TR, and (iv) the TR included
para 3.2.2.2(ii), which specifically refers to the foundations having a life of
20 years. On that basis, E.ON argues that para 3.2.2.2(ii) was clearly
infringed, and, as it was a term of the Contract, it must follow that MTH is,
as Edwards-Stuart J held, liable for breach of contract.
35.
By contrast, MTH supports the reasoning of Jackson LJ, and contends that
it is clear that the Contract stipulated that the Works must be constructed in
accordance with the requirements of J101 (and with appropriate care), and it is
unconvincing to suggest that a provision such as para 3.2.2.2(ii) of the TR
renders MTH liable for faulty construction, given that the Works were
constructed fully in accordance with J101 (and with appropriate care). MTH
contends that the references to a 20-year life in various provisions of the TR,
including para 3.2.2.2(ii), ultimately do no more than reflect the fact that,
as envisaged by J101, Part 1.6 of the TR specifies a “design life” for the
Works. MTH also adopts Jackson LJ’s description of the contractual
documentation as being “of multiple authorship [and]
contain[ing] much loose wording”, and that it includes many “ambiguities,
infelicities and inconsistencies” (quoting Lord Collins in In re Sigma
Finance Corp (in administrative receivership) [2010] 1 All ER 571, para
35). More specifically, MTH makes the points that the TR are “in their nature
technical rather than legal”, and that if the parties had intended MTH to
warrant that the foundations would have a 20-year lifetime, or that they would
be designed to have a 20-year life, a term to that effect would have been
included in plain terms, probably as a Key Functional Requirement in para 1.6
of the TR.
36.
As already explained, it appears to me that, if one considers the
natural meaning of para 3.2.2.2(ii) of the TR, it involved MTH warranting
either that the foundations would have a lifetime of 20 years (as Jackson LJ
accepted) or agreeing that the design of the foundations would be such as to
give them a lifetime of 20 years. As Mr Streatfeild-James realistically
accepted, the combination of the terms of clause 8.1(x) of the Contract and the
definitions of “Employer’s Requirements” and “Fit for Purpose” result in the
provisions of the TR being effectively incorporated into the Contract -
unsurprisingly as they are included in the contractual documentation as Part I.
In those circumstances, I consider that there are only two arguments open to
MTH as to why the paragraph should not be given its natural effect (and while
they are separate arguments, they can fairly be said to be mutually
reinforcing). The first argument is that such an interpretation results in an
obligation which is inconsistent with MTH’s obligation to construct the Works
in accordance with J101. The second argument is that para 3.2.2.2(ii) is simply
too slender a thread on which to hang such an important and potentially onerous
obligation.
The enforceability of para 3.2.2.2(ii) according to its
terms: inconsistency with J101
37.
There have been a number of cases where courts have been called on to
consider a contract which includes two terms, one requiring the contractor to
provide an article which is produced in accordance with a specified design, the
other requiring the article to satisfy specified performance criteria; and where
those criteria cannot be achieved by complying with the design. The
reconciliation of the terms, and the determination of their combined effect
must, of course, be decided by reference to ordinary principles of contractual
interpretation (as recently discussed in Wood v Capita Insurance Services
Ltd [2017] 2 WLR 1095, paras 8 to 15 and the cases cited there), and
therefore by reference to the provisions of the particular contract and its
commercial context. However, it is worth considering some of the cases where
such an issue has been discussed.
38.
Thorn v The Mayor and Commonalty of London (1876) 1 App Cas 120
has been treated as the first decision on this point (including in the
judgments discussed in paras 39 to 43 below), although it seems to me to be
only of indirect relevance. The contractor successfully tendered for work
involving the replacement of the existing Blackfriars Bridge pursuant to an
employer’s invitation, which stated that the work was to be carried out
pursuant to a specification. The specification included wrought iron caissons
which were to form the foundations of the piers “as shewn on [certain]
drawings” (p 121). It subsequently turned out that the caissons as designed
“would not answer to their purpose, and the plan of the work was altered”,
causing consequential expense and delay to the contractor (p 122). The
contractor’s claim was based on the contention that the employer had impliedly
warranted that the bridge could be built according to the specification. The
unanimous rejection of the existence of such a warranty by the House of Lords
does not directly relate to the issue in this case. However, it is worth noting
that, as reconstruction of the bridge had been completed, the employer was not
responsible for the contractor’s losses and expenses flowing from the defective
specification (at least on the basis of an implied warranty). Rather more to
the point, the speeches of Lord Chelmsford (at pp 132 to 133) and Lord O’Hagan
(at p 138) strongly indicate that a contractor who bids on the basis of a
defective specification provided by the employer only has himself to blame if
he does not check their practicality and they turn out to be defective.
39.
The Hydraulic Engineering Co Ltd v Spencer and Sons (1886) 2 TLR
554 appears to me to be more directly in point. In that case, the defendants
contracted to make and deliver to the plaintiffs 15 cast iron cylinders. The
contract provided that the cylinders would be cast according to specifications
and plans provided by the plaintiffs, and also that the cylinders would be able
to stand a pressure of 25 cwt per square inch. The Court of Appeal, upholding
Coleridge CJ, rejected the defendants’ contention that, because “the flaw was
the inevitable result of the plan upon which the plaintiffs ordered them to do
the work the defendants could not be held liable for a defect caused by that
plan” (to quote from the report of counsel’s argument). Lindley LJ said that
“it was manifest that the defendants thought that they could cast the cylinders
on [the] pattern [sent by the plaintiffs] without defects”. Although he
accepted that “the defect was unavoidable”, he said that “[t]here was no doubt
that it was a defect” and “the [defendants] were therefore liable”. Lord Esher
MR and Lopes LJ agreed.
40.
A similar view was taken in Scotland by the Inner House in A M
Gillespie & Co v John Howden & Co (1885) 22 SLR 527, where a
customer ordered a ship from shipbuilders pursuant to a contract which required
the ship “to carry 1,800 tons deadweight”, and which also required the ship to
be built according to a model approved by the customer. The ship as built was
unable to carry 1,800 tons deadweight, and the shipbuilders argued that they
should not be liable for damages because it would have been impossible to
construct a ship capable of carrying 1,800 tons according to the model approved
by the customer. Upholding the Sheriff-Substitute, Lord Rutherfurd-Clark (with
whom Lords Craighill and Young agreed) said at p 528 that “this [was] no
defence”, as “[t]he fact remains that the [shipbuilders] undertook a contract
which they could not fulfil and they are consequently liable in damages for the
breach”.
41.
The issue has also come up in the courts of Canada. In The Steel
Company of Canada Ltd v Willand Management Ltd [1966] SCR 746, the
respondents were claiming for repair work to three defective roofs on buildings
which they had constructed for the appellants. The respondents argued that the
defects were not their fault, as they had constructed the buildings under a
contract which required them to comply with the requirements of the appellants,
and the defects resulted from defects in those requirements. Reversing the
Ontario Court of Appeal, the Supreme Court of Canada rejected this argument on
the ground that the contract also contained a term that the respondent
guaranteed that all work would remain weather tight and that all material and
workmanship would be first class and without defect. In the course of giving
the judgment of the court, Ritchie J at p 751 rejected the respondents’
contention, which was supported by a decision of the courts of New York, that
they “guaranteed only that, as to the work done by it, the roof would be
weather-tight in so far as the plans and specifications with which it had to
comply would allow”, and at pp 753 to 754 approved a statement in the then
current (8th) edition of Hudson’s Building and Engineering Contracts, p 147, to
this effect:
“generally the express obligation
to construct a work capable of carrying out the duty in question overrides the
obligation to comply with the plans and specifications, and the contractor will
be liable for the failure of the work notwithstanding that it is carried out in
accordance with the plans and specification. Nor will he be entitled to extra
payment for amending the work so that it will perform the stipulated duty.”
42.
The reasoning of the Canadian Supreme Court was fairly recently applied
by the Court of Appeal for British Columbia in Greater Vancouver Water
District v North American Pipe & Steel Ltd 2012 BCCA 337, where a
“clear and unambiguous” provision whereby a supplier “warrant[ed] and
guarantee[d]” that the supplied goods were “free from all defects … arising
from faulty design” was held to apply in full, notwithstanding the immediately
preceding warranty by the supplier that the goods would “conform to all
applicable specifications”, and that those specifications were unsatisfactory
and led to the defect complained of.
43.
The law on the topic was well summarised by Lord Wright in Cammell
Laird and Co Ltd v The Manganese Bronze and Brass Co Ltd [1934] AC 402,
425, where he said that “[i]t has been laid down that where a manufacturer or
builder undertakes to produce a finished result according to a design or plan,
he may be still bound by his bargain even though he can show an unanticipated
difficulty or even impossibility in achieving the result desired with the plans
or specification”. After referring to Thorn as being “[s]uch a case”, he
mentioned Gillespie v Howden (1885) 12 R 800, where “the Court of Session
held it was no defence to a shipbuilder who had contracted to build a ship of a
certain design and of a certain carrying capacity, that it was impossible with
the approved design to achieve the agreed capacity: the shipbuilder had to
answer in damages”. Lord Wright then went on to explain that “[t]hough this is
the general principle of law, its application in respect of any particular
contract must vary with the terms and circumstances of that contract”.
44.
Where a contract contains terms which require an item (i) which is to be
produced in accordance with a prescribed design, and (ii) which, when provided,
will comply with prescribed criteria, and literal conformity with the
prescribed design will inevitably result in the product falling short of one or
more of the prescribed criteria, it by no means follows that the two terms are
mutually inconsistent. That may be the right analysis in some cases (and it
appears pretty clear that it was the view of the Inner House in relation to the
contract in A M Gillespie). However, in many contracts, the proper
analysis may well be that the contractor has to improve on any aspects of the
prescribed design which would otherwise lead to the product falling short of
the prescribed criteria, and in other contracts, the correct view could be that
the requirements of the prescribed criteria only apply to aspects of the design
which are not prescribed. While each case must turn on its own facts, the
message from decisions and observations of judges in the United Kingdom and
Canada is that the courts are generally inclined to give full effect to the
requirement that the item as produced complies with the prescribed criteria, on
the basis that, even if the customer or employer has specified or approved the
design, it is the contractor who can be expected to take the risk if he agreed
to work to a design which would render the item incapable of meeting the
criteria to which he has agreed.
45.
Turning to the centrally relevant contractual provisions in the instant
case, it seems to me that MTH’s case, namely that the obligation which appears
to be imposed by para 3.2.2.2(ii) is inconsistent with the obligation imposed
by para 3.2.2.2(i) to comply with J101, faces an insurmountable difficulty. The
opening provision of Section 3, para 3.1, (i) “stresse[s]” that “the
requirements contained in this section … are the MINIMUM requirements of [E.ON]
to be taken into account in the design”, and (ii) goes on to provide that it is
“the responsibility of [MTH] to identify any areas where the works need to be
designed to any additional or more rigorous requirements or parameters”. In
those circumstances, in my judgment, where two provisions of Section 3 impose
different or inconsistent standards or requirements, rather than concluding
that they are inconsistent, the correct analysis by virtue of para 3.1(i) is
that the more rigorous or demanding of the two standards or requirements must
prevail, as the less rigorous can properly be treated as a minimum requirement.
Further, if there is an inconsistency between a design requirement and the
required criteria, it appears to me that the effect of para 3.1(ii) would be to
make it clear that, although it may have complied with the design requirement,
MTH would be liable for the failure to comply with the required criteria, as it
was MTH’s duty to identify the need to improve on the design accordingly.
46.
As to the facts of the present case, para 3.2.2.2(i) could indeed be
said to require that (as recorded in the note to the Equation in J101) δ should
“be taken as 0.00037 Rp for rolled steel surfaces”, and, as explained above,
this was a mistake, in that it substantially over-estimated the connection
strength. However, given the terms of para 3.1(i), this figure for δ was a
“MINIMUM requirement”, and, if para 3.2.2.2(ii) was to be complied with, the
value of δ stipulated by J101 had to be decreased (as it happens by a
factor of around ten). Furthermore, para 3.1(ii) makes it clear that MTH should
have identified that there was a need for a “more rigorous” requirement than
δ being “taken as 0.00037 Rp” to ensure that the design was satisfactory,
or at least complied with para 3.2.2.2(ii).
47.
It is right to add that, even without para 3.1(i) and (ii), I would have
reached the same conclusion. Even in the absence of those paragraphs, it cannot
have been envisaged that MTH would be in breach of its obligations under para
3.2.2.2(i) if it designed the foundations on the basis of δ being less
than 0.00037 Rp for rolled steel surfaces. Accordingly, at least in relation to
the Equation, it represented a minimum standard even in the absence of paras
3.1(i) and (ii), and therefore there would have been no inconsistency between
para 3.2.2.2(i) and 3.2.2.2(ii). I also draw assistance in reaching that conclusion
from the cases discussed in paras 38 to 43 above. The notion that the
Contractor might be expected to depart from the stipulations of J101, where
appropriate, is also supported by para 3.1.2 of the TR, which specifically
envisages that the Contractor’s Foundation Design Basis document may include
“departures from … standards”, and J101 is expressly treated as a “standard” in
para 3.2.3.2. In addition, given that satisfaction of the Equation is required
to justify the absence of shear keys, E.ON’s contention is assisted by the
terms of para 10.5.1, which starts by stating that MTH “shall determine whether
to employ shear keys within the grouted connection”; had shear keys been
provided, the problems which arose would, it appears, have been averted.
The enforceability of para 3.2.2.2(ii) according to its
terms: too slender a thread
48.
MTH relies on a number of factors to support the contention that para
3.2.2.2(ii) of the TR is too weak a basis on which to rest a contention that it
had a liability to warrant that the foundations would survive for 20 years or
would be designed so as to achieve 20 years of lifetime. First, it is said that
the diffuse and unsatisfactorily drafted nature of the contractual
arrangements, with their ambiguities and inconsistencies, should be “recognised
and taken into account”. The contractual arrangements are certainly long,
diffuse and multi-authored with much in the way of detailed description in the
TR, and “belt and braces” provisions both in the TR and the Contract. However,
that does not alter the fact that the court has to do its best to interpret the
contractual arrangements by reference to normal principles. As Lord Bridge of
Harwich said, giving the judgment of the Privy Council in Mitsui
Construction Co Ltd v Attorney General of Hong Kong (1986) 33 BLR 7, 14,
“inelegant and clumsy” drafting of “a badly drafted contract” is not a “reason
to depart from the fundamental rule of construction of contractual documents
that the intention of the parties must be ascertained from the language that
they have used interpreted in the light of the relevant factual situation in
which the contract was made”, although he added that “the poorer the quality of
the drafting, the less willing any court should be to be driven by semantic niceties
to attribute to the parties an improbable and unbusinesslike intention”. In
this case, para 3.2.2.2(ii) is clear in its terms in that it appears to impose
a duty on MTH which involves the foundations having a lifetime of 20 years
(although, as discussed in paras 27 to 32, there is room for argument as to its
precise effect). I do not see why that can be said to be an “improbable [or]
unbusinesslike” interpretation, especially as it is the natural meaning of the
words used and is unsurprising in the light of the references in the TR to the
design life of the Works being 20 years, and the stipulation that the
requirements of the TR are “minimum”.
49.
Secondly, MTH argues that it is surprising that such an onerous
obligation is found only in a part of a paragraph of the TR, essentially a
technical document, rather than spelled out in the Contract. Given that it is
clear from the terms of the Contract that the provisions of the TR are intended
to be of contractual effect, I am not impressed with that point.
50.
Thirdly, MTH suggests that, given the other obligations with regard to
design, manufacture, testing, delivery, installation and completion expressly
included, or impliedly incorporated, in clause 8.1 of the Contract, it is
unlikely that an additional further and onerous obligation was intended to have
been included in the TR. The trouble with that argument is that it involves
saying that para 3.2.2.2(ii) adds nothing to other provisions of the TR or the
contract. I accept that redundancy is not normally a powerful reason for
declining to give a contractual provision its natural meaning especially in a
diffuse and multi-authored contract (see In re Lehman Bros International
(Europe) (in administration) (No 4) [2017] 2 WLR 1497, para 67). However,
it is very different, and much more difficult, to argue that a contractual
provision should not be given its natural meaning, and should instead be given
no meaning or a meaning which renders it redundant.
51.
Fourthly, MTH argues that, if the parties had intended a warranty or
term such as is contended for by E.ON, it would not have been “tucked away” in
para 3.2.2.2 of the TR, but would, for instance, have been a Key Functional
Requirement in Section 1.6 of the TR. Section 1.6 is concerned with general provisions
about the two proposed wind farms, and there is no reference in it to any
specific component, in particular the foundations. In any event, as mentioned
in para 4 above, the Key Functional Requirements include a requirement “for a
minimum site specific ‘design life’ of twenty (20) years without major
retrofits or refurbishments”, and there is no definition of that expression.
Jackson LJ said below, in para 91, “If a structure has a design life of 20
years, that does not mean that inevitably it will function for 20 years,
although it probably will.” Assuming (without deciding) that that is correct,
it seems to me that there is a powerful case for saying that, given a Key
Functional Requirement is that there is a minimum 20-year design life, it is
scarcely surprising that a provision dealing with the “General Design
Conditions” at the “Detailed Design Stage” includes a provision which has the
effect for which E.ON contends in this case.
52.
Fifthly, MTH contends that the TR are concerned in a number of places (eg
paras 1.6, 3.2.6 and 3b.5.6) with emphasising that the “design life” of the
Works or various components of the Works should be 20 years, which does not
carry with it a warranty that the Works, or foundations, will last for 20 years
or that they will be designed to last for 20 years, and so it is unlikely that
para 3.2.2.2(ii) was concerned with imposing a greater obligation on MTH. The
points I have already made at the end of para 49 and the end of para 50 above
appear to me to answer this contention.
53.
Sixthly, MTH points out that para 3.2.2.2(ii) was concerned with planned
maintenance and should not be given the sort of broad effect which E.ON’s case
involves. It appears to me that the reference to planned maintenance at the end
of the first sentence of para 3.2.2.2(ii) emphasises that the design of the
foundations should not simply be such as to last for 20 years, but should be
able to do so without the need for planned maintenance.
Conclusion
54.
In these circumstances, I would allow E.ON’s appeal and restore the
order made at first instance by Edwards-Stuart J.
