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Interpreting a contract: which performance standard applies?

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Posted by Michael Hiscock on 11 May 2015

Michael Hiscock - Construction Lawyer
Michael Hiscock Partner - Head of Construction

In an industry which uses multi-layered contracts, often written by different people and compiled centrally, consistency is the key. Do the component parts of a contract work together? Do the various documents fit together to form one clear expectation, one performance standard, one deliverable?

In April 2015 the Court of Appeal considered cross appeals between MT Hojgaard and Eon relating to foundation/column failure of off shore wind turbines in the Solway Firth and their Lordships took the opportunity to provide a useful reminder of contract interpretation rules. The case relates to load capacity failure where the monopile column attaches to the generator head piece. A grouted steel cylinder covers the join. Serious problems arose on a similar design at a Dutch windfarm, and the industry was alerted. Sensibly, MTH and Eon worked together to find a remedial solution, and then sought declarations from the court about who should pay the 26million euro remedial costs.

The Technical Requirements said various things:

  • The design of the foundations shall ensure a lifetime of 20 years
  • The design must accord with domestic and international design standards
  • All parts (except wear parts and consumables) shall be designed to ensure a minimum service life of 20 years

The contract clauses required the contractor to design:

  • With due care and diligence of appropriately qualified and experienced designers
  • In a professional manner
  • In accordance with modern design principles and practices
  • In accordance with internationally recognised standards
  •  In accordance with Good Industry Practice
  • So the works are fit for purpose in accordance with the Specification using Good Industry Practice
  • So that the works will satisfy any performance specifications in this agreement.

So the question before the court was – which of these plethora of standards applied ? The answer was found in well-established principle of legal interpretation:

  • What a reasonable person having all the background knowledge of the parties would have understood
  • Checking rival provisions looking at commercial consequences based on ordinary meanings
  • If there are two possible interpretations, the court can use business common sense.
  • The court must expect and therefore work though ambiguities and inconsistencies

The court said that it is very possible and absolutely conceivable to find a construction contract with dual obligations to comply with particular specifications and achieve a particular result. A contractor may have to take minimum steps to meet the standard and also further steps to achieve the desired outcome.

The court used the express order of priority in the contract to apply the contract terms above the technical requirements – but what if no such priority existed ?. The court said if the contract required an absolute guarantee of quality it should be in the contract clauses, not “tucked away” in the Technical Requirements. In fact the contractual terms required the opposite, namely due care, professional skill and Good Industry Practice. Even the phrase “fit for purpose” is tested by reference to Good Industry Practice.

The court looked at international standard J101 which was itself not an absolute guarantee of 20 year life but a high probability of doing so, based on a 2% chance of an ultimate maximum load event.

Therefore MTH won its appeal and confirmed that on these contract terms, it had not guaranteed that the turbine structures would achieve 20 year defect free life. So if you want that level of guarantee and that absolute warranty commitment, you need to be very clear in the contract, otherwise an “objective business man” (the court) may interpret the agreement differently.

For assistance with contract drafting please speak to Michael Hiscock or another Construction and Engineering team member.

About the author

Michael Hiscock

Partner - Head of Construction

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

Michael Hiscock

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

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