Clashes between clauses in the same contract are never what any party wants to see – but avoiding this can pose a particular challenge in the construction sector, where contracts are typically laden with extensive technical detail, often rolled out across a variety of documentation.
Though there is a well-established canon of legal principles on how to deal with inconsistencies in contracts, construction disputes tend to throw up particular sets of issues. This is partly because construction contracts often comprise a number of separate documents which, when taken together, constitute the entire contractual agreement between the parties. While parties will normally heavily negotiate the bespoke terms and conditions of their contract and ensure that the terms reflect the agreed risk allocation and obligations, the same attention is not always given to the schedules, appendices and other technical documentation that complete the contract documents.
Factors such as time or cost constraints may result in documentation being attached to a contract in a poorly presented, haphazard manner, and without the parties being fully aware of the effect of that documentation on their respective contractual obligations. In addition, documents that should have been included are left out and other documents are inadvertently included. This can easily lead to inconsistencies between documents.
To give a simple example, the technical documents in a contract may require a contractor to lay piping with a radius of at least 30 metres. However, the contract conditions could stipulate that the trenches in which the pipes are placed can be no wider than 20 metres. The way in which a court would resolve this type of dispute would likely be highly dependent on the facts of the particular case.
However, what if there’s a discrepancy within the specification in your contract? Or between design and performance criteria in the contract? Is it likely that this would be readily spotted before the contract is signed, or could it only crystallise when defects in the work emerge? The two cases described below have been key in demonstrating how the courts approach this scenario. They remain very helpful to keep in mind when negotiating not only the technical aspects of your contract, but also how you rank the priority you want to give various contract documents.
Developments in Case Law
In MT Højgaard1, E.ON Climate and Renewables (“E.ON”) employed MT Højgaard (“Højgaard”) to design, fabricate and install foundations for 60 offshore wind turbines in the Solway Firth. After completion the foundation structures failed resulting in a claim for some €26m of remedial works.
The contract compromised a set of terms and conditions together with technical appendices and schedules, including the “Employer’s Requirements”.
The Contract, amongst other things, required Højgaard to prepare the design for the foundations in accordance with an international standard known as ‘J101’ (the “Specified Design Obligation”). The Contract also required Højgaard to prepare a design which ensured the foundations would last for 20 years (the “Specified Performance Obligation”).
It transpired however that the foundation structures failed (by having insufficient capacity to take the axial load) due to an inherent flaw contained in the Specified Design Obligation with which Højgaard was contractually obliged to comply.
E.ON argued that Højgaard had breached the Specified Performance Obligation to install foundations that lasted for 20 years, while Højgaard claimed that it had complied with the contractual requirements by constructing the foundations in accordance with the Specified Design Obligation. The central issue of the case was whether the Specified Performance Obligation was inconsistent with the Specified Design Obligation and, if so, which took precedence.
The court found in favour of E.ON and held that both obligations were not inconsistent with one another.
The contract stated that the obligations to build in accordance with the J101 standard were “minimum requirements”. Therefore the more onerous standard, the Specified Performance Obligation, should prevail, as the Specified Design Obligation could be treated as merely a minimum requirement.
Although the technical requirements were burdensome, the court held that it was clear from the contract terms that they were intended to be of contractual effect.
The question of Specified Design Obligation versus Specific Performance Obligation dispute arose also in the case of OBS.2
125 OBS (Nominees 1) (“OBS”) employed Lend Lease Construction (Europe) Ltd (“Lend Lease”) to redevelop an office block that formerly housed the London Stock Exchange. OBS claimed for damages following the failure of toughened glass used to clad the building.
The design and build contract consisted of a JCT contract with amendments. The contract expressly prescribed an obligation for Lend Lease to ‘heat soak’ the glass in accordance with an EU standard, which would reduce the risk of breakages.
There was a further obligation in the contract to provide glass panels with a design and service life of 30 years. However, had the glass been heat soaked, this would not have guaranteed that the glass would have lasted for 30 years.
Following completion of the works a number of the glass panels failed causing pieces of glass to fall onto the street.
OBS contended that Lend Lease had breached their contractual obligations to provide glass panels with a design and service life of 30 years. Lend Lease argued that it had complied with its obligation to heat soak the glass and had no other obligations in relation to the breakages.
The court held that there was no inconsistency between the obligation to ‘heat soak’ the glass and the obligation to have a 30-year lifespan. The judge found that the possibility of breakages after heat soaking supported the “commercial sense” of including the additional obligation of the lifespan.
Like the Højgaard case, the court held that the more onerous obligation applied (i.e. that the glass panels had a 30-year lifespan).
Will a priority clause serve as a ‘catch all’ provision?
Courts will look at agreements in their entirely and construe them as far as possible to avoid inconsistencies. However if there remains a clear and irreconcilable discrepancy, attention will be given to the contractual order of precedence to resolve the discrepancy. It is often assumed that the inclusion of a ‘priority clause’ (such that negotiated terms take priority over general terms or conditions or technical documentation) may be sufficient to reconcile inconsistencies between contract documents.
However, a recent case gives a clear warning to those parties who fail to fully understand the manner in which the general obligations of the contract will interact with the specific technical documentation and, critically, whether both aspects are consistent.
In Clancy3, E.ON employed Clancy Docwra Limited (“Clancy”) to carry out groundworks using an amended JCT Sub–Contract. Clancy encountered adverse ground conditions (including an obstruction to the proposed route of works) which led to a dispute as to whether Clancy bore the risk of such ground conditions or was entitled to payment of additional sums to complete the works.
E.ON relied on its bespoke amendments to the sub-contract which passed the risk of ground conditions to Clancy. Clancy relied on tender documentation appended to the sub-contract which detailed the route of the works and showed that the tender did not contemplate dealing with obstructions. Despite bespoke amendments, and a clause giving priority to those amendments, Clancy escaped liability for ground conditions because of the scope of work described in tender documentation appended to the sub-contract.
This case clearly highlights the difficulties that can arise where schedules and other technical documentation are appended to a contract without the parties carefully reviewing their contract and understanding the impact of technical documents on risk allocation. But it also is a great reminder to give careful thought to the parts of the contract that are of overriding importance to you – and whether these need to be given contractual precedence over other parts in the same contract.
All the above cases show that the parties must be clear about what their contracts (including appended documentation) say. Courts will strive to give full effect to all of the documents forming the contract and the contents of appendices should always be carefully considered. Furthermore, the Courts will generally seek to hold the parties to the bargain they made at the time of entering into the contract.
As a stark example of the long-term consequences of an inconsistency, the contract in the Højgaard case was originally entered into in 2006 and the Supreme Court judgment was not delivered until 2017. Litigation can be prolonged and costly and it is always preferable to invest at the outset in reviewing and negotiating a robust contract to minimise as far as possible the risk of unforeseen discrepancies leading you down the path of dispute.
In order to avoid disputes and to assist in the smooth completion of a project, contracting parties should seek to remember the following:
Communication between parties compiling the contract is of paramount importance. As seen in the above cases, the scope of work can be defined by the appended technical requirements, amendments and schedules. Communication is essential to ensure that the parties ensure the scope of work is clearly and consistently defined and set out to help avoid disputes.
Parties should carefully review design requirements and flag any inconsistencies. Be aware of the particular challenges for construction contracts. In particular, contractors should take note of any potential inconsistencies between prescribed designs, criteria and performance obligations.
An order of precedence clause can be a useful means of determining which clauses or documents will prevail in the event of an inconsistency. It may be worthwhile including such a clause between key documents and within and between technical documents. However, as with Clancy, this type of clause may not always come to the rescue and it is up to each party to fully grasp the risks involved in their specific contract. At the end of the day, be clear that what you seek is stated in clear and legally robust terms from the outset.