Interpreting multiple design obligations in construction contracts

A decision of the TCC earlier this month has considered the interrelationship between general fitness for purpose obligations and more specific quality obligations contained in a technical specification. In finding that multiple design obligations were intended, the case raises similar issues to those presently before the Supreme Court in the MT Hojgaard litigation.

125 OBS (Nominees 1) Ltd v Lend Lease Construction (Europe) Ltd

Lend Lease was engaged by 125 OBS under the JCT Standard Form of Building Contract with Contractor’s Design 1998 edition (with bespoke amendments) to redevelop 125 Old Broad Street to provide Category A office and retail space (the “Contract”). Over a four year period following completion of the works 17 glass panes on the outside of the building spontaneously failed due to Nickel Sulphide (“NiS”) inclusions. A decision was taken to replace the outer skin of the glass curtain walling. Litigation proceeded in order to determine who should bear the cost of the remedial works.

The Contract was comprised of a number of different documents, including the JCT conditions, Employer’s Requirements (“ERs”), Contractor’s Proposals (“CPs”) and Technical Clarifications (“TCs”) raised during the tender process. No contractual hierarchy or order of precedence had been agreed for these documents. A number of different provisions were relevant to the standard required of the glass panels:

• Clause 8.1.1 stated generally that the materials used should be “of good quality” and “appropriate for their purpose”.
• The ERs required the “service life” of the glass (defined as the period of time during which no excessive expenditure is required on operation, maintenance of repair) to be no less than 30 years.
• The CPs stated that the glass was to have a “design life” of at least 30 years.
• The CPs also contained a specification document stating that the glass was to be “heat soak tested to reduce the risk of failure due to [NiS] inclusions”. Heat soaking was to be in accordance with a specific British Standard save that heating was to last 4 hours rather than the 2 hours specified by the BS.

Whilst various factual issues required resolution as to the cause of the glass failures, the principal contractual issue between the parties was whether the requirement for heat soak testing defined Lend Lease’s quality obligations in relation to the glass panes, or whether the other fitness for purpose and service life obligations applied separately in addition. In other words, could Lend Lease still be liable for the failures if it had heat soaked the glass panels in accordance with the specification?

Separate obligations

The court found that the obligations for materials to be of “good quality” and “appropriate for their purpose”, as well as the service life requirement in the ERs, were separate and additional obligations to the requirement to heat soak test the glass panels. Central to the court’s analysis was its finding that there was no inconsistency between the relevant terms. As the court noted: “The importance of frank inconsistency is that if two clauses dealing with the same area are mutually consistent, good reason will be required before the Court holds that one clause is effective to the exclusion of the other.”

When considering what was meant by “appropriate for their purpose” the court identified that this was to provide an outer skin of the building with a service life (as defined) of 30 years, as stated in the Employer’s Requirements. In order to achieve this the service life of the glass used in the curtain walling also had to be 30 years. The court placed a large emphasis on the prestige and position of the building and said that the appropriate purpose of the works would have been “self-evident”, even if the contract itself did not expressly state it.

The fact that the Contract also included a specific requirement to heat soak test in accordance with the British Standard and that there would be a residual risk of NiS breakages after such testing, did not justify the reading down of Lend Lease’s other obligations. The fact that more stringent heat soaking was required than specified in the standard supported an interpretation which reduced the overall risk to 125 OBS as far as possible. There was no reason, therefore, why the residual risk of NiS breakages ought not to be covered by the general fitness for purpose and service life obligations stated elsewhere in the Contract.

Conclusions and implications

Construction contracts commonly provide for multiple quality obligations, some of which will be contained in general terms and conditions and others within technical schedules. The present case provides helpful guidance as to how such obligations are to be interpreted in the absence of a contractual order of precedence. The court’s emphasis on the role of inconsistency in such circumstances suggests that in most cases such obligations will operate separately and cumulatively.

The present case has similarities with the MT Hojgaard litigation, presently on appeal to the Supreme Court. In MT Hojgaard, certain parts of a technical schedule imposed an absolute requirement to achieve a 20 year lifetime for certain offshore wind turbines, whereas other parts of the contract only required a “design life” of 20 years. The TCC initially found that there was no inconsistency between these two obligations, one being in the nature of a fitness for purpose obligation and the other requiring reasonable skill and care. The Court of Appeal disagreed, finding that the absolute requirements were inconsistent with the overall scheme of the contract and were “too slender a thread” to hang a finding that MT Hojgaard had warranted a 20 year operational life for the turbines (click here to read our full Law-Now on the Court of Appeal’s decision).

By contrast, in the present case the court found that the overall scheme of the Contract was to impose multiple quality obligations on Lend Lease. Using the wording adopted in MT Hojgaard, the court stated that the contract did not provide “too slender a thread upon which to hold that the Contractor submitted to other obligations in addition to the obligation to heat soak”. It was clear that the prestige of the building meant it should be completed to a high and lasting standard.

It remains to be seen whether the broader concept of inconsistency applied by the Court of Appeal in MT Hojgaard will be upheld by the Supreme Court. For the time being, parties should be aware of the potential for a court to find that performance must meet all of the standards prescribed by their contract and ensure that the drafting accurately reflects what standard they believe is expected.

References:

125 OBS (Nominees 1) Ltd v Lend Lease Construction (Europe) Ltd [2017] EWHC 25 (TCC)

MT Højgaard A/S v E.On Climate And Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407