Round-up of recent cases

Absolute obligations: clarity required

The judgment of the Court of Appeal in MT Højgaard A/S -v- E.On Climate and Renewables UK Robin Rigg East Limited Anor¹ makes it clear that where a contractor is required to give an absolute warranty, guaranteeing a particular outcome, that warranty must be clearly stated in the main contract conditions and not "tucked away" in a technical requirements document.

In this case, the employer, E.On, alleged that the contractor for the design and construction of the foundations for offshore wind turbines, MTH, had warranted that the operational life of the foundations would be 20 years.

MTH had been specifically required to comply with an international standard known as "J101". Unfortunately there was an error in J101, as a result of which the foundations failed. Remedial works cost €26.25 million.

A year ago, Mr Justice Edwards-Stuart in the TCC held that MTH had indeed warranted that the foundations would have a 20 year operational life and that it was in breach of that warranty. He relied upon a paragraph in the Technical Requirements ("TR") which stated that the foundation design would "ensure a lifetime of 20 years in every respect without planned replacement". 

The Court of Appeal overturned that decision. The warranty in the TR was not replicated/reflected in the main contract conditions which Lord Justice Jackson described as being the "opposite of requiring an absolute warranty of quality", imposing, instead, obligations of due care, professional skill, and adherence to good industry practice. 

Apart from a couple of provisions in the TR, the overall scheme of the TR and J101 did not point to the imposition of an absolute warranty as to operational life. All of the other provisions of the TR were directed towards a "design life", which was different: "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". It did not make sense to regard the two provisions in the TR as overriding all other provisions of the contract. If the contractor was to give an absolute warranty as to operational life, the need for making an allowance for that in its tender "should have been clearly flagged up in the contract documents". 

The Court concluded that a reasonable person in the position of E.On and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with J101 and that such compliance was expected - but not absolutely guaranteed - to produce a life of 20 years.  

Maximum price contract or cost-plus?

The construction contract in Secretary of State for Defence -v- Turner Estate Solutions Limited² for design and construction works at HMNB Clyde was a Maximum Price Target Cost contract which operated as follows: 

• a Target Cost was set at the outset; 
• the Target Cost would be adjusted if there were delays entitling the Contractor to an extension of time and/or if there were Changes to the works; 
• while the works were being carried out, the Contractor would be paid its Actual Costs (as defined in the contract); 
• post completion, the Final Price Payable to the Contractor was calculated by a comparison of the Actual Costs with the Target Cost, in order that the parties could share any costs over-runs or underruns (a 'pain/gain-share' mechanism); and 
• there was a Maximum Price payable to the Contractor which, although also capable of adjustment, could not be exceeded.

As it turned out, the Contractor's actual costs/claims outstripped the Maximum Price by some £68 million. It argued that, because the parties stopped implementing the procedure governing Changes, they stopped adjusting the Target Cost and therefore the contractual arrangements relating to the Target Cost, the Maximum Price and the entire pain/gain-share mechanism had to be ignored. On that basis, it said, it was simply entitled to its actual costs and an allowance for profit, without any restrictions, caps or loss-sharing requirements.

The judge resoundingly rejected that argument on the basis that it was completely contrary to business common sense. He noted that previous case law³ was robust in dismissing arguments by contractors that, because of subsequent events (usually variations), the remuneration provisions of the contract should be altered or done away with, so as to result in the contractor recovering on some sort of cost-plus basis.  

Restraining calls on on-demand bonds

MW High Tech Projects UK Ltd & Anr v Biffa Waste Services Ltd⁴ concerned a dispute between Biffa Waste and MW High Tech as to whether or not a beneficiary of an on-demand retention bond should be restrained from making a call on the bond. 

West Sussex County Council engaged Biffa Waste to design, build and operate a waste treatment plant at a site in Horsham. Biffa in turn contracted the design and construction of the waste treatment plant to the claimant, MW, under an EPC contract ("the contract"). 

Biffa and MW agreed that the contract had been terminated but argued about the basis on which it had been: Biffa asserted that it had terminated the contract for Contractor default in not completing on time; MW asserted that it had accepted Biffa's repudiatory breach of contract.

Biffa claimed liquidated damages for delay and costs to complete from MW which were not paid. 

Under the contract, MW had been obliged to give Biffa a parent company guarantee, a retention bond and a performance bond. The proceedings concerned a call by Biffa under the retention bond. The bondsman was Euler Hermes and the bond in the form of an ondemand bond. 

The contract stated that it was a condition precedent to Biffa's ability to make a call on the retention bond that it had first made a demand under the parent company guarantee. If the parent didn’t accept the call in full within 10 business days, then the condition precedent was deemed discharged. 

Accordingly, Biffa first made a call under the parent company guarantee, asserting that MW was liable to pay liquidated damages and had not done so. When the parent did not pay, Biffa wrote to Euler demanding payment under the retention bond. Euler agreed with MW to delay payment until MW's application to the court for an injunction had been heard. A temporary  injunction was granted and the current proceedings concerned the question as to whether or not that injunction should be lifted. 

MW argued that Biffa should be restrained from pursuing a call on the retention bond because the call on the parent company guarantee had not been "valid" (MW said Biffa was not entitled to liquidated damages). 

The judge noted that the word "valid" did not appear anywhere in the contract and rejected the arguments that the call had to be "valid" and that the validity requirement had to be implied into the contract terms governing such calls. 

He stressed that there are only two grounds for restraining a call on an on-demand instrument: 1) fraud of which the bondsman is aware; and 2) where the terms of the underlying contract preclude the beneficiary from making a call, which must be "positively established" but could, in principle, include an implied term precluding a call except in certain circumstances. 

As it turned out, MW had not shown any grounds upon which it could be right to restrain Biffa from making a call upon the retention bond so the injunction was lifted. 

The cost consequences of "overdesign"

On the same waste project as the case summarised above, MW appointed HEC to provide design services. A dispute arose (which came to court in MW High Tech Projects UK Ltd -v- Haase Environmental Consulting GmbH⁵) concerning the question as to which of the parties to the Appointment for the design – MW or HEC - bore the contractual risk of increased costs associated with enhancement of the design for the project. 

MW alleged that throughout the life of the project, HEC proposed design changes and enhancements which constituted a breach of contract because they did not comply with certain contract documents, namely, the EPC Output Specification and the EPC Delivery Plan. These breaches, said MW, caused significant increased costs to MW for which HEC was liable.  

An adjudicator had held that if the design was carried out with reasonable skill and care then the fact that it would cost MW more to implement that design could not be a breach of contract. 

MW argued that the adjudicator's interpretation of the Appointment was wrong. Mr Justice Coulson in the TCC agreed. He held that HEC did have an overriding obligation to design exercising reasonable skill and care. However, HEC also had "clear and unequivocal" additional obligations to comply with the EPC Output Specification and the EPC Delivery Plan. If it were possible for HEC to comply with those EPC documents by way of a non-negligent design, then in the first instance it was contractually obliged to do so. 

Therefore, to the extent that there were modifications or changes to the design which did not comply with the EPC documents, then under the Appointment HEC were prima facie liable to MW for the cost consequences of those modifications or changes. But (and it was a significant 'but'), that position would be subject to all issues of fact arising out of any alleged approval or consent by MW or any other form of waiver or acquiescence. If, on the facts, HEC could show that specific changes and their consequences were notified to and accepted at the time by MW, with MW’s full knowledge of the effects, then MW may be taken to have evaluated the cost consequences and approved the changes and their consequences. These important factual issues would have to be decided on an item-by-item basis in proceedings separate to the current proceedings. 

_{Notes
¹ [2015] EWCA Civ 407
² [2015] EWHC 1150 (TCC)
³ McAlpine Humberoak Ltd v McDermott International Inc (No. 1) [1992] 58 BLR 1
⁴ [2015] EWHC 949 (TCC)
⁵ [2015] EWHC 152 (TCC)}