Construction Matters – June 2015
Print newsletter09/06/2015

Arguing alternatives to an agreed contract must make commercial common sense
The Technology and Construction Court (TCC) has confirmed in the case of Secretary of State […]
The Technology and Construction Court (TCC) has confirmed in the case of Secretary of State for Defence v Turner Estate Solutions [2015] EWHC 1150 (TCC) that it will interpret unclear contractual obligations using ‘business common sense’.
This case involved a Maximum Price Target Cost contract which included a mechanism for sharing costs over-runs or under-runs commonly known as a ‘pain/gain’ mechanism. At some point whilst the works under the contract were ongoing, the parties stopped implementing the adjustment process under the pain/gain mechanism.
Following completion of the works, Turner Estate Solutions’ (TES) actual costs far outstripped any likely Maximum Price under the contract.
TES argued that the parties’ failure to follow the adjustment process under the contract meant that the entire pain/gain mechanism in the contract could be ignored, and instead TES would be entitled to their actual costs and an allowance for profit, without any restrictions, caps, or loss sharing.
The Secretary of State for Defence (SSD) argued that the contractual provisions still applied despite the fact that the parties had not always followed them.
The TCC held that TES’ argument was a radical position to adopt because it changed in a fundamental way the whole basis of the bargain between the parties, replacing the original pain/gain agreement with the cost-plus contract. The Court felt it would be a very odd thing if a procedural failure suddenly meant that the commercial bargain between the parties had been fundamentally altered.
For this reason, the TCC concluded that TES’ arguments flouted business common sense.
In reaching this view, the TCC was persuaded by hypothetical examples put forward by SSD, which illustrated the potentially odd consequences of what TES argued should be the correct construction of the contract. For example, a failure to follow the change proposal procedure just once over a five-year period would change the contract from a carefully calibrated arrangement whereby cost over-runs and under-runs were shared between the parties, to a simple, straight-forward cost plus contract. This could not have been the intention of the parties.
The TCC referred to the leading case on the modern approach to the construction of contracts: Rainy Sky SA v Kookmin Bank [2011] UKSC 50: [2011] 1 WLR 2900, which held that the Court must consider the language used in a contract and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. If there are two possible constructions of a contract, the Court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
The TCC also referred to the case of Barclays Bank PLC v HHY Luxembourg SARL [2010] EWCA Civ 1248 in which the Court said, if a clause is capable of two meanings, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.
Comment
This case is a reminder of the need for clear drafting of contractual provisions, and for parties to operate the provisions of the contract whilst the works are ongoing. Two expensive sets of arbitration proceedings and proceedings in the TCC could have been avoided if the parties had followed the terms of the contract from the outset.
However, it is inevitable that disputes will sometimes arise over the correct interpretation of a contract. A party wishing to obtain the Court’s approval of a certain interpretation will be assisted by hypothetical examples illustrating how the proposed interpretation of the clause would work in practice, and by demonstrating that the interpretation put forward makes sense commercially.

Engineers: does your ‘Duty of Care’ mean you have a ‘Duty to Warn’?
Professional consultants have a duty to exercise reasonable skill and care. In the recent case […]
Professional consultants have a duty to exercise reasonable skill and care.
In the recent case of Goldswain and Another v Beltec Limited and Another [2015] EWHC 556 (TCC), the Technology & Construction Court (TCC) confirmed that in some circumstances, reasonable skill and care will require an engineer to warn its employer client if it suspects that the contractor is not carrying out the works correctly.
The case involved basement excavation works which caused the house above to collapse.
Before the collapse, the engineer visited the basement to check the first pin being cast by the contractor. The engineer found that the contractor did not have copies of the engineer’s drawings on site and the reinforcement for the pin had not been carried out in accordance with the design. The engineer told the contractor that the pin should be completely replaced.
Following the collapse, the Court had to consider whether the engineer was negligent in failing to warn the owners of the property regarding the problems that the engineer found with the contractor’s works when he inspected the first pin.
The Court concluded that the engineer did what many other engineers would do. The engineer’s permanent works design was one which was capable of being implemented safely by the contractor (because if what was specified on the drawings was provided with care, following the sequence and using appropriate propping, there was little doubt that the basement could have been created without any significant damage to the structure above).
The engineer was not negligent because:
- the engineer’s retainer did not include an ongoing obligation to supervise the contractor’s works;
- the purpose of the site visit was simply to see the first pin, and there was no danger at that stage or indication that the contractor was completely out of its depth; and
- a sizeable number of engineers would have done “no more and no less” in the same situation.
The duty to warn will often arise when there is an obvious and significant danger either to life and limb or to property. It can arise however when a careful professional ought to have known of such danger, having regard to all of the facts and circumstances. In considering a case where it is alleged that the careful professional ought to have known of danger, the Court will be unlikely to find liability merely because at the time that the professional sees what is happening there was only a possibility in future of some danger. Any duty to warn may well not be engaged if all there is is a possibility that the contractor in question may in future not do the works properly.
Comment
As a matter of good practice, engineers should consider raising any issues that they identify on site with the employer and with the contractor in writing in order to protect their position in the event that things do go wrong.
Homeowners should consider taking out adequate insurance cover before instructing works, should ensure that the contractor has the required skill and experience, and consider engaging a supervising engineer to oversee the contractor’s works.

Is your contract fit for purpose? A lesson in making sure your contract does what you want it to do
In the recent case of MT Højgaard A/S v E.On Climate and Renewables UK Robin […]
In the recent case of MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another [2015] EWCA Civ 407, the Court of Appeal has confirmed that if the contract is worded clearly enough, a contractor can have a double obligation both to comply with particular standards and to achieve a particular, specified result. Where this applies the contractor “must as a minimum comply with the relevant specifications and standards. He must also take such further steps as are necessary to ensure that he achieves the specified result,” (paragraph 79 of the judgment).
The project in this case involved the design, construction and installation of foundations for wind turbines. The claimant contractor carried out the project in compliance with the contract including an international standard for the design of such turbines: ‘J101’. Unfortunately, there was a mathematical error in J101 which meant that the foundations failed.
E.On successfully argued in the earlier High Court decision that the contractor had a double obligation to comply with the relevant international standard and to achieve a service life of 20 years in relation to the foundations of an offshore wind farm. Therefore even though the Contractor had complied with the relevant standard (and had not been negligent) it was still liable when the works were found to be defective.
However in the Court of Appeal this decision was reversed.
The Court of Appeal reached this decision because although the Employer’s Requirements referred to a design life of 20 years, it considered that the obligations in the main contract conditions took precedence over the Employer’s Requirements. The contract conditions did not impose an absolute obligation of quality but instead required the contractor to act professionally and with reasonable skill and care.
There was no free standing guarantee or warranty within the contract conditions that the works would have a service life or a design life of 20 years. Without that warranty, the contractor did not have an absolute obligation and there was no breach.
Comment
In engineering contracts it can be important for the client to have the ultimate recourse of a fitness for purpose clause.
Key points to note arising from this judgment are:
- Make the wording of the purpose clear and consistent. In this case there were inconsistent references to both a design life and a service life.
- Put the fitness for purpose clause in the document with the highest order of precedence or certainly in the main contract conditions (rather than “hidden” away in a section of the Employer’s Requirements / specification)
- Make the fitness for purpose a clear, standalone clause.
Clearly the above may mean a fitness for purpose clause is flagged at tender stage and there is a risk to a client that it will subsequently be rejected/negotiated out, but the alternative is an uncertain clause that may not be enforceable in any event.
For contractors who are pursued on the basis that they have breached a fitness for purpose clause, this case gives a potential defence depending on how, and where within the contract, the clause is written.