Complex contracts and intricate inconsistencies – a reminder of the court's approach to contractual interpretation

In a year in which the Supreme Court will have produced two Judgments on the topic of contractual interpretation, the TCC's judgment in 125 OBS v Lend Lease is a useful reminder of the courts' approach to resolving these disputes and their attempt to find a balance between the so-called literal and commercial approaches to interpretation.

Complex contracts and intricate inconsistencies – a reminder of the court's approach to contractual interpretation

In the recent case of OBS 125 (Nominees 1) and anr v Lend Lease Construction (Europe) Limited and anr [2017] Mr Justice Stuart-Smith applied the principles of contractual interpretation to a construction contract consisting of multiple documents and which, the Claimants contended, imposed a number of discrete obligations on the Defendants.

The Background

The claim concerned glazing defects to the old Stock Exchange building in London. The Claimants (represented by RPC) contracted with the Defendants to undertake design and construction works to the building. Practical completion occurred in July 2008 and between September 2008 and July 2012, 17 panes of glass on the building failed with a number falling from the building. The cause of the spontaneous failures was established as the presence of Nickel Sulphide (NiS) and the building was eventually entirely re-glazed.

The Judgment is an informative compendium on NiS inclusions. For the purposes of this blog it is sufficient to note that the contract required the Defendants to use toughened glass which had been heat-soaked in accordance with BS EN 14179 (the 2005 Standard) with an extended holding phase of four hours (as opposed to the two required in the 2005 Standard).

The Contract

The Contract incorporated the JCT Standard Form Building Contract with Contractor's Design 1998 edition with substantial bespoke amendments and additional documents. It did not, however, contain a hierarchy of the documents. The relevant contractual terms are annexed to the Judgment.

The Dispute

The Claimants' and Defendants' contractual arguments are set out in detail in the Judgment but the main interpretation issues arising were:

1. Was the obligation to use toughened glass heat-soaked in accordance with the 2005 Standard additional to the other contractual obligations relating to NiS or did it qualify or supersede those additional obligations?

2. If the obligations were distinct, were there inconsistencies between them and if so, how should the court deal with these?

Scarcely preceding the reporting of the Supreme Court's decision in Wood v Capita Insurance Services Limited, Mr Justice Stuart-Smith relied on Arnold v Britton for a summary of the approach to be taken by the court when interpreting commercial contracts.

He recognised that it was not his place to add to the multiple statements of principle set out by the higher courts and reconciled the potential differences between the authorities as reflecting "the need to address the particular facts of the case being decided." He repeated the well-known summary of the court's aim to identify "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in that contract to mean" and highlighted relevant factors as: the natural and ordinary meaning of the words; any other relevant provisions of the contract; the overall purpose of the words in question; the facts and circumstances known or assumed by the parties at the time  the contract was executed; and commercial common sense but disregarding subjective evidence of any party's intentions. These factors are to be applied in an iterative way in no particular order and with the court able to repeatedly apply any or all of the factors it considers relevant.

Additional or inferior obligations

The Judge recognised that in complex contracts there are many reasons why multiple clauses or documents may cover the same points. He considered that "the reasons for this may vary from being accidental (as where a contract is compiled from various different sources or documents, more than one of which addresses a particular point) to deliberate (as where the parties have deliberately imposed multiple obligations upon one party in order to protect the position of the other)".

In applying the relevant contractual principles to the present case, Stuart-Smith J started with two of what he considered to be the principle clauses. Focussing on the natural meaning of the words and the syntax used, he identified that in clause 2.1.1, the Employer's Requirements and Contractor's Proposals were referred to separately with the Defendants being required to complete the works in accordance with each. This clause thus imposed distinct and separate obligations on the Defendants. In relation to clause 8.1.1, he identified no less than four discrete obligations regarding the goods and materials to be used.

Contractual inconsistencies

The Court of Appeal dealt with a contract which imposed several obligations which were arguably inconsistent or unequal in MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2015]. Since the hearing of the current claim and handing down of the Judgment, MT Hojgaard has been heard by the Supreme Court. The Judgment is imminent but until then, the Court of Appeal's decision remains good law and was relied upon in the present case.

In MT Hojgaard, the court recognised that the obligation to comply with a particular standard would not prevent the contract from imposing, through the use of clear words, an additional obligation on a contractor to achieve a particular result. This is not uncommon in construction contracts. In the present case, the court had to consider whether the Defendants had agreed to comply with the 2005 Standard and had additionally warranted to provide a curtain walling system with a service life of 30 years and a design life of at least 30 years, using materials which were of good quality and appropriate for their purpose.

The Judge found no "intrinsic inconsistency" between these obligations. To the contrary, he found that the existence of a residual risk of breakage supported the "the commercial sense (or even necessity)" of including additional obligations. Applying the accepted residual risk rate of 1 in 400 tonnes, he held that had the glass been correctly heat-soaked there should have been none, one or a maximum of three to six breakages on the building. These possibilities were not inconsistent with a service or design life of 30 years.

In addition, the contract did not simply require the Defendants to heat soak the glass in accordance with the 2005 Standard. The parties had agreed to extend the holding phase from two to four hours. The scientific effects of this change were less important to the Court than that which it manifested about the parties' contractual intentions: the change was intended to increase reliability and reduce the residual risk.

Exclusion Clauses – a reminder that clear language is required

The 'Technical Clarifications' stated that until the end of the Defects Liability Period (DLP), the Defendants were responsible for replacement and installation of panels which failed due to NiS. The Judge did not agree with the Defendants that this meant the Claimants had accepted the risk of NiS after this period. He noted that the contract stated that the Claimants were responsible for third party risk after Practical Completion but these provisions were not sufficiently clear to exclude all liability for the Defendants in relation to NiS occurring after the DLP.

In any event, the Court held that the glass had not been correctly heat soaked. Even if an exclusion clause existed, it would not have saved the Defendants from the consequences of their breach of contract.

The importance of record keeping

The Judgment also reiterated the importance of good record keeping - particularly when the contract requires it.

The Defendants were required to provide documentation which evidenced that the glass had been heat soaked. There were clear gaps in the documents provided and the Court found that some of the documents had been fabricated.  By failing to provide the relevant documentation, the Defendants were in breach of contract. The absence of contemporaneous evidence that the Defendants had complied with their contractual obligation was fatal to their defence.

Conclusion

Despite preceding the reporting of Wood v Capita, this case is an example of the literal and commercial approaches to contractual interpretation being combined, to an extent.

Mr Justice Stuart-Smith began by focussing on the literal and natural meaning of the provisions which guided him to the conclusion that the parties intended to impose multiple obligations on the Defendants. He then took an iterative approach of testing his conclusion against other provisions in the contract and found that the existence of residual risk (known to both parties at the time of the contract) had been mitigated by the inclusion of more onerous obligations. This conclusion was consistent with both the literal meaning of the words used and commercial common sense.