The dangers of commercial contract disputes

Big commercial contract disputes are not uncommon. Certain general principles of interpretation or constriction will be called into play: What exactly was the intention of the parties? What was the practice in the particular trade or industry? What was the respective bargaining power of the parties? What are the particular specific terms of this contract? Did the contract follow standard terms? Were the standard terms departed from?

It has to be accepted that businessmen not concerned with the niceties of the language of the lawyer draftsman often use imprecise, opaque, and inconsistent wording.

The judge will lean against the party who proposed or drafted the terms and is seeking an interpretation in their own favour (see Wood v Capita Insurance Services Ltd [2017] UKSC 24 and my previous article ‘Interpretation of contract’ (SJ 161/20)).

The contractor contracted with the employer for the design and build of an offshore windfarm, to conform with the minimum required specifications provided by the employer, with technical requirements in associated documents. The contractor was to ensure a period of 20 years free from repair and maintenance. The specifications and technical requirements were defective, the equations and the calculations were strong, and within a year or so the wind turbine failed through fatigue.

The employer sued the contractor, relying upon the defective design and build, and the failure to fulfil the 20-year trouble-free period. The contractor, by way of defence, claimed that they had complied with the requirements stipulated by the employer, exercised reasonable, competent care, skill, and knowledge, and that the defect lay in the requirements stipulated by the employer, exonerating them from liability and releasing them from the 20-year obligation (see MT Hojgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd [2017] UKSC 59).

This kind of situation has arisen often before. For example, in The Hydraulic Engineering Co Ltd v Spencer and Sons (1886) 2 TLR 554, a contractor promised to supply goods, cylinders capable of withstanding a specified pressure, conforming to employer specifications and “free from defects”. The goods were supplied conforming to employer specifications, but they were defective.

In AM Gillespie and Co v John Howden and Co (1885) 22 SLR 527, a contractor promised to design and build a ship with a capacity for x tons deadweight, in conformity with a model supplied by the employer. The contractor complied, the model was defective, and the ship did not meet the required capacity.

In another case, Thorn v The Mayor and Commonalty of London (1876) 1 App Cas 120, the contract for the building of a new bridge required certain specifications stipulated by the employer to be followed by the contractor. In the course of the work the specifications were found to be defective, so the contractor had to carry out a good deal of additional work at considerable cost, which he claimed from the employer. It was held that the contractor should have examined the specifications at the beginning, not just blindly followed them. The employer is not expressly or impliedly warranting or guaranteeing their soundness.

The governing principle appears to be that the general and normally express obligation on the contractor to deliver goods or to carry out works which are not defective overrides the obligation to conform with the employer’s specifications. The contractor must decline the contract, renegotiate the terms, or use their skill to modify or improve upon the specifications, so that the specifications themselves enable the general purpose of the contract satisfactorily to be fulfilled.

For example, in Cammell Laird and Co Ltd v The Manganese Bronze and Brass Co Ltd [1934] AC 402, the contractor made a ship’s propellers according to the working drawings supplied by the employer. The propellers were too noisy. The contractor was liable. Naturally when things go wrong such a situation gives the employers the opportunity to claim breach on the part of the contractor, and puts the contractor in an uncertain and vulnerable position. Beware the specifications emanating from the employer. In MT Hojgaard, regarding the defective wind turbine, the employer won, and the contractor lost.

In these commercial contracts a multiplicity of documents may arise, such as subsidiary technical documents, and these subsidiary technical documents may contain important requirements. The presumption will be that all these documents together with the main or principal document constitute the contract; the lesser documents are incorporated into the whole.

The contractor should take care before promising a minimum period free from defect with no maintenance or repair necessary. Avoid inadvertently giving an express or implied guarantee or warranty. It is better to promise no more than best endeavours to ensure a specified trouble-free period.

Alec Samuels is a barrister and former reader at Southampton University