Offshore wind farms tend to split the public like Marmite: most people seem to be either vocal supporters or vehement opposers. Unlike Donald Trump, who clearly falls into the latter category, I’m in the former camp. I think that they are essential to meet our future energy needs. However, one thing that I’ve always wondered is, how do contractors actually go about building them? The case of MT Højgaard v E.On sheds some light on how the foundations are constructed, and it’s clearly not an easy task.
MT Højgaard A/S v E.On Climate & Renewables UK
E.On engaged MTH to construct the foundations for 60 wind turbines in the Solway Firth for a sum in excess of €100 million. MTH was to use a jack-up barge called the LISA to do this. However, after the works started, the LISA proved inadequate resulting in delay. Therefore, the engineer issued three variation orders requiring a different vessel to undertake the works. E.On hired the Resolution and provided it to MTH free-issue.
Subsequently, a dispute arose as to how to value the omission under the contract’s variation provisions:
- MTH argued that the original contract price for providing the LISA should be omitted, just under €12.9 million.
- E.On argued that it should be the hypothetical cost of MTH using the LISA to install the foundations. This would have taken considerably longer, hence E.On’s eye-wateringly high proposed omission of over €57 million.
Stuart-Smith J’s decision
The dispute turned on the interpretation of the contract’s variation provisions and it fell to the newest TCC judge, Stuart-Smith J. Even if you are not interested in reading about the problems of laying foundations at sea, Stuart-Smith J’s judgment is worth a read for his review of the relevant law concerning the interpretation of contracts.
Stuart-Smith J referred to the conclusions reached in other cases that, where there are two possible constructions, the court is entitled to prefer the construction that is consistent with business common sense. However, Stuart-Smith J said that courts should be cautious when invited to take a view about whether the consequences of an interpretation are commercially unacceptable because:
- The court will seldom know what motivated parties to agree particular terms and, in any event, such evidence of pre-contractual negotiations is likely to be inadmissible.
- Courts do not easily accept that parties make linguistic mistakes.
Applying these principles to the facts, Stuart-Smith J said that the circumstances in which the variations came to be issued were not a “reliable guide or aid to interpretation”. He preferred MTH’s interpretation of the variation provisions, which he said accorded with the basic principle underpinning the contract that:
“…discrete part of the Works made a discrete contribution to the Contract Price and, if MTH carried out part of the work, it should be entitled to be paid that part’s contribution to the Contract Price but, if it did not, it should not be paid.”
In the event of a delay, Stuart-Smith J said that the remedy was liquidated damages, and not the adjustment of the contract price as E.On contended.
What does this mean for contract administrators?
I can certainly see the logic in Stuart-Smith J’s conclusions. As he said, E.On’s interpretation was:
“…at best hypothetical and at worst fictitious.”
The case may well turn on its facts because the variation provisions were bespoke and not from a standard form of contract. However, I still think that anyone involved in the administration of contracts should take note of the judgment.
Contract administrators and the like sometimes issue instructions that result in variations to a contract, but which they consider the contractor is not entitled to payment due to the circumstances in which the instruction was issued. For example, in the event that a contractor was in delay and an instruction was issued changing the method of working to prevent further delay, the contract administrator might be of the view that the contractor is not entitled to any increased costs because they arose from the contractor’s culpable delay. However, unless this is recorded in the instruction and agreed by the contractor, based on Stuart-Smith J’s findings, the circumstances leading to the instruction might be irrelevant when determining whether the contractor is actually entitled to further payment under the variation provisions.
Either way, I’m sure this isn’t the last we’ll hear of MTH and E.On. As Stuart-Smith J pointed out:
“…E.On appears to have a powerful case for saying that MTH had contractual responsibility for the fact that the Contract fell into serious delay.”
I’m guessing the parties might not agree on MTH’s resulting liability for damages.