England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIS HONOUR JUDGE HAVERY, QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		Thursday 14th June 2001

LORD JUSTICE TUCKEY:

Lord Justice Tuckey: This is the judgment of the Court.

Introduction.

1. On 6 July 1994 Phillips Petroleum Co. UK Ltd. (P) entered into a Contract with Snamprogetti Ltd. (S) under which S were to perform engineering design and procurement work for P for a project designed to increase gas production by providing compression facilities on the Hewett platform in the North Sea and rationalising P's compression facilities onshore at Bacton in Norfolk. In these proceedings P claim that defective design by S has caused them substantial loss. S dispute the claim but contend that the Contract limits their liability for defective design to £75,000 and, if it does not, it should be rectified to this effect.
2. This is an appeal from Judge Havery, QC's judgment on six preliminary issues. For present purposes they can be summarised as follows:

(1) Whether the reward and risk scheme relating to quality in Section 3 of the Contract had the effect of limiting S's liability to £75,000.

(2) If not, whether the Contract should be rectified to this effect and

(3) Whether the general warranty of quality contained in clause 36 of the General Conditions of the Contract could be relied on before completion.

3. The Judge found that the Contract did not limit S's liability. He decided that although the parties had a common intention to limit S's liability it was not sufficiently precise to justify rectification. He also decided that clause 36 could be relied on before completion. S appeal each of the Judge's conclusions. By their respondent's notice P challenge the Judge's finding about the parties' common intention.

The Contract.

4. The Contract is a substantial document but the two page form which the parties signed says that the General Conditions prevail over any conflicting provisions in the other Sections.
5. S's work under the Contract, defined as "the Work", was to enable P to order the equipment and materials and to award the construction, installation and commissioning contracts necessary to carry out the project. It consisted of preliminary engineering (Phase 1), detailed design and procurement (Phase 2) and follow-on engineering (Phase 3).
6. In their claim against S, P allege breaches of clauses 3 and 36 of the General Conditions the material parts of which say :

3.1 The Contractor (S) shall perform the Work ........ in accordance with the provisions of this Contract.

3.5 In performing the Work the Contractor shall observe and exercise the standards of skill, care and diligence adhered to by recognised first class contractors performing work of a similar nature.

3.6 The Contractor warrants that it has the required skills and capacity to perform and that it shall perform, the Work in a professional manner utilising sound engineering and management procedures in accordance with all applicable Regulations, accepted industry practices ........

36 The Contractor warrants that the Work will be free from defects in design and workmanship furnished or performed under this Contract........

7. Section 3 of the Contract where the risk and reward scheme appears is described as a Price Schedule. S were to be paid a "unit rate/lump sum fee" based on "man hour rates, lump sum fees and estimated man hours for the proper fulfilment of all obligations under this Contract". The rates and estimates were set out in the Schedule.
8. The reward and risk scheme is set out in clause 3.5 of the Schedule which starts :

3.5.1 Reward and risk incentive schemes shall apply in respect of Phase 2 of the offshore Work.

Scheme 1 relates to completion. S were to be rewarded if they completed their work earlier than the Contractual milestone dates but accepted a "risk" for failure to complete by these dates. The clause continues :

3.5.1.2 Scheme 2 - Cost of Quality

The Company [P] is committed to a total quality programme in the performance of its business and expects the Contractor to adopt a total quality approach to the Work

During Phases 2 and 3 of the Work, the Company shall monitor the Contractor's performance of the Work and, at the end of three (3) months after commissioning of the Permanent Facilities, the Company shall assess the Contractor's overall performance in respect of compliance with the requirements of this Contract, and, in particular, quality of deliverables, economic design, cost/manhour control and manhours expended by the Contractor on rework.

Reward

Subject to the Company's assessment and at its discretion, the Company shall reward the Contractor for achievement of a total quality performance of the Work by the payment of a single incentive bonus up to a maximum sum of £20 times six per cent (6%) of the total Phase 2 off-shore direct man-hours

Risk

Should the Contractor not achieve a total quality performance and/or the estimated number of manhours, agreed by the Company and the Contractor, to be expended by the Contractor in the rectification of [sic] (rework) of errors, omissions, poor engineering, defective workmanship or other failure of the Contractor is in excess of six per cent (6%) of the total Phase 2 offshore direct manhours, the Contractor shall pay to the Company the amount calculated as follows:

£10 for each estimated rework manhour in excess of the 6% of the total Phase 2 offshore direct manhours up to a maximum of £75,000.

Payment Schedule

The amount of reward or risk, as applicable, shall be settled by the issue of an approved Change Request at the end of three (3) months after commissioning of the Permanent Facilities.

The application of these Risk and Reward schemes shall not affect the Company's rights under this Contract

.

The final paragraph was described by the Judge as "the tail-piece".

9. As the reward or risk payment was to be settled by an approved Change Request, the Change Request provisions in the General Conditions feature prominently in S's arguments on construction. Clause 22.1 entitled P to propose a change by serving a Change Request in a prescribed form on S. By clause 22.2 :

Changes may include :

(a) changes to the Scope of Work or to the Design Basis Memorandum;

(b) increases or decreases in the quantity of the Work;

(c) changes in the character, quality, nature or method of performance of any part of the Work;

(d) adjustment to the Contract Schedule.

Clause 22.4 makes it clear that rework will not be considered a change, so any rework had to be carried out at S's own expense. Clause 23 requires the Contractor to complete Part 2 of the form detailing the cost and schedule effects of the Request. Clause 24.1 requires the parties to negotiate the effects of the change with the object of achieving the change with minimum variation to the terms of the Contract. Clause 25 entitles P to complete Part 3 of the form at which point it becomes an approved Change Request even if the parties have not agreed its cost and schedule effects. By clause 26.3 upon receipt of an approved Change Request "all of the Contractor's obligations under this Contract shall apply to such approved Change Request".

10. Clause 30.1 gives P the right to terminate the Contract "with cause" if, among other things,

(e) There is a failure by the Contractor to perform any of its obligations hereunder or breach by the Contractor of any covenant, warranty or other undertaking given herein or in connection herewith.

11. Clause 30.6 says :

If the Company terminates the Contract with cause under Clause 30.1 the Contractor shall pay the Company damages (other than damages for delay) for any loss suffered by the Company resulting from the events specified in Clause 30.1or from the termination of this Contract including (without limitation) the additional costs of and occasioned by completing the Work itself or having it completed by another contractor.

12. Clause 37 provides for a maintenance period of two years after the issue of the Completion Certificate. It continues :

37.2 At any time during the Maintenance Period the Company may notify the Contractor that the Work has been found in the Company's sole opinion to be defective ........ The Contractor shall, within such reasonable period as may be stated by the Company in such notice, and at no cost to the Company rectify such Work and also carry out all necessary Work associated with such rectification.

The Contractor's liability in respect of remedial Work under this Contract shall be unlimited.

37.5 The provisions of this Clause 37 shall not limit the Contractor's liability under Clause 36 or under any other provision of this Contract. The Company's rights under this Clause are in addition to the Company's rights under Clause 36 and otherwise in this Contract and may be exercised by the Company separately from such other rights.

13. The only other clause we need refer to is clause 44.1 which says :

This Contract constitutes the entire agreement of the parties in respect of the Work and supersedes all prior or contemporaneous written or oral understandings agreements or representations in relation to the Work.

The effect of the risk and reward scheme

14. The Judge concluded that the General Conditions taken on their own envisage that the Contractor should be liable under the Contract for breach of its terms. The reward and risk scheme did not impinge on this. That scheme provided for an adjustment of the price rather than payment of damages and was, as it said, an incentive which applied regardless of whether the Company suffered damage or, as the case may be, enjoyed benefit. His view was reinforced by the fact that the scheme appeared in the Price Schedule and that the Contract provided that the General Conditions prevailed. He reached this conclusion regardless of the "tail-piece".
15. Miss Boswell QC, for S, submits that the Judge should have construed the Contract so that the maximum payable under Scheme 2 replaced or limited S's liability for damages for breach of contract in respect of those breaches of contract which were taken into account on the assessment under the scheme. She accepts that the Contract does not say this in terms, but, she submits, such a limitation can be inferred from or spelt out of the factual matrix, the mechanism by which the reward and risk amount was to be settled and the fact that it was common ground that Scheme 1 was intended to and did supersede S's proposed liability to pay liquidated damages. Scheme 2 provided a simple and sensible substitute for compensating P for defective design measured by the amount of rework which the parties accepted was a good measure of quality. But Miss Boswell accepts that the limitation is not absolute because the scheme only applies to Phase 2 and to defects which have been discovered by the time the amount of reward or risk is settled and does not apply at all if P terminate the Contract for cause.
16. In considering these submissions we bear in mind, what Mr. Charlton QC for P described as hornbook law, that a contract breaker (which S is presumed to be for this purpose) who asserts a limit to or an exclusion of his common law liability must establish that the relevant provision is clearly worded to achieve that result. Neither the limitation nor the qualifications for it which Miss Boswell has to accept are expressly stated in this long and detailed contract.
17. Clauses 3 and 36 of the General Conditions contain unqualified obligations which, standing on their own, entitle P to damages for defective design. One would not expect to find the unlimited rights conferred by these clauses cut down by the terms of a price schedule which has to defer to the General Conditions in the event of conflict. But here there is in fact no conflict because the tail-piece makes it clear that the scheme does not affect P's rights under the Contract which must include their rights to enforce the obligations imposed by clauses 3 and 36.
18. We do not see any inconsistency between (i) an incentive scheme which adjusts the price so as to reward good and penalise poor quality performance without reference to its consequences and (ii) obligations to compensate for the consequences of breaches of contract.
19. We see nothing in the factual matrix which affects the above analysis. Miss Boswell tried to rely on the finding which the Judge made on the rectification issue about the parties, common intention, but we do not think that this can help her on the issue of construction in the light of the entire agreement clause which expressly excludes all prior or contemporaneous understandings or agreements.
20. Miss Boswell's argument based on the Change Request mechanism is that once an approved Change Request has been issued, it has the effect of varying the Contract so as to sanction any breaches which have resulted in rework. Thus, she submits that the tail-piece and clause 36 apply to the Contract as so varied so that P cannot subsequently rely on those breaches. We think this argument stretches the meaning of the Payment Schedule of Scheme 2 too far. It does not say that it has the effect Miss Boswell contends for. It deals with the settlement of an amount of money which has the effect of increasing or reducing the contract price at a time when S's work will have been completed or almost completed. We do not see that it can have the effect of expunging liability for breaches of contract which may or may not have resulted in rework.
21. The fact that Scheme 1 replaced S's liability for liquidated damages is not to the point. Just because Scheme 1 had this effect it does not follow that Scheme 2 had the effect contended for unless the Contract so provided. So this argument begs the question. In fact, as far as Scheme 1 is concerned, the parties' intentions were made clear because clause 35 of the General Conditions, which was a liquidated damages clause, was deleted from the Contract and the words ("other than damages for delay") were added to clause 30.6. No such alterations were made to the quality provisions in the General Conditions.
22. So, for these reasons, we do not accept Miss Boswell's submissions. We think the Judge reached the right conclusion on this issue of construction for the reasons he gave.

Rectification.

23. S's claim to rectify the Contract has had a chequered history. It has always been based on common mistake but originally it was contended that the reward and risk scheme was intended to replace all liability for defective design. By the time of the trial the only rectification sought was deletion of the tail-piece. The Judge did not have to decide the rectification issue because, rightly in our view, he found that, irrespective of the tail-piece, the reward and risk scheme did not have the effect contended for.
24. However, the Judge concluded :

38. I am satisfied that at the time of signing the Contract, Snamprogetti intended that its general liability under the warranty of quality should be limited by the reward and risk scheme, the limit ultimately agreed being £75,000. I am satisfied that those negotiating on behalf of Phillips, specifically Mr. Rayner and Mr. Dennis, knew that that was the intention of Snamprogetti. There is no suggestion of dishonesty or sharp practice on the part of Phillips. I conclude that Phillips were negotiating on the basis that that was the effect of the scheme. On the other hand, they had no interest in limiting Snamprogetti's liability in that way; their interest was to reach agreement with Snamprogetti. They intended to limit Snamprogetti's liability only in the sense that they intended to enter into an agreement which they assumed had that effect. But that is, in my judgment, a sufficient intention for the purposes of rectification, if the other requirements are fulfilled.

39. Thus both parties intended to enter into a contract in precisely the terms of the actual contract, but they both believed or assumed, mistakenly, that it had the effect of limiting Snamprogetti's general liability for breach of warranty to £75,000. Such a situation can justify rectification. As Brightman J said in In Re Butlin's Settlement [1976] Ch. 251, 260 :

........ rectification is available not only in a case where particular words have been added, omitted or wrongly written as the result of careless copying or the like. It is also available were the words of the document were purposely used but it was mistakenly considered that they bore a different meaning from their correct meaning as a matter of true construction. In such a case ........ the court will rectify the wording of the document so that it expresses the true intention ........

25. But the Judge then went on to reject the claim for rectification saying :

41 The reward and risk scheme applied in respect only of the Phase 2 offshore Work. One question is whether it was intended to limit liability for breach of performance or quality terms in relation to other parts of the Work. It is not clear that the negotiators for either party gave their minds to that question. Mr. Lake's evidence was that it was his understanding throughout the negotiations that the cap on liability related to Snamprogetti's overall liability under its design contract, though he would accept that Snamprogetti would be liable for defects discovered after the expiry of three months from the conclusion of the commissioning of the permanent facilities. That is another point that does not appear to have been considered. Thus the common intention which I am satisfied existed was not in my judgment sufficiently precise to justify rectification of the contract.

26. After the Judge had circulated his draft judgment S applied to amend their application to rectify in an attempt to reflect the Judge's finding at paragraph 38 of his judgment. They did so by saying that the words we have underlined should be added to the tail-piece so it read :

The application of these schemes replaces the Company's rights to claim damages in relation to delay (scheme 1) and breach of warranty in relation to Phase 2 off-shore Works (scheme 2) otherwise the application of these Reward and Risk Schemes shall not affect the Company's rights under this Contract

.The Judge refused the application saying simply that it would not have the desired effect.

27. S appeal the Judge's refusal. Mr. Charlton says S should not be allowed to amend because it would be unfair to P. They would want to call evidence from those involved in negotiating the Contract about their reaction to the term now proposed. He also submits that as a claim for rectification requires proof of a common intention which can be formulated with certainty the mere fact that S have changed their case shows that the proposed amendment is doomed to failure.
28. We should not like to decide this appeal on a pleading point. However, we doubt whether the proposed amendment fully reflects the Judge's finding. Nevertheless we shall proceed on the assumption that it does or that an amendment could be formulated which did.
29. This is not to say that the difficulty in formulating the way in which the Contract should be rectified is not significant and this leads us to the Judge's reason for refusing rectification. He says, in effect, that the common intention was not sufficiently precise because it was in fact qualified by the Contract. We do not think lack of precision is the answer. A common intention that the limitation of liability should be general is not imprecise. But it seems to us that the real difficulty is that such an intention is inconsistent with a qualified limitation. A limitation of liability which is admittedly restricted to Phase 2 and in time and does not apply at all to termination for cause is obviously not the same as an unqualified general limitation.
30. Miss Boswell submits that the greater should include the lesser. In other words if the common intention was to limit any liability then the court can and should give effect to at least a qualified limit. But we think there is a conceptual difficulty about this. If it is accepted that the limit is qualified then the court cannot give effect to a common intention which is unqualified. Put another way, there is in truth no such common intention. The Contract itself which compels acceptance of the qualification shows that there is no unqualified limitation.
31. We think this is a complete answer to the claim for rectification. But in case we are wrong about this we will deal shortly with Mr. Charlton's other reasons for saying that the claim for rectification should fail which essentially attack the Judge's finding that there was a common intention.
32. Mr. Charlton starts by reminding the court that rectification for common mistake based on the common intention of the parties must be founded on some outward expression of accord. A high standard of proof is required (see Jocelyne -v- Nissan CA [1970] 2 QB 86, 98 and The Olympic Pride [1980] 2 LLRep. 67, 72.) Furthermore, where there is an entire agreement clause this

may tend to show in fact no inconsistent governing intention has subsisted and that hence no basis for rectification has arisen because the parties have intended to be bound by the document in the material respects regardless of prior or other intentions (Spry on Equitable Remedies 5th Edition at p.612.)

33. Mr. Charlton submits that in making his findings the Judge did not direct himself as to the onus of proof or the need to identify an outward expression of accord and does not refer to the entire agreement clause. Had he done so he would have concluded that there was no basis for rectification. He should have followed the reasoning of Hobhouse LJ in a similar case, Britoil PLC -v- Hunt Overseas Oil Inc. CA [1994] CLC 561, 573 who said :

It can accordingly be asked what then is the basis for the defendant's claim for rectification in the present case. It is the first sentence of art.8 of the heads of agreement. It is contended that this sentence in this informal document which is not intended to have legal effect is to be treated as a superior statement of the parties' agreement and is to displace the clear language of the considered and carefully drafted definitive agreement.

It can immediately be seen that this proposition needs to be carefully examined. As a matter of logic it can lead to the result that where there is a succession of documents of increasing formality but without legal effect leading up to a final considered legal document, the ascertainment of the actual agreement between the parties can be thrown back to the successively less formal, less considered and less carefully drafted earlier documents. This cannot be right. The process of negotiation and progressing towards a complete and formalised agreement is one which may contain many ambiguities. The purpose of the final document is to remove those ambiguities and to define authoritatively and clearly what the parties' respective rights and obligations are to be.

34. Here, Mr. Charlton submits, S were not even able to rely on any document which expressly set out the common intention and the Judge based his conclusions on inferences drawn from a number of documents. Each side was represented by experienced commercial negotiators and P by a senior in-house lawyer. The negotiations lasted for many months. There must be a strong presumption, Mr. Charlton submits, that the parties intended to be bound by precisely the words they used in the Contract and the Judge found (para. 39) that both parties intended to enter into a contract in precisely the terms of the actual Contract.
35. We broadly accept these submissions. Whilst we think the Judge must have been aware of the standard of proof required, he does not make a finding that there was any outward expression of accord as to the common intention which he found. It may be, as Mr. Charlton suggested, that the Judge was misled by the passage which he cited from In Re Butlin's Settlement. But in that case the court was concerned with a mistake by a settlor in drawing up a deed of settlement. The deed was not the result of a bargain with anyone else. The court was not therefore dealing with a case of common mistake so it did not have to look for an outward expression of accord. If the Judge in this case had looked for an outward expression of accord, it does not seem to me that he would have found one. None of the documents we were referred to showed such an accord. Indeed they point the other way and we think there is much force in Mr. Charlton's criticisms of the inferences which the Judge drew.
36. In short we do not think the Judge's findings are sufficient to found a claim for rectification. After months of negotiation experienced negotiators finally reduced their agreement into a detailed, lengthy document. The task of showing that this document did not represent the parties' intention was formidable. S's difficulties are illustrated by their changes of case. We do not think they have made out their claim for rectification in terms of the amendment or at all.
37. It follows that we think the Judge was right to dismiss the claim for rectification although my reasons for doing so differ from his.

Clause 36

38. Miss Boswell's simple point is that the clause 36 warranty cannot apply to work until it is complete. As the only contractual measure of when work is complete is when P issue a Completion Certificate for the whole of the work under clause 34, the warranty cannot be relied on until after the issue of that certificate. P's position in the meantime is protected by the provisions of clause 3.
39. The Judge rejected these arguments by reference to the definition of Work in the General Conditions as "any and all Work".

He said :

45 In my judgment, the use of the word "any" in the definition makes it clear that the warranty applies to any part of the Work, once that part is completed. That interpretation in my judgment is consistent with the rest of the Contract. Clause 30.6 provides that on termination of the Contract by Phillips with cause Snamprogetti shall pay to Phillips damages (other than damages for delay) for any loss suffered by Phillips resulting from events specified in clause 30.1. One of these events is breach of warranty by Snamprogetti. It would, I think, be surprising if clause 36 were not intended to be covered by that provision.

40. Miss Boswell took us through other provisions of the Contract where the distinction between part or parts of the work and all the work was made clear and argued that despite the definition relied upon by the Judge, "the Work" in clause 36 should have the same meaning as it does in the preceding clause 34 which obviously does refer to all the work.
41. We do not accept these submissions for the reasons given by the Judge. Warranties are by their nature continuing obligations and we can see no reason why the general warranty should not apply to any part of the Work once it has been completed. There is no real difficulty in practice in deciding when work is completed. The date of issue of the Completion Certificate would be a wholly artificial start date for the warranty for work which might have been completed months or years before that time. It seems to me that the quality requirements of clauses 3 and 36 were intended to operate concurrently not consecutively.

Conclusion

For these reasons we would dismiss this appeal.

ORDER: Appeal dismissed; costs reserved. (Order does not form part of approved Judgment)