3D Cruise Ship in Beautiful Ocean with Blue Sky

For obvious reasons it is crucial to define ‘the works’ that are to be carried out under a construction contract. After all, carrying out the ‘works’ is the whole point of the contract, and if they are properly defined, the parties will know exactly who is responsible for what.

Often the works will be set out in a specification document, which itself will contain numerous documents, sometimes running to hundreds of pages. As well as these specification documents, there will also be other, related documents, such as costs breakdowns. In this day and age of digital communication, these documents are often sent to the parties digitally instead of in hard copy, with the result that the parties never see some of the documents in hard form.

With such a lot of documents being provided in digital form, it is inevitable that, at least sometimes, not all of them get thoroughly checked when the contractual documents get reviewed. However, as a recent High Court case[1] highlights, it is as important as ever to make sure that all documents are checked to make sure that they say the same thing – particularly ones relating to the scope of works.

The case concerned a SAGA cruise liner that broke down shortly after being overhauled at a shipyard. Several voyages had to be cancelled and SAGA estimated its resultant losses to be over £3 million. The cause of the break-down was discovered to be defective luboil coolers, critical components of the engines that lubricate the oil that runs through the engines.

SAGA took the view that the shipyard should have inspected the luboil coolers. If they had, they would have discovered that they were defective, and would have recommended that they should be replaced. SAGA therefore sued the shipyard for breach of contract for its losses of over £3 million.

If you looked at the technical specification alone (which was specifically referred to in the definition of ‘the Works’), SAGA’s case would have been a slam-dunk, because it provided for the reconditioning and overhaul of the luboil coolers – and this would have included replacing them, if necessary.

The trouble is, another document appended to the contract said something different. The ‘Contract Price Breakdown’ only provided for cleaning of the luboil coolers. If replacement was required, this would be ‘quoted apart’. The shipyard argued that this meant that replacing the tubes was outside the scope of works and that they were therefore not obliged to replace them.

The £3 million question was therefore whether the specification document took precedence, or the Contract Price Breakdown did.

In the event, the Judge found a way around this tricky question. She decided that there was a clear obligation (pursuant to the specification) on the shipyard to recondition and overhaul the coolers. If they had done this, they would have discovered that they were defective and advised SAGA of this fact. The obligation to inspect and advise on any defects was an integral part of the shipyard’s obligations. The Contract Price Breakdown did not mean that the shipyard were not obliged to replace the coolers, it just meant that if they discovered that they needed replacing (which, in the circumstances, they should have done), then they were entitled to charge extra for the work involved.

In other words, the judge decided that the specification and the Contract Price Breakdown were, in fact, consistent rather than contradictory. SAGA was lucky – the judge’s conclusion required a considerable amount of intellectual flexibility. Another judge on another day may have come to a different conclusion. The lesson here is that all documents relating to the definition of ‘works’ must be checked carefully to ensure that they are consistent with one another. Also, if the parties intend that there should be a hierarchy of documents, then this should be made clear within the contract. It is too risky to leave that decision to a judge.

For more information, email blogs@gateleyplc.com.

[1] SAGA Cruises BDF Limited, SAGA Cruises Limited v Fincantieri SPA [2016] EWHC 1875 (Comm)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.