Snamprogetti Ltd & Anor v Phillips Petroleum Company United Kingdom Ltd

A contractual reward-and-risk scheme that adjusts the contract price for quality performance does not, without clear words, replace or cap damages for defective work. General contractual obligations and damages rights can operate alongside an incentive scheme, especially where the contract preserves other rights.

Rectification for common mistake requires a sufficiently precise common intention, outwardly expressed in the parties’ dealings and proved to the required high standard. A qualified limitation cannot be rectified into an unqualified one. A general quality warranty applies to each completed part of the work and need not await completion of the whole contract.

Under a 1994 engineering design and procurement contract for a North Sea gas project, Phillips claimed damages from Snamprogetti for defective design. Snamprogetti contended that a quality reward-and-risk scheme capped its liability at £75,000, alternatively sought rectification, and argued that a general quality warranty could not be relied on before completion.

His Honour Judge Havery QC rejected the proposed contractual cap, found a common intention relevant to rectification but refused that remedy, and held that the warranty could be relied on before completion. Snamprogetti appealed each conclusion. Phillips challenged the finding of common intention by respondent’s notice. The central issues concerned construction of the scheme, rectification for common mistake, and the operation of the warranty.

The Court of Appeal, in the judgment of Lord Justice Tuckey on behalf of the court, dismissed the appeal.

1. Construction of the reward-and-risk scheme. A party asserting a limitation or exclusion of common law liability must show clear contractual wording. Clauses 3 and 36 imposed unqualified obligations concerning the quality of the work. Scheme 2 appeared in the Price Schedule, which deferred to the General Conditions in the event of conflict. Its tail-piece also preserved Phillips’s rights under the contract. The scheme adjusted the price to reward or penalise quality performance without reference to the consequences of breach. It could therefore coexist with obligations to compensate for loss caused by defective design. The Change Request mechanism settled the amount of the price adjustment; it did not expunge liability for breaches. Scheme 1 was not decisive by analogy because the contract expressly deleted the liquidated damages provision and amended clause 30.6, while making no equivalent alteration to the quality provisions.
2. Rectification. The proposed general limitation was inconsistent with the contractual qualifications that it applied only to Phase 2 offshore work, was limited in time, and did not apply on termination for cause. The court rejected the submission that a general intention to limit liability could justify imposing at least a qualified limitation. The contract itself showed that there was no true common intention to an unqualified limitation.
3. Evidential requirements. In the alternative, the court accepted that rectification for common mistake in a negotiated contract requires an outward expression of accord and a high standard of proof. In Re Butlin’s Settlement [1976] Ch. 251 concerned a settlor’s deed rather than a bargain between parties and did not remove the need to find outward accord in a common-mistake case. The reasoning in Britoil PLC v Hunt Overseas Oil Inc. [1994] CLC 561 was applicable: a detailed final agreement is intended to define the parties’ rights and obligations. No document showed the necessary accord, so the rectification claim failed. The result below was correct, although the reasons differed.
4. Clause 36 warranty. The general warranty was a continuing obligation. It applied to any part of the work once that part had been completed, rather than only after the completion certificate for the whole work. Clauses 3 and 36 operated concurrently. The warranty could accordingly be relied on before overall completion.

The formal order was: appeal dismissed; costs reserved.

• Court of Appeal (Civil Division): in [2001] EWCA Civ 889, dismissed the appeal and reserved costs.
• His Honour Judge Havery, QC: determined six preliminary issues, rejecting the liability cap and rectification claim and holding that clause 36 could be relied on before completion.