The Supreme Court has reversed the Court of Appeal’s decision in MT Højgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59 on the basis that where there is a fitness for purpose obligation it should be given its natural meaning despite the fact that it is contained in a technical schedule and is potentially inconsistent with other provisions. The court took into account the fact that the contractor had complied with its obligations under the main conditions of contract, including its obligations to exercise reasonable skill and care and to comply with relevant international standards.

Background

The case concerns a contract between MT Højgaard A/S (MTH) and E.ON Climate & Renewables Robin Rigg East Limited (E.ON) for the design, fabrication and installation of the foundations for turbines for the offshore wind farms at Robin Rigg in the Solway Firth.

As part of the tender documents E.ON issued certain Technical Requirements (TR), which included the requirement for MTH to comply with an international standard for the design of wind turbine structures called DNV-OS-J101 (J101). Shortly after completion of the works, the foundations started to fail due to a deficient design which was based on a fundamental error in an equation contained in J101.

Having carried out remedial works, which cost approximately € 26 million, the parties entered into proceedings to determine liability.

There were various design obligations that E.ON relied on to bring its claim, some of which provided as follows:

  • The Contract conditions contained a requirement in Clause 8.1 for MTH to perform the works:Paragraph 1.6 of the Key Functional Requirements in the TRs stated that “The Works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofits or refurbishments“;
    • in a professional manner in accordance with modern commercial and engineering, design…principles and practices and in accordance with international recognized standards and Good Industry Practice” (Clause 8.1(iv)). “Good Industry Practice” as defined included an obligation to exercise reasonable skill and care.
    • such that the Works as a whole were “fit for purpose as determined in accordance with the Specification” (Clause 8.1(x))
    • so that the design of the Works and the Works when completed by [MTH] shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement…” (Clause 8.1 (xv)
  • Paragraph 3.1 of the TRs stated that the requirements contained in the relevant section relating to the design of the foundations contained only the minimum requirements and that it “shall be the responsibility of [MTH] to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters“;
  • Paragraph 3.2.2.2(i) required MTH to prepare the detailed design of the foundations in accordance with J101;
  • Paragraph 3.2.2.2(ii) of the TRs provided that the “The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement“;

Journey Through the Courts

TCC

In the Technology and Construction Court, Edwards-Stuart J found that MTH was responsible for the cost of the remedial works as it had provided a warranty that the foundations would have a service life of 20 years, which was additional to, but not inconsistent with, MTH’s other less onerous obligation to comply with J101.

MTH appealed on the grounds that the TCC had erred in its construction of Paragraph 3.2.2.2(ii) and Clause 8.1 of the Contract.

Court of Appeal

The Court of Appeal allowed MTH’s appeal. It read Paragraph 3.2.2.2(ii) of the TRs as a “warranty [on the part of MTH] that the foundations will function for 20 years“. However, it held that such a warranty was inconsistent with the Contract conditions, which should be treated as superior to the TRs in priority based on the order of precedence clause. Lord Justice Jackson’s view was that a “design life” of 20 years fell short of a guarantee to achieve an operational life of that period and that therefore the provisions of the TRs requiring a 20 year service life (as opposed to design life) were “too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations“. Accordingly, E.ON was to bear the costs of the remedial works.

Supreme Court

E.ON appealed this decision. The central question that the Supreme Court was asked was whether, in light of Paragraph 3.2.2.2(ii) of the TRs, MTH was in breach of contract, despite the fact that it used due skill and care, adhered to good industry practice and complied with J101.

In order to answer this question, the Supreme Court considered whether the requirement in Paragraph 3.2.2.2(ii) of the TRs was inconsistent with the obligation in J101 and whether such requirement was “too slender a thread” on which to rest the contention that MTH gave a warranty of 20 years’ life for the foundations.

On the first question, the Court considered several cases where a contract includes two distinct terms, “one requiring the contract to provide an article which is produced in accordance with a specified design, the other requiring the article to satisfy specified performance criteria“. Lord Neuberger held that:

the message from decisions and observations of judges in the United Kingdom … is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has prescribed or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed“.

In arriving at this conclusion, Lord Neuberger noted that the relevant provisions in the TRs only contained E.ON’s minimum requirements. He concluded that where there are inconsistent or different standards of requirement, MTH would be required to comply with the more rigorous or demanding of the two standards, as the less rigorous are simply minimum requirements. Lord Neuberger did note that his conclusion would have been the same even if there was no reference to the TRs containing minimum requirements.

On the second question, the Supreme Court rejected the Court of Appeal’s conclusion that this was too weak a basis for imposing such an obligation. It held that Paragraph 3.2.2.2(ii) was clear in its terms and that, subject to its views on the extent of the purported warranty (see below), there was nothing “improbable [or] unbusinesslike” about interpreting it as imposing such a requirement.

Accordingly, the Supreme Court allowed E.ON’s appeal.

Lord Neuberger also focussed on the meaning of Paragraph 3.2.2.2(ii) and the extent of the warranty. It had been interpreted by both the TCC and the Court of Appeal as imposing “a warranty that the foundation will function for 20 years”. Based on a discussion of the defects liability period under the contract, he concluded that there was a strong argument that Paragraph 3.2.2.2(ii) “did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last 20 years without replacement“. This may provide some relief to contractors who may not have intended for the “design life” to be taken as a warranty extending beyond the defects liability period.

Interestingly, as part of its analysis, the Supreme Court noted that “any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the Works would normally be barred” on the basis that there was a two year defects liability period and an exclusive remedies clause. This is an interesting conclusion as the Supreme Court has read the defects liability period as barring any claims (not just for physically rectifying defects, but for the costs of such rectification as well) on the basis of a general exclusive remedies clause.

Comment

The judgment highlights the importance attached to documents forming part of a contract, including the technical schedules, in interpreting the contractor’s obligations. The contractor’s obligations may be expressed in the contract terms as subject to the lower standard of reasonable skill and care, but even if only a single fitness for purpose or ‘strict’ obligation slips into the contract documents, it may have the effect of applying such higher standard.

Conversely, if the employer is looking for full protection of a “fitness for purpose” type warranty, it should include clear and unambiguous language and avoid it being tucked away in the technical requirements. Otherwise, it may find that apparently clear wording imposing a fitness for purpose warranty may be read down in light of any reasonable skill and care obligation (which is the situation E.ON found itself in following the Court of Appeal’s decision), unless the contract contains express wording to state specifically which obligations the relevant standards apply to.

For those responsible for contract drafting and negotiation, the key lesson is that it is important to review the entire contract, including all technical requirements and schedules as a whole, in order to eliminate inconsistencies and ambiguities. For practical reasons this may not always be possible in case of complex construction contracts involving multiple authors and, therefore, a priority of documents provision should be included. In this case the priority of documents clause did not come into play as the Supreme Court managed to reconcile “dual” obligations, but this may not always be possible and, therefore, the parties should carefully consider this provision.

A defects liability clause is typically seen as granting the contractor the right to return and remedy a defect, but not as excluding the right of the employer to make a claim for damages beyond the end of the defects liability period. Such a right would typically only be subject to any statutory limitation periods. Given the way the Supreme Court has interpreted the defects liability clause together with the exclusive remedies clause, the employer should ensure it considers the impact of such provisions in the contract and to make clear that the conclusion of the defects liability period does not bar it from making a claim for damages in case of a breach of contract.

As an aside, this case may have the unintended consequence of contractor’s trying to price in their proposals the risk of international standards containing errors or to exclude liability for such errors. Employers should not agree as they would always be expecting contractors with the relevant expertise to verify their designs rather than blindly following standards and, therefore, they are best placed to assume such a risk. In any event, the risk of such errors is likely to be minimal, and therefore, not something that may be appropriately priced.

James Doe
James Doe
Partner and UK Head of Construction & Infrastructure Disputes, London
+44 20 7466 2583
David Nitek
David Nitek
Partner, London
+44 20 7466 2453