The recent UK Court of Appeal decision in the case of MT Holgaard A/S v E.ON Climate and Renewables (2015) EWCA Civ 407 Illustrates the ultimate catastrophe if there isn’t sufficient interface between the legal and technical teams. The case involved the interpretation of a contract for the construction of the foundations for an offshore wind farm known as Robin Rigg on Solway Firth in Scotland. An offshore wind farm is basically a cluster of turbines standing on monopiles that are driven into the seabed. A steel cylinder known as a ‘transition piece’ sits on top of each monopile, and the tower which supports the electricity generator fits on to the transition piece. The gap between the transition piece and the monopile is filled with grout, although shear keys can be inserted into the grouted connections in order to increase the shear strength. Such shear keys can, however, also have the effect of creating stress lines that cause failure of the grout.
There is an International Standard for offshore wind farms called J101. This says that if the service life is not specified in the contract, 20 years should be used. It goes on to say that a ‘grouted connection can be established with or without shears.’ It provides parametric equations to be used in the design. But unfortunately, as we now know, one of these equations is wrong, and relying on it can cause serious problems.
In this case, E.ON (‘the employer’) appointed MT Holgaard (‘the contractor’) to construct the foundations for Robin Rigg following a tender process. There was a written contract, but, as always, there was a great deal of other documentation that was attached to it. The contract, however, made it clear that there was a hierarchy, with the contract being at the top of the pile, and the tender return submitted by the contractor at the bottom.
The contract said that the contractor’s work would be ‘in accordance with internationally recognised standards’. The expression ‘Fit for Purpose’ appeared in the contract, and this was linked to the ‘Employer’s Requirements’.
The Employer’s Requirement’s spoke of a ‘design life’ of 20 years, and said that ‘the design of the foundations shall ensure a lifetime of 20 years.’ It also referred to a ‘minimum service life’ of 20 years. The document required the contractor to determine if shear keys should be used and said that, if the contractor decided against them, it needed to demonstrate with test data that the grouted connection was sufficient. The contractor decided against shear keys.
Not long after construction, the transition pieces started slipping down the monopiles. This was not due to any negligence on the part of the contractor, but rather the error in the J101 standard. The remedial work was done at a cost of Euros 26 million. But who was liable for the cost?
The judge got to the nub of the issue when he said this: ‘The court is confronted in this case with contractual documents of multiple authorship, which contain much loose wording…The problem arises because MTH was required to comply with J101 which contained a significant error.’ He made the point that the standard legal textbook, Hudson’s Building and Engineering Contracts (1959), says that ‘generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications, and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specifications.’
The judge went on to say this: ‘It is not unknown for construction contracts to require the contractor a) to comply with particular specifications and standards and b) to achieve a particular result. Such a contract, if worded with sufficient clarity, may impose a double obligation upon the contractor…The question I must address is whether the agreement negotiated between E.ON and MTH is a contract of that character. This involves applying the rules of contractual interpretation to the somewhat diffuse contract documents in the present case.’
The issue essentially was whether a reasonable man would interpret this contract to mean that the contractor had to both comply with J101, and achieve foundations with a service life of 20 years. The judge drew a distinction between ‘design life’ and ‘service life’ and said this:’ ‘If a structure has a design life of 20 years that does not mean that inevitably it will function for 20 years, although it probably will.’
The judge said that the written agreement, which was at the top of hierarchy, made it clear that there had to be compliance with internationally recognised standards, which in this case was J101. Although J101 is a standard that is intended to lead to a ‘design life’ of 20 years, it isn’t a guaranteed life. The judge went on to say that, although the written agreement also required the work to be ‘Fit for Purpose’, this was qualified by reference to ‘specifications using good industry practice’ and the Employer’s Requirements.
The judge said that there were inconsistencies between the documents. He said that the Employer’s Requirements was ‘too slender a thread upon which to hang a finding that the contractor gave a warranty of 20 years for the foundations.’ If there was to be an absolute warranty of 20 years’ operational life, this should have been in the contract itself, not ‘tucked away in the technical requirements.’
The judge concluded as follows: ‘ A reasonable person…would know that the normal standard required in the construction of offshore wind farms was compliance with J101 and that such compliance was expected, but not absolutely guaranteed, to produce a life of 20 years.’ He held that the contractor was not liable for any breach of a warranty that the foundation structures for the wind farm would have a 20-year service life.
There was one further issue and that was this: had the contractor been in breach of its obligation to provide ‘test data’ to explain why shear keys were not used? The judge said that it had been in breach, making the point that ‘the contractor is required to do more than a desk exercise.’ But the judge went on to say that the evidence suggested that such testing would not have made any difference, and that it ‘would not have revealed potential weaknesses’. So the employer was entitled to no more than nominal damages for this breach. And nominal they were - he awarded the employer GBP10 - against the contractor’s Euro 26 million odd!
So, a clear warning that contractual terms must be clear, and that there shouldn’t be inconsistencies between the written agreement and the technical requirements that are attached to it. The judge made it clear that problems of this sort arise because of ‘diffuse contract documents’ and ‘multiple authorship’. One commentator has suggested that these problems can be avoided if employers invest a little extra in order to have a ‘consistency check’ done. Good advice indeed!