The case of MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [ 2017] UKSC 59 has received a lot of recent coverage, both because of the potential implications on the drafting of contracts and the Supreme Court’s interpretation of fitness for purpose obligations.
In December 2006, MT Hojgaard (the “Contractor”) was engaged by the E.ON group (“E.ON”) to design, fabricate and install the foundations for proposed offshore wind turbines in the Solway Firth. Shortly after completion of the project, the foundation structures failed.
The dispute concerned who should bear the cost of the remedial works, which were valued at over €26 million. The Supreme Court overturned the Court of Appeal’s previous decision and held that the repair bill was the Contractor’s responsibility, even though the Contractor had used reasonable skill and care, complied with an international standard for the design of offshore wind turbines (known as J101) and had not been negligent.
E.ON’s argument was based upon the fitness for purpose obligations contained within the contract. Clause 8.1(x) of Part D of the contract required the Contractor to “design, manufacture, test, deliver and install and complete the Works“ so that each item of Plant and the Works shall be “fit for its purpose“. The contract defined “Fit for Purpose“ as “fitness for purpose in accordance with, and as can properly be inferred from, the Employer’s Requirements“. E.ON argued that the Technical Requirements required that the foundations had an operational (service) life of 20 years as the Technical Requirements (which were included within the Employer’s Requirements and appended to the contract) stated that: “The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly“. In addition, Part 3.1 of the Technical Requirements “stressed“ that the requirements set out in the Technical Requirements were the “MINIMUM requirements“ of E.ON and that it was the Contractor’s responsibility to “identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters.“
The Contractor denied liability stating that it had exercised “due care and professional skill“ and adhered to the contractual obligations to produce a design which was compliant with J101. In addition, the Contractor argued that the requirement for a 20 year service life include within the Technical Requirements was not a legal requirement. If E.ON had intended that the foundations have an operational life of 20 years then this should have been included within the Key Functional Requirements section of the contract and not appended to the contract (the Supreme Court was unconvinced by this latter point). In addition, the Contractor stated that there was an inconsistency between the underlying contract terms and the Technical Requirements.
The Supreme Court held in favour of E.ON, that the Technical Requirements required a design and service life of 20 years. The Supreme Court found that the foundations did not have a service life of 20 years nor would their design ensure a lifetime of 20 years and therefore, the Contractor was liable. They determined that the Technical Requirements were clearly part of the contract and that Part 3.1 set out the minimum requirements of the Contractor and that it was the Contractor’s responsibility to amend the design as required. The Supreme Court concluded that where a contract imposes different or inconsistent standards, rather than simply stating that they are inconsistent, the correct approach is to use the more rigorous or demanding standard. In any event, under Part 3.1 of the Technical Requirements, the Contractor was under an obligation to identify and improve the design accordingly. In addition, where there is inconsistency between the design requirement and the required criteria, the Supreme Court stated that the effect of paragraph 3.1(ii) of the contract was that although the Contractor may have complied with the design requirement, the Contractor would still be liable for the failure to comply with the required criteria. The Supreme Court cited a number of cases but concluded that where a contract requires an item to be produced in accordance with a prescribed design, even if the prescribed design is defective, it is the contractor who has undertaken the contract and therefore takes the risk of the defective design.
Whilst this is definitely a thought provoking case for contractors and employers, it also serves to raise a number of drafting points.
- In this case, there was not an actual inconsistency in the contract; one term was more onerous than the other. If the underlying contract had stated a design life of 20 years and the Technical Requirements had stated a design life of 15 years then this would clearly have been an inconsistency. The take-away point from this case is to ensure that the technical documents and the main contract are consistent.
- Often lawyers will put together the contract terms and the technical advisers will provide the technical annexures. It is important to ensure that both documents are carefully checked by an appropriate person so that there are no inconsistencies.
- Check the technical documents (specifications, employer’s requirements, contractor’s proposals, etc) to ensure that any onerous obligations or fitness for purpose obligations are back-to-back with the underlying contract and can be met by the parties involved. A fairly usual amendment to make to the JCT Design and Build Contract is for the contractor to accept entire responsibility for the employer’s requirements and contractor’s proposals, including responsibility for any mistake, inaccuracy, discrepancy or omission contained in the technical documents. In addition, if there are any mistakes, inaccuracies, discrepancies, divergences or omissions in the employer’s requirements and/or the contractor’s proposals, the contractor is to correct such errors without allowance for additional money.
- Ensure that the contract includes clear wording to govern how technical schedules and appendices are affected by the contractual terms and conditions.
- From this case it is clear that a reasonable skill and care obligation will not overrule an express fitness for purpose provision. Assume that the parties will be held to the higher standard and check the provisions of the contract.
- Do not enter into a contract where it is clear that the parties cannot fulfil the obligations. When acting for a contractor, check the terms and conditions and the technical documents carefully. We place a lot of emphasis on the terms and conditions, but it is crucial that the client’s technical advisers have had a thorough review of the documents and that they have been signed-off by the appropriate person.
- Where there are multi-authored contracts, appoint one person to have a final review of the contract. Poor quality drafting does not necessarily mean that the courts will ignore the contractual meaning of the contract unless such poor drafting leads to “an improbable and unbusinesslike intention” (Mitsui Construction Co Ltd v Attorney General of Hong Kong (1986) 33 BLR 7, 14).
- For clarity, put any absolute requirements into the main body of the contract and not in appendices / technical documents.
Tight timescales to get planning, funding or start works urgently means that there is pressure to complete documents as soon as possible, but this case shows the importance of carefully checking all parts of the contract. It is better to ensure the contract is correct rather than end up in a dispute.