A key consideration for any contractor or sub-contractor under a construction contract is to ascertain the standard of care required of them in order to fulfil their contractual obligations. In many instances the standard is reasonable skill and care, however there are also occasions where a contract requires the higher and more onerous standard of fitness for purpose. The tension between those two standards has historically led to disputes. A significant case for both employers and contractors to be aware of is a recent decision of the English Supreme Court detailed below.
Fitness for Purpose Clauses – Advantages vs Disadvantages:
- Attractive to employers as a means of ensuring that the construction project adheres to their specific requirements / intended use;
- Much easier for an employer to establish breach of duty by a contractor on the basis of a failure to comply with a specific obligation under the contract, as opposed to the employer having to establish negligence on the contractor’s part.
- Significant issue with fitness for purpose clauses is that a contractor’s professional indemnity policy will usually only cover duties to the standard of ‘reasonable skill and care’.
The Courts have often been called upon to examine the interaction between the standard of fitness for purpose and that of reasonable skill and care but the decision in this English Supreme Court case is quite dramatic – it held that carrying out one’s contractual obligations in compliance with a specified industry practice or standard will not be enough to exclude a contractor’s liability for a failure to comply with an agreed fitness for purpose obligation.
MT Højgaard A/S (Respondent) –v– E.ON Climate and Renewables UK Robin Rigg East Limited and Another (Appellants)
- MT Højgaard entered into a contract in 2006 with E.ON for the design, build and installation of the foundations for 60 wind turbine generators at the Robin Rigg offshore wind farm.
- The contract required MT Højgaard to carry out the works with due skill, care and diligence.
- The contract’s technical requirements section also required MT Højgaard to prepare the turbine foundations design in accordance with an international standard known as DNV-OS-J101 (“J101”).
- The technical requirements also stipulated that MT Højgaard’s design was to be for a minimum design lifetime of 20 years.
- MT Højgaard designed the turbine foundations in accordance with J101 however, shortly after completion, deficiencies with the J101 standard were discovered.
- An error in the equation within the J101 standard was uncovered which meant that the foundations would not be fit for purpose for the 20 year life span as required.
- Remedial works of €26.25 million would be required to address the deficiencies in the turbine foundations. A dispute arose between the parties as to whether MT Højgaard was liable for the defects and the costs of these remedial works.
Fit for Purpose vs Reasonable Skill and Care:
E.ON’s claimed that MT Højgaard was liable for the defects due to its failure to comply with the specific fitness for purpose obligation under the contract (i.e. the turbine foundations were to have a life span of 20 years). MT Højgaard argued that the strict fitness for purpose obligation should not apply, as its primary contractual obligations were to act in accordance with good industry practice, comply with the J101 and to exercise reasonable skill and care.
At first instance, the UK High Court held that as the turbine foundations did not have a lifespan of 20 years MT Højgaard had breached its fitness for purpose obligations under the contract. The 20 years lifespan requirement was additional to and not inconsistent with the contractor’s other obligations including compliance with the J101.
MT Højgaard appealed the judgment to the UK Court of Appeal. They overturned the High Court decision and held that the fitness for purpose obligation was not an absolute warranty and what the contract required was due care, professional skill, adherence to the good industry practice and compliance with the J101.
The matter was again appealed and in its judgment the UK Supreme Court reversed the decision of the Court of Appeal finding in favour of E.ON. The Supreme Court in its decision noted that a conflict between competing terms (in a contract) is to “be decided by reference to the ordinary principles of contractual interpretation”.
While the Court went on to state that a requirement to produce an item in accordance with a prescribed design and a requirement that the item will comply with a prescribed criteria are “by no means…mutually inconsistent”, it noted 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 specified 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.”
Upon examination of the requirements under the contract, the Supreme Court found that compliance with the J101 was a minimum requirement and that the more onerous fitness for purpose requirement should prevail. In coming to this conclusion, the Supreme Court rejected MT Højgaard’s argument that the fitness for purpose requirement (i.e. 20 year lifespan) was inconsistent with the requirement that the design would comply with the J101. It stated that where there are two terms that require different standards, “rather than concluding that they are inconsistent, the correct analysis…is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement”.
The Court further held even where there was an inconsistency between a design requirement and the required criteria, MT Højgaard had a duty to identify the need to improve the design so that the required criteria was met.
It was notable that the Court rejected MT Højgaard’s argument that the fitness for purpose obligations should have been set out more prominently in the contract, as opposed to being contained within the technical requirements, if they were intended to have contractual effect. The Court noted that it was clear that the technical requirements were to form part of the contract and that a 20 year design lifespan was required.
- This case makes it clear that even if a design and build contractor is carrying out one’s contractual obligations in compliance with a specified industry practice or standard, this will not be enough to exclude a contractor’s liability for a failure to comply with an agreed fitness for purpose obligation.
- Even where a contractor is obliged to follow a standard or design specified by an employer, the contractor has a duty to amend or improve any such standard or design in order to comply with its more onerous fitness for purpose obligation.
- It remains the case that contractors need to carefully consider and comprehend what is required of them under a contract (and in particular any positive provisions contained with technical documents or schedules) as the courts have continued to show their willingness to give effect to the specific terms of contracts agreed between parties.