The Court of Appeal last year had to consider whether the employer or contractor under a design and build contract had assumed the risk for defects in the design of the foundations of 60 offshore wind turbines, and the consequent cost of remedial works amounting to €26.56m, where the defects were the result of errors in an internationally recognised engineering specification expressly incorporated into the terms of the contract, and not the result of any negligence on the part of the contractor. That question turned on whether the contractor was under an obligation to exercise reasonable skill and care in complying with the contractual specification, or had provided a warranty that the turbines would be fit for purpose and would have a minimum service life of 20 years.
In a further twist to this long-running dispute, the Supreme Court first refused Eon permission to appeal then, late last year, granted permission. This is exceptional in itself and means that the debate over allocation of risk continues.
In 2006, MT Højgaard ("MTH") was engaged by Eon to design, fabricate and install 60 wind turbines at the Robin Rigg wind farm. The contract incorporated what appeared to be conflicting technical requirements. Pursuant to clause 8.1(i), (iv) and (ix) MTH was required to carry out and complete the design, installation and works, exercising due care and diligence to be expected of an appropriately qualified and experienced designer, in accordance with modern commercial engineering principles, internationally recognised standards, and good industry practice.
The only applicable international standard was produced by Det Norske Veritas ("DNV"), who published an international standard for the design of offshore wind turbines entitled "DNV-OS-J101" ("J101"). J101 provided that unless a contract otherwise stated, as a design principle a "service life" of 20 years should be used for the structural components. In order to achieve that design objective for the foundations, J101 contained an equation for use by designers. MTH was also required to demonstrate, using test data, that its design was appropriate, or in the absence of any test data, to carry out its own tests in order to verify its design.
However, pursuant to clause 8.1(x) of the contract, MTH was to deliver the works "free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice". Clause 18.104.22.168 stated that the foundation design shall "ensure a lifetime of 20 years in every aspect without planned replacement". At first sight these provisions could be interpreted as a warranty from MTH that the foundations of the wind turbines would be fit for their purpose and would have a service life of 20 years.
MTH carried out and completed its design strictly in accordance with J101, using the equation set out in that document. In early 2009 the foundations for the wind turbines were complete. In September 2009, DNV notified the industry that as a result of defects identified in the foundations at other wind farms, it had identified that the equation contained in J101 was defective, which resulted in the actual load capacity of piled foundations being over-estimated. Defects in the foundations at the Robin Rigg windfarm were identified in April 2010.
The question was who carried the risk for the defective specification (and the consequent €26.56m cost of carrying out the required remedial works); the employer who required work to be carried out in accordance with J101, or the contractor?
The contractor contended that it was not liable. There had been no negligence or want of professional skill on their part. They were required to exercise all reasonable skill and care and comply with the provisions of J101. The defects in the foundations arose because J101 had contained a fundamental error. As a result the foundation could not fulfil the intended purpose for a period of 20 years.
The employer contended, however, that notwithstanding the positions for clauses 8.1(i),(iv) and (ix), MTH had warranted that the works as a whole would be "free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice". Further, pursuant to clause 22.214.171.124 of the contract, MTH was required to design the foundations so as to "ensure a life time of 20 years in every respect without planned replacement". Accordingly, MTH had actually warranted that the foundations would last for 20 years.
The Court of Appeal, overturning the decision of the first instance judge, held that although clause 126.96.36.199 stated that the foundation design shall ensure a lifetime of 20 years, and that first sight such a provision could be interpreted as a warranty, that had not been the intention of the parties. The other provisions of the contract merely indicated that the design life should be 20 years. If a structure had a design life of 20 years, that did not necessarily mean that it would inevitably function for 20 years, although that would usually be the case. MTH was required to design the foundations in accordance with J101. However, J101 merely prescribed what needed to be done in order to create a structure which had a sufficiently high probability of functioning for 20 years. It did not guarantee that the structure could achieve a guaranteed life of 20 years.
The court further held that the requirement of the works should be "fit for purpose" was qualified by the phrase "as determined in accordance with the Specification using Good Industry Practice". That required the exercise of skill and care as well as compliance with J101. It did not impose upon any form of warranty for that the foundations would be fit for purpose for the entirety of their intended operational life.
Whilst the court held that MTH had not complied with its contractual obligation to demonstrate, using test data, that various parts of the design were appropriate and, if that test data was not available, to carry out experimental verification of those parts of the design, the court held that as the experts at trial had agreed that any form of testing would not have revealed the fundamental defects in the design caused by the error in J101, MTH's breach of contract had not caused any loss. The employer was only awarded nominal damages of £10.
It is common for contracts to make reference to two or more documents setting out contractual specifications and requirements.
If the employer had simply given outline requirements and let the contractor produce design in accordance with those requirements rather than set out precisely how the wind turbines were to be designed and constructed, the court is likely to have held that the works to be carried out were to be fit for their intended purpose.
Care needs to be taken to ensure that contracts are worded with sufficient clarity and that contract specifications and requirements are consistent with each other so that the standards to which a contractor must carry out and complete its works is clear and unambiguous and that there are not any inconsistencies between documents.
It will, in particular, be important to distinguish between those obligations which require reasonable skill and care from those in respect of which the contractor warrants performance or fitness for purpose.
This in turn will allow both contractors and their insurers to properly understand (a) whether insurance cover is adequate to cover the risks assumed under the contract and (b) so far as insurers are concerned, the risk in respect of which that they will be potentially liable.