The Supreme Court has recently considered 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.
The Court found in favour of E.ON, the Employer, overturning the Court of Appeal's decision.
It is perhaps noteworthy that the Supreme Court first refused E.ON permission to appeal then granted permission, which is exceptional and perhaps underlines the difficulty of drawing the line between compliance with complying with express terms and achieving long tem fitness for purpose as against "merely" exercising reasonable skill and care.
In 2006, MT Højgaard ("MTH") was engaged by E.ON 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 126.96.36.199 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 188.8.131.52 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 Supreme Court came to a unanimous decision finding in favour of the Employer.
Particular scrutiny occurred of the Technical Requirements section of an Employer’s Requirements schedule to the contract which required that the design of the foundations "shall ensure a lifetime of 20 years in every aspect without planned replacement” (the “TR Paragraphs”). This provision applied in addition to MTH’s other less onerous obligations such as a requirement to exercise reasonable skill and care and to comply with an international standard for the design of offshore wind turbines known as J101.
The Supreme Court's decision emphasises that the contractor will be held to deliver a contracted result even if this is impracticable or even unachievable. Commercial parties are held to the bargains they have made, even if they turn out to be unduly onerous.
In particular, the Supreme Court held that the Employer's Requirements were minimum requirements and that it was the contractor's responsibility to identify if there were any more onerous requirements.
The Supreme Court also held that where a contract requires an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent and the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria.
It is not uncommon for contractual documents to be inconsistent in complex projects.
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.
Parties to similar construction contracts need to consider carefully whether to state expressly in the contract documents that reasonable skill and care as opposed to a guarantee of fitness for purpose is the requisite standard (or vice versa in the case of the employer!).