Background 

The Robin Rigg Wind Farms in the Solway Firth are the first commercial offshore wind farms in Scottish waters. They were designed and installed by MT Hjgaard ("MTD") for two companies within the E.ON group ("E.ON") following a competitive tender, but their foundation structures failed shortly after completion of the project. The tender documents from 2006 contained certain Employer's Requirements, which included Technical Requirements ("the TR"). Part 3.2 of the TR contained two key requirements:

1. Paragraph 3.2.2.2(i) required MTH to prepare the detailed design of the foundations in accordance with a document known as J101; and

2. Paragraph 3.2.2.2(ii) required 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".

J101 was a reference to the international standard for the design of offshore wind turbines published by Det Norske Veritas, an independent Norwegian classification and certification organisation which aimed to set minimum international construction standards - including a 20-year service life for foundations.

On 20 December 2006, E.ON and MTH entered into a written contract for MTH to design, fabricate and install the foundations for the proposed turbines ("the Contract"). The Contract defined "fit for purpose" as fitness in accordance with "the Employer's Requirements", which included the TR, and defined "Good Industry Practice" as including "recognised international standards". Clause 8.1 then required MTH to deliver and install the foundations "in accordance with internationally recognised standards and Good Industry Practice", be "fit for purpose" and "satisfy any performance specifications or requirements of the Employer as set out in this Agreement". It follows that paragraphs 3.2.2.2(i) and 3.2.2.2(ii) of the TR were incorporated into the Contract.

Unfortunately, one of the crucial calculations used by Det Norske Veritas in the J101 standards for the axial capacity of grouted connections in wind farm foundations proved to be overestimated by a factor of about ten, meaning that transition pieces would start to slip down the monopoles into the sea. Det Norske Veritas became aware of this serious problem in 2009 and alerted MTD and others in the industry.

When the foundations of the Robin Rigg Wind Farms failed, the parties agreed that remedial work should be carried out at a cost of 26.25 million but disputed who should pay for the work. MTH contended that it had exercised reasonable skill and care and had complied with its contractual obligation to follow the J101 standards. E.ON contended that MTH had been negligent and had breached their obligation to ensure that the foundations were designed to last for 20 years.

At first instance, Edwards-Stuart J ([2014] EWHC 1088 (TCC)) rejected E.ON's negligence case but found for E.ON on breach of contract on the primary basis that the foundations had not been fit for purpose in accordance with paragraph 3.2.2.2(ii), which required that they should be designed so as to have a lifetime of 20 years.

The Court of Appeal ([2015] EWCA Civ 407) accepted that paragraph 3.2.2.2(ii), taken in isolation, appeared to warrant that the foundations would be designed to have a lifetime of 20 years but upheld MTD's appeal on the basis that this requirement was inconsistent with the other contractual provisions, including the requirement in paragraph 3.2.2.2(i) to construct the foundation in accordance with the J101 standards. It held that this was "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations".

The Decision

The Supreme Court unanimously overturned the Court of Appeal and restored the decision of Edwards-Stuart J, finding that MTH had given a warranty that the foundations would be designed to last for 20 years and therefore bore the cost of the proposed remedial work.

Lord Neuberger, giving the judgment of the Court, rejected MTH's argument that compliance with the J101 standards in accordance with paragraph 3.2.2.2(i) of the TR would negate what might otherwise be a liability for faulty construction under paragraph 3.2.2.2(ii). The natural meaning of paragraph 3.2.2.2(ii) was that it warranted that the foundations would be designed to have a life of 20 years and there was no inconsistency between this warranty and the obligation to follow J101 because those terms could be reconciled according to the principles of contractual interpretations summarised in Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095 at [8][15].

Having regard to the provisions of the Contract and its commercial context, Lord Neuberger considered that "where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and 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 . . . in many contracts, 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, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed". The answer would depend on the facts of each case, but the general weight of authority favoured giving full effect to prescribed criteria clauses, even in situations in which a customer or employer had agreed to a particular design.

In this case, notwithstanding the Contract being somewhat badly drafted, the Court was prepared to give full effect to the 20-year warranty in paragraph 3.2.2.2(ii).

Conclusions

This is a significant case for all those involved in construction disputes (whether for off-shore windfarms, ships, drilling rigs or other items) under contracts which require compliance with a specification or design whilst including other specified performance criteria.

In the event that the specification or design agreed by the parties proves to be defective, such that the contractor cannot met the specified performance criteria without deviating from the design, the courts are inclined to require that the performance criteria be followed even at the expense of technical compliance with the agreed design. It is therefore likely, absent terms to the contrary, to be the contractor who bears the risk of a faulty design or specification for the work to be carried out and not the purchaser.

In so finding, the Supreme Court took a comparative approach by affirming the ship-building decision of the Court of Appeal in The Hydraulic Engineering co Ltd v Spencer and Sons (1886) 2 TLR 554, the Scottish Inner House in A M Gillespie & Co v John Howden & Co (1885) 22 SLR 527, and the Canadian Supreme Court in The Steel Company of Canada Ltd v Willand Management Ltd [1966] SCR 746. It also expressly approved the summary of the law given by Lord Wright in Cammell Lair and co Ltd v The Manganese Bronze and Brass Co Ltd [1934] AC 402, 425 that "where a manufacturer or builder undertakes to produce a finished result according to a design or plan, he may still be bound by his bargain even though he can show an unanticipated difficulty or even impossibility in achieving the result desired with the plan or specification".

This is also consistent with the decision of Coulson J in MW High Tech Projects UK Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152 (TCC) that obligations to follow certain specifications were subject to an overriding duty to exercise reasonable skill and care, so that if compliance with specifications or plans was not possible without the contractor to a higher negligence the contractor would standard than that provided for not be obliged to comply with by the specified or approved those specifications or plans.

This decision makes clear that compliance with the agreed specifications and plans will not usually excuse a failure to comply with a separate warranty which secures a better outcome than compliance with those specifications and plans could achieve. However, the proper construction of the contract will always depend on its precise terms and context and there are circumstances in which the correct view will be that the alleged warranties only apply to aspects of the construction which are not prescribed by the specifications and plans.

Pending further clarification as to the situations in which the contractor will or will not bear the risk of a faulty design for the work to be carried out, parties should express their intentions clearly in the construction contract and remember that courts will be inclined to give additional warranties full effect in holding the contractor to a higher standard than that provided for by the specified or approved design.

KEY TAKEAWAYS

In the event that an agreed specification or design proves to be defective and the contractor cannot met a specified performance criteria without deviating from the plan, the courts will be be inclined to require that the performance criteria be followed, even at the expense of technical compliance with the agreed design.

There will be circumstances in which the courts are prepared to construe the specified performance criteria as only applying to aspects of the design which are not prescribed by the designs.

The court will determine the scope of performance criteria warranties in light of the other provisions of the contract and its commercial context but parties should resolve the remaining uncertainty with clear drafting and seek legal advice.