In a previous construction e-bulletin in December 2012, we considered the impact of Trebor Basset and Cadbury v ADT Fire and Security (Trebor) on the established principles of a contractor's obligations with regard to fitness for purpose provisions. While our e-bulletin focussed on the implications of the decision on the difference between fitness for purpose provisions in contracts for the supply of goods and those in contracts for the supply of services, Trebor also provided a timely reminder of the importance of clear contractual provisions when parties are attempting to impose a fitness for purpose obligation on a contractor, a principle which has been brought to the fore again in the recent case of MT Hojgaard v E.ON Climate and Renewables (Hojgaard).
A brief reminder of the facts in Trebor: Trebor had contracted with ADT to design, supply, install and commission a fire suppression system, which failed to prevent a fire caused during the production of popcorn, causing significant damage to the factory. While the trial judge found that ADT was liable for a failure to design the system with reasonable skill and care, the Court of Appeal dismissed the claim against ADT. One of its reasons was that, where the contract required both that ADT exercise reasonable skill and care, and that it had to ensure the system was "fit for purpose", the contract would need to contain "very clear words indeed" in order that the "fit for purpose" obligation could be deemed to take precedence over the duty of reasonable skill and care. The Court determined that, as the "context is fire suppression, not even fire prevention" a reasonable person would not expect the contract to impose a "fit for purpose" obligation on ADT that it had guaranteed the system to prevent all fires.
In Hojgaard, the contractor, MT Hojgaard (MTH) designed, fabricated and installed 60 wind turbines for Scotland’s first offshore wind farm. In doing so, MTH was under an obligation to their employer, E.ON, to design in accordance with the international standard DNV-OS-J101 ("J101") and also to "ensure a lifetime of 20 years in every aspect without planned replacement."
The foundations of the turbines consisted of a monopole and a transition piece held in place by a grouted connection, designed by MTH. It was accepted that MTH had complied with the requirements of J101. However, as J101 itself contained a fundamental flaw regarding the formula used to calculate axial load capacity, remedial works were necessary to the turbines within the 20-year lifetime, causing MTH to be in alleged breach of its obligation to ensure a lifetime of 20 years, notwithstanding its compliance with J101.
A dispute arose between the parties as to who was liable for the remedial costs. E.ON argued that MTH was responsible for the design and the absolute obligations to achieve fitness for purpose and a lifetime of 20 years. Conversely, MTH argued that its obligation was to exercise good industry practice to produce a J101-compliant design, and that it should not be responsible for the risk that J101 was flawed.
First instance decision
At first instance, the Technology and Construction Court held in favour of E.ON. The court held that MTH was required to achieve the result of designing foundations with a lifetime of 20 years, this provision being "additional to, but not inconsistent with, MTH's other less onerous obligations such as compliance with J101." The court found that a general obligation to exercise reasonable care can exist concurrently with an absolute obligation that the foundations would last 20 years. Therefore, even though MTH was not found to have been negligent, it was held liable for the cost of the remedial works because it failed to comply with its obligation to design foundations that would have a lifetime of 20 years.
Court of Appeal decision
The Court of Appeal reversed the first instance judgment. The court found that the "fit for purpose" clause was qualified by the phrase "as determined in accordance with the Specification using Good Industry Practice", (a term which was defined in the contract as requiring the exercise of reasonable skill and care, as well as compliance with J101) and was, therefore, "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations." The court took a wider interpretation and considered that a reasonable person in the position of either of the parties would realise that the normal industry standard in the construction of offshore wind farms was compliance with J101. Such a reasonable person would have known that "such compliance was expected, but not absolutely guaranteed, to produce a life of 20 years."
Hojgaard supplements the principles laid out in Trebor, that where a fitness for purpose requirement sits side-by-side with a general obligation of reasonable skill and care, it ought to be made clear that the former is intended to have absolute and overriding application. In each case, the judge considered what a reasonable person would have expected when faced with the contract in question, and determined that a reasonable person would not expect the fitness for purpose obligation to be overriding: in the case of Trebor, a reasonable person would not have expected the fire suppression system to prevent all fires, and in Hojgaard, a reasonable person would not have expected the foundations to be guaranteed for 20 years in circumstances where the relevant design standard was met.
Both cases emphasise the importance of clear wording when drafting – or interpreting – fitness for purpose obligations. To displace the obligation of reasonable skill and care, the contract must use certain and conclusive terms to make it clear that the parties intended that a fitness for purpose obligation might be breached even if the reasonable skill and care obligation had been met.