Why complying with an agreed international standard can still land you in stormy waters
In a decision that may come as a shock to many, and that will have potentially wide-reaching ramifications for English law contracts, the UK Supreme Court has overturned the Court of Appeal's decision in the long-running Robin Rigg offshore wind farm dispute, by finding in favour of E.ON Climate & Renewables (E.ON).
This decision could significantly affect the risk assessment of existing contracts, as well as insurance and finance arrangements, in the offshore wind farm sector and beyond.
In its judgment, the Supreme Court has held that:
- In giving effect to the natural meaning of the words used by the parties, the contractor, MT Højgaard (MTH), was under an obligation to ensure that the foundations at Robin Rigg would have a minimum lifetime of 20 years.
- That was the case notwithstanding the fact that the 20 year lifetime provision that E.ON relied upon was "tucked away" in a part of the contract that was, according to MTH, essentially a technical - rather than a legal - document.
- This effectively placed on MTH the consequences of an error in the applicable international design standard - DNV's J101 – even though MTH complied with that standard and carried out its work in accordance with good industry practice.
In 2006, E.ON employed MTH to design, fabricate and install 60 wind turbine foundations at the Robin Rigg offshore wind farm in the Solway Firth. In designing the foundations, MTH’s designer, Rambøll, relied on J101, the international standard that was commonly used in the industry at the time and was incorporated into the contract. Unbeknown to the industry then was the fact that J101 contained a fundamental error (the value given in one of the equations for delta (δ) was wrong by a factor of about ten) that resulted in a significant overestimation of the axial load capacity for wind turbines with grouted connections.
In 2009, movement was discovered in the grouted connections, following which the error in J101 came to light. All of the foundations required remedial work, at an agreed cost of EUR 26.25 million. The contract between E.ON and MTH contained various warranties regarding fitness for purpose and provisions regarding the intended lifetime of the foundations.
The issue before the court was which of the parties should bear responsibility for the error in J101 and, therefore, the cost of the remedial work.
Decision in the High Court
At first instance, MTH submitted that it had exercised reasonable skill and care and had complied with its contractual obligations to produce a design that was compliant with J101. E.ON, on the other hand, submitted that MTH had warranted that the foundations would have a service life of 20 years, which had not been achieved, and that MTH was therefore liable as a result.
The judge, Mr Justice Edwards-Stuart, held that the contract required MTH to provide foundations with a service life of 20 years and, as the foundations did not in fact have a 20 year service life, MTH was in breach of contract. As such, MTH was held responsible for the cost of the remedial work.
Decision in the Court of Appeal
On appeal to the Court of Appeal it was held that, although there was “much loose wording” contained in “somewhat diffuse contract documents”, on balance MTH had not given a warranty of 20 years guaranteed service life for the foundations. Rather, MTH had agreed to comply with J101, which was intended to lead to offshore structures with a design life of 20 years. MTH had in fact complied with J101. As such, the Court of Appeal allowed MTH’s appeal.
Decision in the Supreme Court
E.ON subsequently sought permission from the Supreme Court to appeal the Court of Appeal’s decision. The Supreme Court originally refused permission to appeal but then, in late November 2015, and without any explanation or warning, it did a U-Turn and granted permission to appeal.
The matter was heard by the Supreme Court on 20 June 2017, and judgment was handed down on 3 August 20171. Judgment was given by Lord Neuberger, the President of the Supreme Court, with whom Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge agreed.
In reversing the decision of the Court of Appeal and restoring the High Court's decision, the Supreme Court unanimously allowed E.ON's appeal, and held that MTH was responsible for the cost of the remedial work to the Robin Rigg foundations.
In reaching its decision, the Supreme Court held that:
- The natural meaning of the relevant 20 provision at paragraph 184.108.40.206(ii) of the Technical Requirements (TR) involved MTH warranting either (i) that the foundations would have an actual lifetime of 20 years, or (ii) that they would be designed to have a lifetime of 20 years.
- If this paragraph was an effective term of the contract, then it was breached by MTH, regardless of whether MTH warranted an actual 20 year lifetime or a 20 year design life.
- In those circumstances, there were only two arguments open to MTH as to why this paragraph should not be given its natural meaning.
MTH's first argument: a 20 year lifetime obligation would be inconsistent with J101
- The first argument that was open to MTH was that such an interpretation would be inconsistent with MTH’s obligation to construct the works in accordance with J101.
- In relation to that argument, the Court considered a number of earlier cases regarding the reconciliation of competing contractual terms.Applying the principles established in those cases to the present contract, the Court found that MTH's case faced "an insurmountable difficulty" as J101 and the 20 year lifetime warranty were stated to be the "MINIMUM" requirements to be taken into account by MTH in the design of the foundations.
- As such, the Court held that the "more rigorous or demanding" provision (i.e. the 20 year lifetime provision) "must prevail", as the "less rigorous" provision (i.e. J101) "can properly be treated as a minimum requirement".
- The Court went on to comment that MTH was obliged to determine whether to employ shear keys within the grouted connection.MTH chose not to do so, but had shear keys been employed, the Court noted that "the problems which arose would, it appears, have been averted."
MTH's second argument: "too slender a thread"
- The second argument that was open to MTH was that the relevant 20 year clause in the TR was simply too slender a thread on which to hang such an important and potentially onerous obligation (i.e. that the foundations "would survive for 20 years or would be designed so as to achieve 20 years of lifetime").
- MTH relied on a number of factors in support of this argument.In dealing withand rejecting those factors, the Court emphasised the importance of giving effect to the natural meaning of the words used in the contract, irrespective of where those words appear in the contract and/or the nature of document within which they are contained.
- The Court was clear that, in this case, the natural meaning of the words used in the contract "appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years".
In reaching its decision, the Supreme Court has, it seems, reinforced the more literal approach towards contract interpretation that has been increasingly adopted by the English courts in recent years. As such, this decision will be of relevance to all parties who contract under English law.
Going forwards, contractors in particular should be aware of this decision and the increased risk that it potentially entails. Now, more than ever, the importance of clearly drafted contracts cannot be overstated.