In MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd and others [2017] UKSC 59, the court considered the two standards of duty generally applied to design & build contractors: the obligation to use reasonable skill and care in relation to design, and the obligation to design a product that is fit for its intended purpose. In what is a landmark decision, the Supreme Court has held, reinstating the first instance judgment, that the contractor was liable under the fitness for purpose ("FFP") obligation, despite the contractor not being negligent, and therefore not in breach of the reasonable skill and care clause found elsewhere in the contract.

This is an extremely important decision. It will have significant ramifications for contractors and, to a lesser extent, consultants who may now find themselves liable under similar warranties/contractual promises. Depending on the precise terms of cover this may leave insureds unable to recover losses under their professional indemnity policies.

MT Højgaard A/S ("MTH"), the designer contractor, undertook to design and supply foundations for off-shore wind turbines that would last 20 years or more. MTH designed the foundations, relying on J101, the international standard that was commonly used in the industry at the time. The standard had been incorporated into the contract. This standard in fact contained a serious error (of which MTH could not reasonably have known) which produced incorrect equations, resulting in the foundations failing and remediation costs of €26.5m. The dispute centred on who should bear these costs.

The Technology & Construction Court ("TCC"), whilst finding that MTH had exercised reasonable skill and care and had not been negligent, held that:

  • the contract required the foundations to be fit for purpose;
  • fitness for purpose was to be determined by reference to the technical requirements contained in the tender documents;
  • the technical requirements warranted that the foundations be designed so that they would have a lifetime of 20 years.

The TCC found MTH in breach of contract and liable for the remediation costs. The Court of Appeal reversed the decision, finding that as MTH had agreed to comply and had complied with J101, it was not in breach of contract.

E.ON appealed. The Supreme Court unanimously allowed the appeal, restoring the TCC's original finding of liability on the part of the contractor. Its principal finding was that where a contract requires the product to be made according to a prescribed specification, the contractor takes the risk of the defective design even if the prescribed specification is defective and the contractor exercised reasonable skill and care. Lord Neuberger held that where there are two inconsistent provisions or standards, rather than concluding that they are inconsistent, the correct analysis is that the more rigorous or demanding of the two standards or requirements must prevail. The less rigorous provision (in this case, reasonable skill and care) will be treated as a minimum requirement.

What does this mean for contractors' defences?

For decades the test for standard of care in English professional negligence claims has been the "Bolam test" after the 1957 case of Bolam v Friern Hospital Management Committee. This established that a professional would not be guilty of negligence if he had acted in accordance with a practice accepted as proper by a responsible body of people skilled in that particular area. It also confirmed that such a professional would not be negligent merely because another body of opinion existed, which would adopt a different practice.

Following the Bolam case, the 1998 case of Bolitho v City & Hackney Health Authority addressed the interaction with the concept of causation. Whilst the Bolam test ensures that an action cannot be a breach of duty if it conforms to a reasonable body of professional opinion, Bolitho established that the professional opinion relied upon must not be unreasonable or illogical. Otherwise, the action would constitute a breach of duty. However, the courts would only find that a body of opinion is unreasonable in rare cases.

Accordingly, if the contractor has exercised the required level of skill and care, he will not be liable for failures. This reliance on his skill and judgement does not necessarily require him to achieve a particular result; it does not guarantee anything.

This contrasts with the stricter fitness for purpose ("FFP") obligation. This obligation requires the contractor to achieve a particular result or comply with a particular standard/regulation and does not require a finding of negligence for the contractor to be liable if that result is not achieved. At common law, in the absence of an express standard of care, or other term or circumstance to the contrary, an FFP obligation is likely to be implied (IBA v EMI and BICC [1980]).

The problem for design & build contractors is that their contracts contain both FFP and reasonable skill and care obligations. Historically, construction professionals may have been comforted by the assumption that as long as they acted with reasonable skill and care, they would not be in breach and liable for defects. In other words, it has long been thought that the reasonable skill and care obligation would prevail over other terms or at least that stricter FFP terms would be construed within the context of the duty of reasonable skill and care. That presumption is now in tatters. This case clearly shows that the Court is not going to regard the exercise of reasonable skill and care as a "get out of jail free card".

In practice, whether a reasonable skill and care obligation will prevail over other obligations in the contract will depend on how the contract is drafted. In MT Hojgaard the skill and care obligation came off second best. The parties had agreed a fitness for purpose obligation and MTH was therefore held to that higher standard. It is not hard to find similar obligations/promises tucked away in the small print of most design & build construction contracts. In some construction industry sectors, express FFP warranties are standard. How many contractors will have expressly warranted compliance with building regulations for instance? The current review of the fire safety of ACM panels will surely bring these obligations into sharp focus.

What does this mean for insured contractors?

Professional indemnity policies cover contractors for breach of professional activities and duties i.e. the failure to act with reasonable skill and care. As with consultant's PI, there is no cover for contractual promises. Typically, therefore, design & build PI policies expressly exclude cover for contractual warranties and guarantees, including fitness for purpose warranties. Such exclusions commonly contain a write back of cover where the Insured is also in breach of its duty of skill and care and hence would have been liable in the tort of negligence anyway. It can readily be seen that this type of provision would not have availed the contractor in MT Hojgaard. It is worth noting that there are a number of bespoke FFP extensions on the market for those who seek them, but they need very careful consideration as they are often complex and may not always provide the cover that is needed.

So if an FFP claim is made in circumstances where the contractor is not also found to be in breach of a duty of care, the contractor's loss is generally going to be uninsured under its PI policy. Claimants may also now be encouraged to bring standalone FFP claims without the fall back of a negligence claim at all (which would be harder to prove and add a further tier of expense). Contractors could therefore find themselves facing strict claims without the prospect of any insurance cover.

So be warned.

It has hitherto been extremely rare, if not unheard of, for a party who has breached an FFP warranty not to have also been found negligent at the same time. Not anymore. If the MT Hojgaard case marks a paradigm shift against design & build contractors and the way their contract obligations are construed, it is certainly something to be worried about FFP claims may start to emerge over the traditional negligence claims which are not only much more difficult to defend (strict obligations naturally are) but may also have coverage implications under PI insurance. Moreover, it is very unlikely that any design consultant that the contractor has appointed would have taken on a fitness for purpose warranty in the same way and therefore contractors may struggle to pass their liability down to their supply chain.

In practice, this decision means that insured professionals should study their insurance policies to ensure that they understand how their PI cover is intended to respond to FFP claims. They should in any event think very carefully before agreeing to give any FFP warranties. Importantly, they should seek to clarify whether and how technical schedules and other contract documents (often running to hundreds of pages) affect overall obligations in their general contract design conditions. When doing so, they would be well advised to interpret what the contract says quite literally. The test set out by the Supreme Court in the case of Arnold v Britton [2015] UKSC 36, suggests the courts will be increasingly inclined to interpret contract provisions at face value.