On 3 August 2017 the Supreme Court handed down its decision in the case of MT Højgaard A/S (MTH) v E.ON Climate and Renewables UK and others (E.ON) which could have significant ramifications on the interpretation of construction contracts.

The Background

In December 2006, E.ON engaged MTH to design, fabricate and install 60 wind turbine foundations at Scotland’s first offshore wind farm, Robin Rigg in the Solway Firth. Whilst completion of the works was achieved in February 2009 shortly thereafter; serious failures in the grouted connections of each foundation came to light.

A similar failure had taken place in an offshore windfarm in the Dutch North Sea, Egmond aan Zee, which subsequently triggered a review of the international standard for design of offshore wind turbines, J101. As a result, a fundamental error was discovered which meant that the axial capacity of the grouted connections in wind farm foundations at various locations including Egmond aan Zee and Robin Rigg had been substantially over-estimated.

Whilst the parties agreed that E.ON would develop a scheme of remedial works which were undertaken at a cost of EUR €26.25 million, proceedings were issued to determine which of the parties should bear the responsibility for paying such costs.

The Dispute

The contract between E.ON and MTH contained various warranties regarding fitness for purpose and provisions regarding the intended lifetime of the foundations.

E.ON’s argument was based upon the fitness for purpose obligation contained in the conditions, which was located (most prominently) in paragraph 3.2.2.2 of the Technical Requirements (i.e. the Employer’s Requirements) (TR). Paragraph 3.2.2.2 of the TR stated:

“… design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement.”

On the other hand, MTH relied upon a series of provisions contained in the TR, which imposed a ‘design life’ of 20 years. It was MTH’s positon that paragraph 3.2.2.2 of the TR had to be read in the context of the other obligations, and was insufficient by itself to amount to a fitness for purpose warranty.

It maintained the position that the essence of its contractual obligations was limited to complying with J101, with a 20-year design life in mind, and to otherwise carry out its work non-negligently.

As a result, the central question before the Supreme Court was whether in light of the clauses contained within the TR, MTH was in breach of contract (despite the fact that it used due care and professional skill, adhered to good industry practice, and complied with J101).

The Supreme Court Decision

The Supreme Court held that the provision contained within the contract could be read in two ways either as:

  • a warranty that the foundations would have a lifetime of 20 years; or
  • as an undertaking to provide a design that can objectively be expected to have a lifetime of 20 years.

On either interpretation MTH were liable because the foundations neither had a lifetime of 20 years, nor were their design fit to ensure one. As a result, the court gave full effect to a fitness for purpose obligation even though it was not in a prominent place in the contract.

In addition, whilst the court found that MTH had complied with J101 this did not assist their position. The court held that obligations to:

  • comply with a particular design, specification or standard; and
  • achieve a particular result

are “not mutually inconsistent”, even if there is an error in the standard which will prevent compliance with the second point.

In other words, MTH’s obligation to achieve the result was overridden by the obligation to comply with J101. In addition, J101 only provided for a minimum standard and it was MTH’s responsibility to identify where the works needed to be designed beyond that set out in J101.

The Supreme Court stated generally that a contractor is expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he had agreed.

Comments

In reaching its decision, the Supreme Court has, it seems, reinforced the more literal approach towards contract interpretation. The importance of clearly drafted contracts is, now more than ever before, of vital importance to ensure that the contract reflects the parties intentions.

In addition, parties’ considerations should extend beyond the contract to specifications and the like. Whilst historically these documents may not have attracted the same level of scrutiny as say a schedule of amendments to a standard form contract, the courts have provided a stark warning to all.