Supreme Court rules on fitness for purpose obligation where industry standard defective

Business Meeting 10 Print publication

10/08/2017

In a unanimous judgment handed down on 3 August 2017, the Supreme Court found a contractor liable for repair costs of €26.25 million after the foundation structures it designed and installed for offshore wind farms failed shortly after completion [1].  The contract imposed a fitness for purpose obligation on the contractor, which allocated to the contractor the risk that the design standard imposed on it by the other party was defective.  The Supreme Court’s ruling overturned an earlier Court of Appeal decision.

Partners Gwendoline Davies and Jules Harbage, from Walker Morris’ Commercial Dispute Resolution and Construction & Engineering teams, consider the judgment and the practical implications for those responsible for drafting commercial and construction contracts within their organisations.

Background

MT Højgaard A/S (MTH) designed and installed the foundation structures of two offshore wind farms at Robin Rigg in the Solway Firth for companies in the E.ON Group (Eon).  The Technical Requirements (TR), which formed part of the Employer’s Requirements in the tender documents, required MTH to prepare the detailed design in accordance with a document known as J101, an international standard for the design of offshore wind turbines.

Importantly, paragraph 3.2.2.2 (ii) of the TR provided:

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.

Clause 8.1 of the parties’ later written contract included, among other things, a provision requiring the works to be fit for purpose (defined as “fitness for purpose in accordance with, and as can properly be inferred from, the Employer’s Requirements”). The TR were attached as Part i of the contract.

Crucially, there was an error in one of the J101 equations dealing with the design and construction of grouted connections. MTH’s design provided for grouted connections without shear keys.  It explained at the time that no shear keys were specified because application of the equation indicated that the connections, as designed, had more than sufficient axial capacity to take the axial load.  However, after completion of the works, there was a serious problem at another wind farm where the grouted connections did not have shear keys and started to fail.  The publisher of J101 identified an error in the equation which meant that the connection strength at wind farms including Robin Rigg had been substantially over-estimated.  When the Robin Rigg connections also started to fail, MTH and Eon agreed that Eon would develop a scheme for remedial works.  Legal proceedings to determine who was responsible for meeting the cost of the works went all the way to the Supreme Court.

The decision

The key issue was whether, in light of paragraph 3.2.2.2 (ii) and another similar provision in 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 said that, when considering the natural meaning of paragraph 3.2.2.2 (ii), that provision involved MTH warranting that the foundations would have a lifetime of 20 years or agreeing that the design of the foundations would be such as to give them a lifetime of 20 years. (Ultimately, it was not necessary for the Court to decide this point, as MTH had breached the provision regardless.)

Having concluded that the TR provisions were effectively incorporated into the parties’ contract, the Court went on to say that there were only two arguments open to MTH as to why paragraph 3.2.2.2 (ii) should not be given its natural meaning. Firstly, that such an interpretation would result in an obligation which was inconsistent with MTH’s obligation to construct the works in accordance with J101.  Secondly, that the paragraph was “simply too slender a thread on which to hang such an important and potentially onerous obligation”.

In relation to the first argument, the Court concluded that, while each case must turn on its own facts, the message from a line of UK (and Canadian) cases is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, it is the contractor who can be 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 has agreed.

In this case, it was clear from express wording in the TR that J101 was a minimum design requirement and it was MTH’s responsibility to identify any areas where the works needed to be designed to any additional or more rigorous requirements.  Even if MTH complied with the design requirement, it would still be liable for the failure to comply with the required criteria, because it had a duty to identify the need to improve on the design.  Other TR provisions supported this conclusion.

In relation to the second argument, paragraph 3.2.2.2 (ii) clearly appeared to impose a duty on MTH which involved the foundations having a lifetime of 20 years. That was not an “improbable” or “unbusinesslike” interpretation, especially as it was the natural meaning of the words used.  It was also not unsurprising in light of other TR provisions.

Despite the contractual arrangements being “long, diffuse and multi-authored”, the Court had to do its best to interpret them by reference to normal principles. In this regard, it is interesting to note the following extract from a 1986 Privy Council judgment referred to by the Court [2]: “inelegant and clumsy” drafting of a “badly drafted contract” is not a “reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made”, although “the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention”.

The Court gave short shrift to MTH’s suggestions that it was surprising that such an onerous obligation was only found in part of a paragraph of the TR and not spelled out in the parties’ contract, that if the parties had intended such a warranty or term it would not be “tucked away”, and that paragraph 3.2.2.2 (ii) was redundant given that the other obligations with regard to design, installation and so on were included in clause 8.1 of the contract. Among other things, it was clear from the terms of the contract that the TR provisions were intended to be of contractual effect.

WM Comment

This decision serves as a further important reminder to contracting parties of the need to ensure that their contractual documents accurately record their intentions. Clear, unambiguous and consistent drafting is vital.  In its judgment, the Supreme Court reiterated once again that emphasis should be placed on giving effect to the natural meaning of clear contractual wording as drafted and agreed by the parties (even if this has disastrous consequences for a party) [3].

Construction and engineering projects in particular are likely to involve complex contractual arrangements, where the documentation comprises numerous appendices and technical schedules in addition to the main contract terms.

This case highlights the importance of dovetailing the different provisions and ensuring that technical requirements and the like are sufficiently examined, understood, and effectively incorporated, into the parties’ contract (if that is what is intended).

Contractors and specialist subcontractors will need to ensure that they pay close attention to the small print and consider whether enhanced design is required (and price accordingly).

Developers, particularly on engineering contracts, will take comfort from this case that a fitness for purpose obligation will be enforced with reference to all the purposes set out within the contract as a whole. However, if a specific purpose is vital, it would still be prudent to set this out within the express fitness for purpose clause itself rather than relying on a provision buried within a technical schedule.

Remember: Be clear as to what you intend (or do not intend), to avoid any nasty surprises further down the line.

If you have any queries in relation to provisions in existing contracts, or require assistance in relation to future contractual arrangements, please contact Gwendoline Davies or Jules Harbage who will be very happy to help.

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[1] MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59
[2] Mitsui Construction Co Ltd v Attorney General of Hong Kong (1986) 33 BLR 7, 14
[3] Arnold v Britton and others [2015] UKSC 36

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