MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
We have reported in the past1 on this long running litigation and the decisions in the High Court and the Court of Appeal. The Supreme Court initially rejected the application for permission to appeal the Court of Appeal's decision but in an unprecedented U-turn late last year it granted permission. This week's final decision has overturned the Court of Appeal decision and restored the order of the Technology and Construction Court holding MT Højgaard liable for failure of foundation structures of offshore wind turbines at Robin Rigg.
As anticipated, the decision has important consequences for those with warranty, "fitness for purpose", "good industry practice" and similar obligations in sale and construction contracts, even if they build in accordance with the specification (which is itself erroneous).
The background
In 2006, MT Højgaard (MTH, the contractor) agreed to design, fabricate and install 60 wind turbine foundations at the Robin Rigg offshore wind farm for E.ON Climate and Renewables (E.ON, the employer).
In carrying out the design of the foundations, and the grouted connections in particular, MTH's designer, Rambøll, relied on the international standard DNV-OS-J101 (J101). However, J101 contained a fundamental error that resulted in a significant overestimation of the axial load capacity for wind turbines with grouted connections. Rambøll was unaware of this error when it carried out the design.
In 2009, it was discovered that movement was taking place 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 €26.25 million.
The contract stated at clause 8.1 that, amongst other things, MTH "shall ... complete the Works":
- "with due care and diligence";
- "in a professional manner in accordance with ... Good Industry Practice";
- "so that the Works, when completed, comply with the requirements of this Agreement"; and
- "so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification".
The Technical Requirements ("TRs") within E.ON's tender documents (which became part of the contract) appeared to be contradictory. This was a key issue in both the Technology and Construction Court ("TCC") and the Court of Appeal ("CA") decisions. Those TRs stated that the foundation design would "ensure a lifetime of 20 years in every respect without planned replacement", which appeared to constitute a warranty that the foundations would function for 20 years. However, all of the other provisions in the TRs were directed towards a design life of 20 years. Furthermore, J101 (which was also incorporated into the contract) was itself confusing in this respect, as it referred to both a service life and a design life of 20 years.
The parties disagreed as to whether there was a warranty by MTH that the foundations would actually have a lifetime of 20 years, or simply an undertaking to provide a design that objectively could be expected to have a lifetime of 20 years.
Both the CA and the TCC confirmed that engineering and construction contracts may, and often do, contain obligations both to comply with certain specifications and standards and to achieve a particular result.
However, they disagreed on the interpretation of the contract, with the CA overturning the decision of the TCC on the basis that, while at first sight there appeared to be a warranty of an operational life of 20 years, looking at the contract as a whole (including the TRs and J101) and, given that all but two references were to a design lifetime of 20 years, it should not be taken as such.
The Supreme Court decision
The Supreme Court found that it was not necessary to determine whether the TR provisions included a warranty by MTH for 20 years' operational life or simply an undertaking for 20 years' design life. It held that MTH was in breach of contract in either case, as the foundations neither had a lifetime of twenty years, nor was their design fit to ensure one.
It considered that there were only two arguments open to MTH. First, that a warranty would be inconsistent with the obligation to comply with J101. Second, that such a warranty was too onerous an obligation to be established by reference to so "slender a thread" as only two provisions in the TRs rather than more substantive provisions in the main body of the contract.
On the first point, the Supreme Court concluded that the courts are generally inclined to give full effect to a requirement that the works produced comply with the prescribed criteria, even if the employer has specified or approved the design. So a contractor is expected to bear the risk if it has agreed to use a design that is incapable of meeting the criteria it has agreed. In this case, J101 was a "minimum requirement" and the TRs provided that it was the responsibility of MTH to identify any areas where the works needed to be designed to any additional or more rigorous parameters.
On the second point, the Supreme Court considered that the rules of contract interpretation required it to give effect to the provisions in the TRs to "ensure a lifetime of 20 years" notwithstanding MTH's arguments that: the contract was ambiguous and inconsistent; the obligation was found in only part of the TRs, essentially a technical document, rather than in the contract; if the parties intended to include such an onerous obligation it would have been given more prominence in the contract; the emphasis was on design life, not operational life; and the specific clause in question was concerned with planned maintenance and should not be given broad effect.
Comment
Although the Supreme Court reversed the CA, all three courts confirmed that an express obligation to construct a work capable of carrying out a defined duty (e.g. a 20 year service life or fit for purpose) can, if the contract wording is sufficiently clear, apply in addition to the obligation to comply with the plans and specifications. Complying with the specifications and applying the relevant standard may not be enough and, even though the standard has been followed, and the design has been verified and approved by the relevant certifying authority (as it had been in this case by DNV, the same authority that promulgated J101), this may not be sufficient to discharge the contractor's absolute obligation to achieve a particular purpose or service life.
Absolute warranties are common in engineering and construction contracts, including those used in the offshore oil and gas and wind farm sectors. Many of the popular standard forms, such as the LOGIC standard contracts, include absolute fitness for purpose obligations. The risks to contractors of accepting these provisions has now been clarified.
It is also notable that a warranty may be "tucked away" in the TRs or specification rather than in the main contract and confusion may arise out of the potential ambiguity between a warranty for an operational life and one for a design life.
Footnotes
1 http://www.incelaw.com/tw/know...
http://www.incelaw.com/en/know...
http://www.incelaw.com/tw/know...
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