Fitness for purpose v Compliance with specification: the Supreme Court wades in

MT Højgaard A/S v E.ON Climate & Renewables UK

The standard of works to be provided under a construction and/ or engineering contract will always be a key provision, requiring careful consideration by the parties, not least as it can influence the allocation of risk as between the parties.

It is not unusual for the parties to agree that works should be provided to an objective standard, for example, in accordance with reasonable skill and care. Alternatively, the parties may agree that the completed works will achieve a prescribed criteria – i.e. that they will be fit for a stated purpose. The recent case of MT Højgaard A/S (MTH) v E.ON Climate & Renewables UK (E.ON) highlights the difficulties which can arise when the same contractual instrument calls for performance in accordance with a combination of performance standards.

Background

In December 2006 E.ON engaged MTH to design, fabricate and install the foundations in respect of a number of offshore wind turbine generators due to be constructed in the Robin Rigg wind farm in the Solway Firth, Scotland. Pursuant to clause 8.1(x) of the contract, MTH was obliged to design, install and complete the works so that they were fit for purpose. The contract incorporated a number of schedules, which included the Employer's Requirements, which in turn included the Technical Requirements. Pursuant to the Technical Requirements the foundations were to be designed in accordance with an international standard for wind turbine design, known as J101. The Technical Requirements also required that the design of the foundations "shall ensure a lifetime of 20 years in every aspect without planned replacement".

The J101 international design standard was supposed to ensure a service life of 20 years in respect of steel structures. At first blush, therefore, compliance with the J101 international standard would also ensure compliance with the obligation to ensure a service life of 20 years. MTH duly prepared its design for the foundations in accordance with the Employer's Requirements and the J101 international standard.

MTH completed the foundation works in February 2009. However, in late summer of 2009 an error in the J101 international standard was discovered, the result of which was to significantly reduce the likely service life of structures constructed in accordance with the standard.

Only 14 months after MTH's completion of the works, the foundations started to fail. The parties agreed that E.ON would implement remedial works, at the eye-watering cost of €26.25 million. E.ON then commenced proceedings to determine which party should be liable for such costs.

First instance decision

At first instance, the TCC held MTH liable, primarily on the grounds that:

• clause 8.1(x) of the contract required the foundations to be fit for purpose;
• fitness for purpose was to be determined by reference to the Technical Requirements; and
• the Technical Requirements required the foundations to be designed so they would have a service life of 20 years. The foundations failed before expiry of the 20 year promise, and therefore MTH was in breach.

Court of Appeal decision

MTH appealed to the Court of Appeal. Jackson LJ, giving the unanimous judgment, allowed the appeal, finding that:

• the obligation within the Technical Requirements to ensure a service life of 20 years was inconsistent with the remainder of the contract;
• in light of the inconsistency, the other contractual provisions should prevail; and
• the obligation to ensure a service life of 20 years was "tucked away" within the Technical Requirements and accordingly was "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years for the life of the foundations".

Supreme Court Decision

Not content with the decision of the Court of Appeal, the dispute came before the Supreme Court. The question for the Supreme Court was whether, in light of the obligation to ensure a service life of 20 years, MTH was in breach of contract, despite the fact it had used skill and professional care, adhered to good industry practice and complied with the J101 internal standard.

The Supreme Court found that:

• case law has repeatedly demonstrated that the courts are generally inclined to give full effect to a requirement that an item will comply with a prescribed criteria, on the basis that, even where the customer has specified the design for the item, it is the contractor who can be expected to take the risk of that design falling short of the prescribed criteria;

• in any event, there was no inconsistency between the provisions. The obligation to comply with the J1010 international standard was expressly stated to be a minimum requirement. Importantly, the contract also contained a provision pursuant to which MTH was to identify any areas where the works needed to be designed to more rigorous requirements. In light of this, while the contract may impose different standards in respect of the works, the more rigorous of the two standards should prevail. So, notwithstanding that it may have complied with its obligation to design the foundations in accordance with the J101 international standard, MTH had failed in its duty to identify the need to improve on such a design;

• the wording of the relevant provision in the Technical Requirements was not "too slender a thread" in which to impose a service life obligation of 20 years. To the contrary, the words used in the provision were clear and should be given effect.

Key points

The judgment further emphasises that the courts will seek to resolve disputes by reference to the wording of the contract, even here where, as Lord Neuberger put it, the drafting was "long, diffuse and multi-authored". Several commentators have rushed to conclude that the issue faced by E.ON and MTH could have been resolved by a priority or order of precedence clause however Lord Neuberger gave the existing contractual precedence clause short shrift in his judgment, preferring to find that there was no conflict between the contractual provisions and therefore no need to rely on the order of precedence. This case therefore serves as a useful reminder that the courts will not be quick to conclude that there is a conflict between contractual provisions, and will instead look to interpret the contract in a way which will give effect to every clause in the agreement.

This case also highlights that, notwithstanding the onerous nature of a fitness for purpose obligation, the courts will not shy away from a finding that if a party has warranted that it will achieve a particular result, then any failure to achieve such a result is a breach; the reasons behind the breach are immaterial.  Whether this case will make contractors more wary of accepting design liability in the future, for fear of warranting that it will achieve a particular result, remains to be seen.

Practice points

• The importance of each party to a contract understanding its terms and the proper allocation of risk is obvious and should not need further reinforcement but this case serves as a useful reminder that technical requirements and other documents must be thoroughly scrutinised to ensure that they present the same picture as the main contractual conditions. The judgment will be of particular significance in the construction industry in which technical specifications frequently form part of contracts.

• Read the contract carefully so as to identify whether there is a fitness for purpose provision. Remember, that such an obligation may be express (as was the case in the contract between E.ON and MTH) or more subtle. For example, an obligation to warrant that the works will comply with the performance specification may effectively amount to a fitness for purpose obligation.

• As a general rule, due to their draconian nature, contractors should try to avoid agreeing to a fitness for purpose obligation, not least as breach of such an obligation is often uninsurable. Conversely, clients should be aware that, while a fitness for purpose provision will often provide a comprehensive transfer of risk, contractors will almost certainly price for such a risk, which may significantly inflate project costs. Parties may wish to consider if there are alternative contractual mechanisms available which will adequately provide for the transfer of risk without imposing an absolute obligation on the contractor.

If you would like to discuss this topic in more detail please contact Jessica Evans.