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.
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:
Court of Appeal decision
MTH appealed to the Court of Appeal. Jackson LJ, giving the unanimous judgment, allowed the appeal, finding that:
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:
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.
If you would like to discuss this topic in more detail please contact Jessica Evans.