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Fitness for Purpose: When €26.25 million hangs by a thread

MT Højgaard A/S (Respondent) v E.On Climate & Renewables UK Robin Rigg East Limited and another (Appellants)

The Supreme Court has clarified some important principles regarding contract interpretation and the duties imposed on parties overturning the decision of the Court of Appeal, to hold that a fitness for purpose obligation required the contractor to achieve a particular result.  Even though the contractor complied with the prescribed design set out in the contract and it was that design that caused/contributed to the failure to achieve a particular result, the risk remained with the contractor.   

Background

E.On engaged MT Højgaard to design and install the foundation structures for two offshore wind farms.  E.On had specified in the contract that the foundation structures should be designed, as a minimum, in accordance with an international industry standard (J101). The foundation structures failed shortly after completion of the project.  It was found that there was a design flaw  contravening J101 due to an erroneous calculation.  The parties worked together to develop a scheme for remedial works in the sum of €26.25 million.  Proceedings were issued to determine which party was liable for the costs of the rectification.

The Court was asked to interpret the interaction between various terms within the contractual documents to determine (1) whether MT Højgaard had exercised reasonable skill and care in its application of the standards set out in J101 and the design of the foundations, and (2) the extent of the fitness for purpose obligations on MT Højgaard. 

E.On relied on a standard fitness for purpose term within the contract and referred specifically to the Employer’s Requirements, which included Technical Requirements (“TR”), with paragraph 3.2.2.2(ii) providing - " The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement.”

Further provisions specified that a hierarchy of standards applied to the TR, with 1 being the highest and that where any conflict arose between the standards, the one with the highest priority would take precedence.  Immediately preceding paragraph 3.2.2.2 (ii) was the requirement for MT Højgaardt to produce the detailed design of the foundation structures in accordance with J101 (at paragraph 3.2.2.2(i)). 

MT Højgaard argued that it had exercised reasonable skill and care and had complied with all of its contractual obligations, including that of the standard prescribed by J101.  E.On alleged that MT Højgaard had been negligent in the design of the foundations, and that MT Højgaard was responsible for numerous breaches of contract, including the fitness for purpose obligation as the lifetime of the foundations had fallen far short of 20 years.   

At First Instance – Technology & Construction Court

The TCC found that MT Højgaard had not been negligent and rejected a number of allegations for breach of contract.  However, judgment was held in favour of E.On on the grounds that the contract did impose a fitness for purpose obligation on MT Højgaard, which it had breached as the foundation structures had failed shortly after completion of the project.  In effect, MT Højgaard gave a warranty of a 20 year life span for the foundation structures. 

Court of Appeal

The CA overturned the decision of the TCC.  The CA held that there was no fitness for purpose warranty within the contract and that MT Højgaard’s obligation was that the foundations should have a ‘design life’ of 20 years but this was not a guarantee.  Further, the CA commented that the Technical Requirements were “tucked away” in the contract and were “too slender a thread upon which to hang a finding that MT Højgaard gave a warranty of 20 years life for the foundations."

Supreme Court

The central question before the SC was whether MT Højgaard had provided a fitness for purpose warranty, and was therefore in breach of contract despite using due care and skill and in complying with J101.  The SC considered that MT Højgaard had two potential arguments as to why paragraph 3.2.2.2(ii) should not be given its natural effect: -

Such an interpretation (that a fitness warranty had been given) resulted in an inconsistent obligation to MT Højgaard’s obligation to construct the foundations in accordance with J101.  This premise was rejected with reference to a number of previous decisions and observations of judges in the courts.   Whilst each case turns on its own facts, the courts are generally inclined to give full effect to the requirement that the end result complies with the contractual criteria.  Even where the employer has specified/approved the design, it is the contractor who is expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the agreed criteria.

The second argument relied upon Jackson LJ’s comment in the Court of Appeal that the paragraph was “too slender a thread” upon which to hang such an onerous obligation.  This was rejected on the basis that paragraph 3.2.2.2(ii) is clear in its terms in that it imposes a duty on MT Højgaard which involved the foundations having a lifetime of 20 years. It was a not an “improbable [or] unbusinesslike” interpretation and there was a stipulation that the Technical Requirements were a “minimum”.

E.On’s appeal succeeded and the order made by the TCC was restored.

Comments

Prior to the Supreme Court decision, there was a perceived reluctance by the courts to find that the contractual intent was for a professional to warrant a specific outcome.  The default position previously seemed to be to revert to a promise to exercise reasonable skill and care.  Clearly, Højgaard changes this. Though each case must be dealt with on its own facts, it seems the courts may be less reluctant to apply the stricter standard in future.

Højgaard reinforces the need for all contracts to be reviewed and scrutinised. This relates not just to the body of the contract itself but it is equally applicable to subordinate documents or references to professional or industry codes which may be referred to.  Policy cover is not usually provided for fitness for purpose guarantees or contractual guarantees above the common law standard of using reasonable skill and care and PII policies generally exclude indemnity for claims beyond the insured's liability in negligence.  An exclusion such as this might prove useful in a situation such as in Højgaard, where Insurers would not be liable for damages.  However, such exclusions may have the potential to give rise to coverage disputes between insurers and the insured where, for example, the Claimant’s allegations are so comprehensive that it is often difficult in commercial negotiations to delineate whether a settlement is due to fitness for purpose or negligence.

In technical contracts such as the above, the existence or extent of a fitness for purpose obligation may be unclear.  This reinforces the need for contracts to be properly reviewed before they are agreed and for brokers to advise on the potential pitfalls of insured's agreeing contractual terms without proper advice.

Contact

For more information please contact Steve Oates, Partner on +44 333 010 5954 or Eliza Kwok, Solicitor on +44 121 516 7444.

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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