Supreme Court rules that contractor bears the risk where international design standard found to contain error

The Supreme Court has handed down its judgment on the high-profile case concerning failed foundation structures of the Robin Rigg offshore wind farm designed and installed by MT Højgaard, which was employed by E.On.  The decision is an important reminder to contractors (and indeed any party that has signed up to a fitness for purpose design obligation) to understand that in fulfilling these obligations they might be required to go beyond the other standards referred to in the contract.

In reaching the decision, the Supreme Court held that the fitness for purpose design obligation that MT Højgaard had signed up to was to be given its natural meaning and that it was not inconsistent with other design obligations contained in the contact – in particular, the obligation to construct the works in accordance with specified international standards, which in this case turned out to contain an error.

It is an important lesson that, unless the parties have specifically provided otherwise, it is the contractor who is expected to take the risk if it has agreed to carry out  a specific design.

What was the dispute about?

The tender documents issued by E.On contained Technical Requirements, which laid out certain design requirements for the contractor to take into consideration, including that the foundations should be in accordance with a document known as “J101”.  J101 is a reference to an international standard for the design of offshore wind turbines.  There is a formula within these standards, which MT Højgaard applied when it designed the foundation structures.  It turned out that one of the values in the formula was incorrect, which ultimately resulted in the foundation structures being too weak and subsequently failing.

Remedial works were carried out to the foundations, but there was – perhaps unsurprisingly given the costs involved (some €26m) – a disagreement over who would bear these costs.

When it came to considering the design obligations in the tender and contract documents, there were seemingly a number of competing design obligations on MT Højgaard.

E.On relied on the following provisions, amongst others, which it argued amounted to a warranty that the foundations would have a lifetime of 20 years:

• Paragraph 1.6 the Technical Requirements (which were part of the Employer’s Requirements) stated that “The Works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofits or refurbishments“.
• Paragraph 3.2.2.2(ii) of the Technical Requirements stated that: “The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement”.
• The contract provided that MT Højgaard should carry out the works so that they are “fit for purpose“, which was ultimately defined in a way that it included adherence to Employer’s Requirements (of which was stated to include the Technical Requirements).
• Another clause of the contract highlighted the requirement for MT Højgaard to design the works in a “professional manner in accordance with modern commercial and engineering, design principles and practices and in accordance with internationally recognised standards and Good Industry Practice“.

MT Højgaard, by contrast, argued that this interpretation was inconsistent with the requirement to carry out the works according to specified standards, and in particular, JS101, which it duly did.

The TCC decision

When the case was first heard (in the Technology and Construction Court), the Court found that MT Højgaard had breached the “fitness for purpose” contractual obligations because the foundations were not fit for their purpose in not ‘surviving’ a service life of 20 years.  The reasoning of the TCC was that the Employer’s Requirements required MT Højgaard to design the foundations with a service life of 20 years, and that this provision was sufficiently clear that it took precedence over the less onerous obligations that the design should comply with “international standards”.  In other words, it did not matter that the breach was caused or contributed by the error in the formula in the J101 international standards – MT Højgaard was still liable although it was held that they were not negligent.

The Court of Appeal decision

MT Højgaard appealed the TCC decision.  The Court of Appeal allowed the appeal, holding that there was no absolute “fitness for purpose” obligation, and focussing instead on the distinction between a design life of 20 years and a service life of 20 years.  The Court of Appeal held that MT Højgaard was not responsible for the problem with the formula because the Technical Requirements simply required it to adopt a “design life” of 20 years, which the Court held that it had done.  The Court of Appeal found that the service life obligation in paragraph 3.2.2.2(ii) of the Technical Requirements was inconsistent with the general theme of the contract, and was “too slender a thread upon which to hang a finding that [MT Højgaard] gave a warranty of 20 years life for the foundations“.  The Court of Appeal therefore found that MT Højgaard was not liable for the full costs of the remedial works.

The Supreme Court decision

E.ON appealed this decision.  The central issue on the appeal to the Supreme Court was whether, in the light of paragraph 3.2.2.2(ii) of the Technical Requirements, MT Højgaard 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.  This came down to two questions:

• Was the requirement in paragraph 3.2.2.2(ii) inconsistent with the obligation to comply with JS101?
• Was paragraph 3.2.2.2(ii) “too slender a thread” on which to hang such an important and potentially onerous obligation?

On the first question, Lord Neuberger held that where the contractor undertakes to construct works according to a specified design, but also undertakes that it will comply with specified criteria (such as a design life of 20 years), the two requirements are not mutually inconsistent.  Rather:

“the courts are generally inclined to give full effect to the requirement that the item complies with the specified 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, this conclusion was helped by the fact that the contract specifically provided that the technical specifications were “MINIMUM requirements” (at Section 3 of the Technical Requirements) and that it was MT Højgaard’s responsibility to identify “any areas where the works need to be designed to any additional or more rigorous requirements or parameters.”

The Supreme Court also rejected the argument that these obligations were “too slender” a thread to hang a finding that MT Højgaard gave a warranty of a service life of 20 years.  Lord Neuberger held that it is clear what the parties agreed, and his judgment acts as a strict reminder for contractors (and indeed any party to a contract) to be sure what their obligations are, even if these go beyond ensuring that standards beyond those referenced in the contract documents are met.

Although it was not necessary to do so to decide the case, the Supreme Court also considered the wording in paragraph 3.2.2.2(ii) (that “the design… shall ensure a lifetime of 20 years“), which could be read it two ways – either: (1) as a warranty that the foundations will actually have a lifetime of 20 years; or (2) as an undertaking to provide a design that can objectively be expected to have a lifetime of 20 years.  In this case, it did not in fact matter because the foundations neither had a lifetime of 20 years, nor was their design fit to ensure a 20 year lifetime.  However, although the first meaning had been taken as correct by the parties in the lower courts, Lord Neuberger stated that he would have preferred the second meaning.

What does this mean for contractors and employers?

Employers often include extensive technical specifications in contracts, for a variety of reasons.  This case confirms that contractors will not simply be able to rely on the employer’s specifications to discharge any performance obligations in the contract, unless this is spelled out clearly in the contract.

There is, however, a glimmer or something positive for contractors signing up on the terms that MT Højgaard found itself in.  At paragraph 30 of the Judgment, Lord Neuberger held that the 20 year lifetime design obligations at paragraph 3.2.2.2(ii) did not guarantee that the foundations would last 20 years without replacement, but simply that they had been designed to last for 20 years without replacement.

Lord Neuberger also held that, despite clause 3.2.2.2(ii) having the appearance of a 20 year warranty, the agreed Defects Liability Period meant that E.ON only had 24 months to appreciate that the foundations were not, in fact, designed as such that they would last 20 years.  In other words, it was not enough for E.On to show that the foundations were failing, meaning that on these terms there is a higher hurdle to jump over for employers wanting to bring these types of claims.