Court of Appeal overturns fitness for purpose ruling

The Court of Appeal has determined that a fitness for purpose obligation contained within a schedule to a construction contract was to be read subject to more general obligations to exercise reasonable skill and care and comply with international standards found elsewhere in the contract. The decision sets aside an earlier judgment of the TCC which held that the fitness for purpose obligation was to supplement these more general obligations. This case highlights the tensions that can arise where parties include references to differing standards of design within the same contract.

MT Hojgaard A/S v E.ON Climate and Renewables UK

MT Hojgaard (MTH) was engaged by E.ON to design, fabricate and install the foundation structures for 60 offshore wind turbines in the Solway Firth. Shortly after completion the grouted connections failed. The parties agreed that E.ON would develop a scheme of remedial works, the cost of which amounted to €26 million. Litigation proceeded in order to determine who should bear that cost.

In April 2014, the TCC held that MTH was liable to E.ON for breach of contract because the design of the foundations was not fit for purpose. The judge’s reasoning was based on an Employer’s Requirements schedule to the contract which required MTH to achieve a result, namely foundations with a service life of 20 years. This provision took precedence over MTH’s other less onerous obligations such as the requirement to comply with an international standard for the design of offshore wind turbines known as J101.

MTH appealed.

The Court of Appeal’s Decision

The Court of Appeal had to identify MTH’s obligations within somewhat “diffuse” contract documents. The question for the Court was whether the contract imposed a “double obligation” upon the contractor requiring MTH not only to comply with J101, but also to achieve a result, namely foundations with a service life of 20 years. Part of the problem lay in the fact that J101 contained a significant error, not known about at the time the contract was entered into, which dramatically reduced the service life of the foundations. Compliance with J101 would not therefore allow the foundations to fulfil their intended purpose for a period of 20 years, as envisaged by a number of contractual provisions.

The Court started by considering two paragraphs of the Employer’s Requirements schedule relied upon by the TCC judge which stated that the design of the foundations “shall ensure a lifetime of 20 years in every respect without planned replacement”. The Court stated that at first sight such provisions constituted a warranty that the foundations would function for 20 years. On the other hand, however, all of the other provisions of the Employer’s Requirements referred to a “design life” of 20 years. That did not necessarily mean a guaranteed operational life of 20 years.

The Court also took note of the hierarchy of the various contract documents. The contract conditions took precedence over other contract documents, and the Employer’s Requirements came fourth in the order of precedence. The Court determined that the obligations imposed by the contract conditions required only due care, professional skill, adherence to good industry practice, and compliance with the Employer’s Requirements and so were in fact the opposite of requiring an absolute warranty of quality.

The Court concluded that a reasonable person in the position of E.ON and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with J101 and that such compliance was expected, but not absolutely guaranteed, to produce a service life of 20 years. There was an inconsistency between the obligations in relation to achieving a guaranteed operational life of 20 years and all the other contractual provisions, and the court was not to “be led astray by that inconsistency”. The two strongly worded paragraphs in the Employer’s Requirements were “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years operational life for the foundations.

Conclusions

This case demonstrates the difficulties posed by the co-existence of absolute obligations (requiring performance to a certain standard) alongside obligations qualified to the standard of reasonable skill and care.

In setting aside the High Court’s decision, the Court of Appeal has provided comfort to construction professionals. Reasonable skill and care is the common law standard by which professionals are expected to discharge their obligations. If, however, absolute obligations sit alongside that obligation, there is a risk that performance must be discharged to a higher standard.

The tensions in this area are highlighted by the fact that this is already the second time this year the courts have been asked to consider fitness for purpose obligations versus reasonable skill and care. In MW High Tech Projects v Haase Environmental Consulting (see our earlier Law-Now here) the TCC noted that specific obligations to comply with a specification would remain subject to an overriding obligation to exercise reasonable skill and care where the contract made provision for both to apply.

It is of utmost importance for parties to agree their respective responsibilities during the negotiation and drafting of any construction contract. Here the Court was faced with contract documents of “multiple authorship”, which contained “much loose wording”. Parties are well advised to review their obligations carefully to ensure they reflect what the parties understood the contract to mean and that their risks can be covered adequately taking into account insurances and appropriate pricing.

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References: MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited [2015] EWCA Civ 407

MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited [2014] EWHC 1088 (TCC)

MW High Tech Projects UK Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152 (TCC)