MT Højgaard: Supreme Court rules on fitness for purpose dispute

In a decision issued today, the Supreme Court has upheld an appeal in the MT Højgaard litigation restoring the TCC’s original decision and finding the contractor liable to comply with a fitness for purpose type obligation contained in a technical schedule despite obligations elsewhere in the contract to exercise reasonable skill and care and to comply with an international standard. The decision will have significant ramifications for the interpretation of construction contracts, which commonly incorporate technical schedules and other specification documents within their terms.

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

MT Højgaard (“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, grouted connections incorporated within the foundation structures 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 court’s reasoning was based on two paragraphs in the Technical Requirements section of an Employer’s Requirements schedule to the contract which required that the design of the foundations "shall ensure a lifetime of 20 years in every aspect without planned replacement” (the “TR Paragraphs”). This provision applied in addition to MTH’s other less onerous obligations such as a requirement to exercise reasonable skill and care and to comply with an international standard for the design of offshore wind turbines known as J101.

Compliance with J101 was also intended to bring about a service life of 20 years, subject to a probable rate of failure of between 1 in every 10,000 to 100,000 installations. As a matter of professional design practice, the adoption of J101 was consistent with a desire to achieve a design life of 20 years and MTH reasonably relied on the standard in preparing its design. However, 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 did not therefore provide a design life of 20 years in reality.

The Court of Appeal overturned the TCC’s decision, finding that the TR Paragraphs were inconsistent with the rest of the contract and the obligation to comply with J101 in particular. Those paragraphs were “too slender a thread" upon which to hang a finding that MTH gave a warranty of 20 years for the life of the foundations. The Court of Appeal emphasised the fact that an ordinary person in the position of the parties would have known that J101 was the normal design standard required of offshore wind farms. More was required, therefore, than two paragraphs described as being "tucked away" in the Technical Requirements if a much more onerous obligation was to be imposed warranting a 20 year lifetime come what may. To read our original Law-Now on the Court of Appeal’s decision, click here.

The Supreme Court

In a unanimous decision, the Supreme Court has overturned the Court of Appeal’s decision and restored the decision of the TCC:

• Whilst the TCC and the Court of Appeal had interpreted the TR Paragraphs as a warranty that each of the foundation structures would have a minimum lifetime of 20 years, the Supreme Court was minded to give those paragraphs a slightly narrower interpretation requiring only that they be designed to last for 20 years. This narrower interpretation would allow scope for probabilistic failures of the kind envisaged by J101 (i.e. 1 in 10,000 to 100,000). It was ultimately unnecessary for the court to rule on this issue as either interpretation would have placed MTH in breach of contract: both are in the nature of fitness for purpose obligations which require the achievement of a result rather than the exercise of reasonable skill and care.

• The Supreme Court disagreed that the TR Paragraphs were inconsistent with the balance of the contract. The court referred to a number of previous decisions in the UK and in Canada where contractors had accepted obligations to achieve certain performance criteria whilst at the same time agreeing to implement a certain design or specification. No inherent inconsistency arises where the performance criteria proves impossible to achieve if the agreed design or specification is to be adhered to. Whilst each case depends on its own facts, “the message from decisions and observations of judges in the United Kingdom and Canada is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed 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.”

• The Supreme Court noted that the requirement to comply with J101 was expressed as being a minimum requirement and that MTH was obliged to identify any areas where a more rigorous design was needed. This would also have been the position even without express wording in this particular case. It could not have been envisaged that MTH would have been in breach of contract if it had sought to improve on the requirements of J101. There was therefore no actual inconsistency between the TR Requirements and the rest of the contract.

• The Supreme Court also disagreed that the TR Paragraphs were insufficiently prominent or “too slender a thread” to support the more onerous fitness for purpose obligation alleged by E.ON. The court was particularly unimpressed by an argument that paragraphs such as these contained in a technical schedule should not be readily interpreted as imposing additional onerous obligations above those spelled out in the primary contract conditions. Given that the technical schedule in question had been given contractual force by the parties, it was to be taken at face value.

Conclusions and implications

This decision will have significant ramifications for the interpretation of construction contracts, which routinely incorporate schedules and technical documentation often with less than complete harmonisation as to intended legal standards of design and workmanship. The Supreme Court agreed with the Court of Appeal’s characterisation of the contract in this case as being comprised of documents of “multiple authorship”, which contained “much loose wording”. Despite this, it found no reason not to give effect to the natural meaning of the two TR Paragraphs, imposing a more onerous fitness for purpose type obligation in addition to MTH’s other obligations to exercise reasonable skill and care and to follow the J101 standard.

The decision may be seen as a further example of a return in emphasis to the literal meaning of contract provisions observed by many commentators since the Supreme Court's earlier decision in Arnold v Britton. Although no overall change in the approach to interpretation has occurred, arguments which depend upon a reading down of particular parts of a contract because of their commercial implications or because they are less prominent than might be expected will face an uphill battle. More than ever, parties will be taken to mean what they say in their contracts.

In light of this decision, parties should consider making clear in their general contract conditions whether and how technical schedules are to affect overall obligations as to design and workmanship. Contractors may wish, for example, to include paramountcy provisions which state that nothing in any of the schedules to the contract is to impose a design obligation of a greater standard than reasonable skill and care. Employers wishing to impose fitness for purpose type obligations in combination with obligations to adhere to certain standards or designs should make clear that those standards or designs represent minimum obligations as found by the court in this case.

References:

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

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 [2017] UKSC 59