Is your contract fit for purpose?
On 3 August 2017, the Supreme Court issued its decision in the dispute between Mt Højgaard A/S (MTH) and E.ON Climate and Renewables UK (E.ON) and restored the decision at first instance that the contractor was in breach of its obligation to ensure the foundations were fit for purpose.
In 2006 E.ON selected MTH as contractor to design and install foundations of two windfarms. The contract between the parties provided that the foundations needed to be ‘fit for purpose’. What constitutes fitness for purpose was defined as, among other things, being in accordance with E.ON’s Technical Requirements, which were sent to MTH when E.ON issued its invitation to tender. Paragraph 188.8.131.52(i) of Technical Requirements required MTH to prepare the detailed design of the foundations in accordance with an international standard for the design of offshore wind turbines, contained in the so-called ‘J101’ document. Para 184.108.40.206(ii) of the Technical Requirements provided that “the design of foundation shall ensure a lifetime of 20 years in every aspect without planned replacement”. Clause, 8.1 of the contract also imposed an obligation that that the foundations should be designed and installed in accordance with internationally recognised standards (J101 would fall into that category).
The project was completed in February 2009. However, later on that year it was discovered that the industry standards set out in J101 contained an error in that the connections strength was considerably overestimated. As MTH relied on J101 when designing the foundations, the foundations proved not to be strong enough and started to fail in April 2010. In order to rectify this, the parties decided that E.ON would carry out remedial works. The works were performed in 2014, with the total costs being estimated at €26.25m.
Court proceedings were raised by the parties to determine who should bear the cost of the remedial works. MTH argued that it should not be held liable for a breach of contract, as the foundations were designed and constructed with appropriate care and in accordance with J101. E.ON, however, claimed that MTS should be held liable for the cost of remedial works as they had breached their contact by failing to ensure the foundations had a design life of 20 years.
The Technology and Construction Court (TCC) found MTH was in breach of clause 8.1 of the contract as the design was not fit for purpose and was not wholly in accordance with the requirements of the contract given that the Technical Requirements meant the structures were to be designed in a way that ensures a lifetime of 20 years. The TCC reasoned that the Technical Requirements were incorporated into the contract as ‘fit for purpose’ was defined as being in accordance with, among other things, the Technical Requirements.
In 2015, the Court of Appeal overturned the TCC’s decision. It noted that even though the terms of the Technical Requirements could appear to amount to warranty that the foundations will have a design life of 20 years, this was seen as inconsistent with other the other contract terms. The Court of Appeal pointed out that the obligation of ensuring that the foundations are ‘fit for purpose’ was qualified by the phrase “as determined in accordance with the Specification using Good Industry Practice”. Therefore Lord Justice Jackson found that “That obligation requires the exercise of reasonable skill and care, as well as compliance with J101. It does not require or impose any form of warranty as to the length of operational life.”
The Court of Appeal also held that as the contract terms had precedence over the Technical Requirements, the terms of the Technical Requirements were not enough to establish that MHT gave E. ON a warranty that the foundations will function for 20 years.
Supreme Court Decision
E.On appealed the decision to the Supreme Court, which unanimously overturned the decision in the Court of Appeal and restored the decision of the TCC.
The Supreme Court initially considered the effect of para 220.127.116.11(ii) and whether this set out a warranty that the foundations would have a lifetime of 20 years, or if a it amounted to an agreement that the design of the foundations would have a lifetime of 20 years. The Supreme Court was minded to apply the latter meaning that para 18.104.22.168(11) and clauses 30 and 42.3 of the contract, when read together, did not guarantee that the foundations would last for 20 years without replacement, but they had been designed to last for 20 years without replacement. It was ultimately not necessary for the Court to determine this issue as MTH were in breach of clause 22.214.171.124(ii) whichever meaning it has.
The central issue of the appeal was whether, in light of para 126.96.36.199(ii) of the Technical Requirements, which require a lifetime of the foundations of 20 years, MTH was in breach of contract despite the fact that it had used due care and professional skill, adhered to good industry practice and complied with J101. In determining this issues, the Court considered that there were only two arguments available to MTH as to why para 188.8.131.52(ii) should be given its ordinary meaning and effect. The first is that such an interpretation would be inconsistent with MTH’s obligation to construct the Works in accordance with J101 as provided for in para 184.108.40.206(i). The second is that para 220.127.116.11(ii) is too ‘slender a thread on which to hang such an interpretation’.
In considering the first issue Lord Neuberger referenced the ordinary principles of contractual interpretation and referred to a number of decisions in the UK and Canada. He noted that opening sentence of section 3, para 3.1(i), provides that the requirements set out in that section are minimum requirements, and para 3.2(ii) provides that it was the responsibility of MTH to ensure the works be designed to more rigorous requirements or parameters. Where there are two inconsistent standards, the more rigorous or demanding of the two must prevail. Para 3.1(ii) makes clear that MTH should have identified that there was a need for more rigorous requirements to ensure that the design complied with para 18.104.22.168(ii).
In determining whether para 22.214.171.124(ii) is too weak a basis on which to support the contention that the foundations would survive for 20 years the Court noted that it was clear in its terms that it imposes a duty on MTH that the foundations have a lifetime of 20 years. There was no reason to say that this was an ‘improbable or unbusinesslike’ interpretation. Neither was the Court persuaded by the fact that an obligation such as this was to be found in a technical document rather than in the main body of the Contract.
It is commonly the case that contracts incorporate technical documents and standards into the contract. This can often lead to inconsistencies in the terminology and the standards imposed in both documents. However, the Supreme Court found no reason not to apply the natural meaning of terms of the Technical Requirements. The effect of this was that where there are two standards or requirements under a contract, the more rigorous or demanding of the two standards should prevail, as the less onerous standard can be treated as a minimum requirement.
Undoubtedly, the Supreme Court decisions will result in increased attention being paid to standards and conditions stated in technical specifications. Moreover, once again, it highlights the importance of ensuring that the contracts clearly stipulate terms and conditions intended by the parties, limiting any scope for dispute over interpretation.