UK: The Supreme Court Upholds Fitness For Purpose On A Slender Thread

Last Updated: 9 February 2018
Article by Robert Meakin

Most Read Contributor in UK, October 2018

The much awaited Supreme Court case MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59 provided a number of interesting comments in relation to fitness for purpose obligations in construction contracts, as well as providing a number of important practical lessons.

Background to the case

MT Højgaard ('MTH') was employed by E.On to design, fabricate and install the foundation structures for 60 offshore wind turbines. Shortly after completion, the foundation structures failed and the parties agreed that E.On would develop a scheme of remedial measures. They could not agree, however, as to who should bear the cost of such measures. This litigation was then launched.

The contract documents included a number of provisions as to quality, including various reasonable skill and care provisions, "minimum" compliance with an internationally recognised standard (J101) and, within the technical specifications, a requirement for a design life of 20 years.

Compliance with the J101 standard was expected to ensure a service life of 20 years. What was not known at the time was that the standard had a fundamental error, which meant that compliance with the standard would never have resulted in a 20 year service life.

However, within the technical requirements section of the Employer's Requirements, there was the following more onerous fitness for purpose obligation: "the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement". It was this specific obligation that E.On claimed had been breached.

The TCC agreed that MTH had breached the contract and was liable for the failures, because its design was not fit for purpose, putting emphasis on the 20 year service life obligation. MTH appealed against this decision arguing that the more onerous 20 year requirement was inconsistent with the other design obligations. The Court of Appeal agreed, stating that one mention of the 20 year service life was "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations" and that the provision was inconsistent with the other, less onerous, design obligations in the contract.

The Supreme Court

The first issue that the Supreme Court had to consider was whether the Employer's Requirements were properly incorporated into the contract documents. MTH alleged that they were not, but E.On argued that they were, for the following three reasons: "(i) clause 8.1(x) of the Contract required the Works to be fit for purpose, (ii) Part C of the Contract equated fitness for purpose with compliance with the Employer's Requirements, (iii) Part C also defined Employer's Requirements as including the contents of the TR [technical requirements]".

The Supreme Court agreed with E.On, and held that the requirements were properly incorporated into the contract. As such, Lord Neuberger (who gave the unanimous judgement) noted that there were two arguments open to MTH, the first being that the 20 year obligation was inconsistent with the other design obligations, in particular that of compliance with J101 and, second, that it was too slender a thread to hold such an important and onerous requirement.

In relation to the argument of inconsistency with the other terms, the Court rejected this. Emphasis was given to the point that J101 was the "minimum" required standard and as a result MTH could reasonably have been expected to decide where requirements additional to those in J101 were needed to meet the 20 year service life obligation. The Court held that there was no inconsistency because of this, as one provision was simply a less onerous obligation on the contractor.

The argument in relation to the requirement being too slender a thread saw MTH suggest a number of reasons as to why that was the case. It was noted that the Employer's Requirements were unsatisfactory, in that they were ambiguous and inconsistently drafted, due to the fact that they were multi-authored. The Court agreed that this was the case, but held that this did not alter the rules of contractual interpretation, and that the Court's role was to interpret the provisions based on normal principles and give effect to the natural meaning of the words, unless it created an improbable or unbusinesslike situation. It was held the requirement for a service life of 20 years was not improbable or unbusinesslike by nature, and as such the words should be given their natural meaning.

E.On's appeal was allowed, therefore, and the decision of the TCC restored.

Takeaways

This judgement provides a number of important takeaways for employers and contractors alike:

  • The case makes clear how important fitness for purpose obligations in construction contracts are deemed to be by the courts. If they are properly incorporated they will be upheld, even if they are very difficult or impossible to achieve, as the principle is that the contractor takes the risk of compliance, and should adapt to situations where it becomes a great deal more difficult to meet the obligations included in the contract.
  • One of the practical lessons is the need to ensure that it is clear and unambiguous which documents are intended to be contract documents and which are not. This can be done, for example, through clauses establishing an order of priority for the contract documents and their obligations.
  • It is also vital to make absolutely clear what the required standard is and to seek (as far as possible) to remove any obligations which are in conflict with that standard. The required standard should be set out in the main contractual clauses and it should be made clear that they override any lesser standards mentioned in any other documents.
  • Finally, this case reinforces the trend of courts refusing to go behind the express words of contract documents. In this case, it was noted that, despite the documents containing "ambiguities and inconsistencies", the Court should not try to interpret the provisions in a different manner to the normal established rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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