Australia: MT HØJGAARD A//S v E.ON Climate and Renewables UK EWCA CIV 407: Fitness for purpose
Construction Law Update - October 2015

KEYWORDS: FITNESS FOR PURPOSE

KEY TAKEAWAY

This case highlights the difficulties that can arise where different design obligations are spread across various arguably inconsistent contract documents.

The issue at the heart of this case is who should pay rectification costs where:

• the contractor has complied with an established, but incorrect, international design standard; and
• compliance with the standard means that the contractor cannot satisfy the 20-year fitness for purpose warranty.

The Court was asked to interpret the effect of this specific fitness for purpose warranty, in conjunction with more general warranty provisions. The Court of Appeal overturned the trial Judge's decision, holding that the contractor was not under a "fitness for purpose" obligation and had met the more general requirements of reasonable skill and care by complying with the standard, regardless of the error.

Construction contracts commonly include express undertakings in regards to design or suitability. The implications which flow from these can generate disputes when the contract also contains obligations to perform work in accordance with certain standards. This case considers the effect of such a provision, which stipulated design in accordance with an established, international standard that was subsequently found to be flawed.

The facts

E.ON engaged MTH to design, fabricate and install the foundations for 60 wind turbine generators in Scotland. The Contract required MTH, amongst other things, to carry out the Works with due care and skill and to ensure they were "fit for purpose". Importantly, the "fitness for purpose" requirement was to be determined in accordance with the Specification (also referred to as the Technical Requirements) using "Good Industry Practice", which was defined as the skill to be reasonably expected of an experienced contractor, in a manner consistent with international standards. The Technical Requirements were found within a separate document, the Employer's Requirements schedule. They obliged MTH to comply with the internationally recognised design standard, J101, and included a requirement that the foundation structures "ensure a lifetime of 20 years in every aspect without replacement".

Each turbine foundation required a monopile and transition piece held in place by a grouted connection with or without shear keys. MTH's subcontractor designed the grouted connection in accordance with international standard J101. Unfortunately, MTH and the subcontractor did not know this standard contained a fundamental error which resulted in the Works being defective. The transition piece began to slide from the monopile. The turbine foundations accordingly required immediate remedial work shortly after completion. The dispute centred on which party was liable for the €26.25 million costs.

MTH and E.ON's claims

Both parties agreed that the contract obliged MHT to design the works with due care and diligence so that each item would be fit for purpose. The disagreement centred on whether the general obligations, when read with the specific requirements, imposed a strict obligation for the turbines to have a lifetime function of 20 years. MTH submitted that its obligation to exercise good practice and compliance with J101 was achieved, regardless of J101's error and the consequential defects in the turbine foundations. E.ON argued MTH took full responsibility for the design and that its obligations to achieve "fitness for purpose" and a design life of 20 years were not qualified.

Findings

Trial — poor contractor!

The Technology and Construction Court (TCC) found that MTH was liable to E.ON for breach of contract. It held that the design of the foundations was not fit for purpose, as the Works failed to achieve a minimum lifespan of 20 years.¹⁴⁷

Edwards-Stuart J focused on the terms of the contract to reason that although MTH was expressly obliged to design in accordance with the J101 standard, it also assumed responsibility for the overall design of the turbines. This in turn required that they would have an operational life of 20 years. Therefore, as a matter of drafting, his Honour found that these two obligations were clearly separate and could not have been intended to qualify each other.

His Honour referred to several Canadian decisions in which the Canadian Supreme Court rejected contractors' claim for payment on the basis that the contractors had failed to comply with an express contractual obligation to construct works capable of performing the function intended, even if the works carried out were in accordance with the general specifications.¹⁴⁸

Edwards-Stuart J interpreted the J101 standard as an "owner's specification" to find that an express warranty for "fitness of purpose" by the contractor can trump the obligation to comply with a specification, even if it contains an error.149 By finding that the 20-year lifespan was to be read with the other terms of the contract, E.ON was entitled to rely upon that warranty, and MTH was responsible for costs of rectification. MTH appealed the decision.

Court of Appeal — a win for the contractor!

The Court of Appeal reversed the decision of the TCC to find that the "fitness for purpose" clause and 20- year design life, in the wider context of the contract, were not to be construed strictly.

The Court started by considering the Employer's Requirements schedule which stated that the design foundations "shall ensure a lifetime of 20 years in every respect without planned replacement". The Court found that this alone may constitute a warranty that the foundations would function for 20 years. However, in this Contract, all of the other provisions in the same schedule referred to a "design life" of 20 years, which did not guarantee that the foundations would be operationally functional for 20 years.

The Court of Appeal then focused on the hierarchy of various contractual documents, finding the contractual conditions took overall priority, and the schedule came fourth in precedence. The leading judgment of Jackson LJ noted that the Technical Requirements could, by reference to the other relevant provisions in the contract, require a 20 year functioning lifespan. However, the Technical Requirements were inconsistent with contractual conditions which sit above them in the hierarchy. The Court was "not to be led astray by that inconsistency". ¹⁵⁰

Jackson LJ also cited with approval a judgment of Lord Clarke of the Supreme Court, who observed "if there are two possible interpretations of a provision, the court is entitled to prefer the construction which is consistent with business common sense" 151

Hence, the problem for E.ON was that the Court found that a reasonable person in the position of the parties would know that the normal standard required that the design of offshore wind farms comply with J101. That compliance was expected, but not guaranteed, to achieve a life of 20 years. The inconsistency between the obligations to achieve a 20-year operational life and the other contractual provisions were to be read strictly.

Comments

The UK Court of Appeal decision shows considerable sympathy for the contractor. The error in J101 was clearly significant in the Court's interpretation of the contract.

This case also demonstrates the difficulties that arise where absolute obligations co-exist alongside obligations qualified to the standard of reasonable skill and care. The judgment is the latest in a string of cases considering this interplay (see also MW High Tech Projects v Haase Environmental Consulting).¹⁵² While this most recent judgment stressed that each case must be decided on the wording of the contract in question, parties must be cautious when drafting provisions imposing potentially inconsistent strict and general obligations.

Court of Appeal:

http://www.bailii.org/ew/cases/EWCA/ Civ/2015/407.html

Technology and Construction Court (Trial):

http://www.bailii.org/ew/cases/EWHC/ TCC/2014/1088.html

Footnotes

¹⁴⁷ MT Højgaard a/s v E.ON Climate and Renewables UK Robin Rigg East Ltd [2014] EWHC 1088 (TCC)
¹⁴⁸ The Steel Company of Canada Ltd V Willand Management Ltd [1966] SCR 746
¹⁴⁹ MT Højgaard a/s v E.ON Climate and Renewables UK Robin Rigg East Ltd [2014] EWHC 1088 (TCC) at 74 (Edwards-Stuart J)
¹⁵⁰ MT Højgaard A/S V E.ON Climate and Renewables UK [2015] EWCA Civ 407 at 104 (Jackson LJ)
¹⁵¹ Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900. After the present case was decided, the Supreme Court of the United Kingdom revisited the extent to which a court may prefer a "commercial common sense" and has, by contrast, emphasised the importance of linguistic meaning. See the note on Arnold and Britton [2015] UKSC 36 above
¹⁵² MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152 (TCC)

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