MT Højgaard: Supreme Court rules on fitness for purpose dispute
Adrian Bell, Victoria Peckett, Steven Williams & David Parton
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.