Contractors and Insurers beware - Contractor found to bear the risk of an incorrect standard as fitness for purpose prevails in the Supreme Court

This morning the Supreme Court handed down its much anticipated judgment in MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59. The Judgment should be of concern to both contractors and their insurers.

The issue to be decided was whether a contract for the design and installation of foundations for an offshore windfarm imposed a fitness for purpose obligation on the contractor amounting to a warranty that said foundations would have a service life of 20 years.

In its Judgment the Supreme Court gave full effect to a fitness for purpose obligation even though it was not in a prominent place in the contract and held that the contractor had breached the contract even though it had complied with the relevant internationally recognised standard and carried out the works with reasonable skill and care.

The facts

The foundations of two offshore wind farms at Robin Rigg in Solway Firth, which MTH had designed and built for E.ON, failed shortly after completion.

The contract included a provision that "the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement".

However, the contract also contained a number of other provisions which required reasonable skill and care, a design life of 20 years, and compliance with an internationally recognised standard for the design of offshore wind turbines which provided for a design life of 20 years.

MTH had complied with the standard and carried out the work with reasonable skill and care but the standard turned out to be wrong and this was the reason the foundations failed.

The TCC

In the TCC Mr Justice Edwards-Stuart found that E.ON was in breach of a contractual warranty that the foundations would have a service life of 20 years.

The Judge held that that the construction contract required MTH (a) to comply with particular specifications and standards and (b) to achieve a particular result (a service life of 20 years). The contract therefore imposed a double obligation upon MTH to as a minimum, comply with the relevant specifications and standards and, in addition, to take such further steps as are necessary to ensure that it achieved the specified result. In other words, MTH had to ensure that the finished structure conformed to that which he had warranted.

Court of Appeal

However, the Court of Appeal (Lord Justice Jackson) found that the provision in the contract requiring MTH to achieve a result, namely foundations with a service life of 20 years, was inconsistent with the remainder of the provisions in the contract which only required reasonable skill and care and a design life of 20 years.

Lord Justice Jackson held that the provisions regarding service life were "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations".

Supreme Court

This morning the Supreme Court upheld E.ON's appeal and in an unanimous decision Lord Neuberger found that  "while each case must turn 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."(paragraph 44)

The Supreme Court held that the provision could be read in two ways: either as a warranty that the foundations will actually have a lifetime of twenty years, or as an undertaking to provide a design that can objectively be expected to have a lifetime of twenty years.

MTH were liable on either interpretation because the foundations neither had a lifetime of twenty years, nor was their design fit to ensure one.

The Court ultimately held that MT had warranted that the foundations would survive for twenty years or would be designed so as to achieve twenty years of lifetime. The fact that this was difficult or even impossible to achieve did not render this interpretation "improbable or unbusinesslike".

The fact that MTH had complied with an internationally recognised standard which proved to be wrong did not assist it. The Court held that obligations to (a) comply with a particular design, specification or standard and (b) to achieve a particular result are "not mutually inconsistent", even if there is an error in the standard which will prevent compliance with (b). In other words, the obligation to achieve the result overrides the obligation to comply with the standard.

The Supreme Court held that generally speaking a contractor is 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 had agreed.

The standard was only a minimum standard and it was MTH's responsibility to identify where the other works needed to be designed in a more rigorous way; in other words, to go beyond the standard.

Nonetheless, the Supreme Court may have offered a saving grace by finding that the clauses setting out the defects liability period would have prevented E.ON from bringing a claim against MTH after 24 months, save where misconduct was involved. This was unable to save MTH as the damage occurred well within that period. However, this interpretation would have substantially reduced the effect of the warranty and would suggest a suitable compromise between commercial entities looking to achieve a mutually acceptable contract.

The lesson