Clients can have their cake and eat it

Date: Wednesday, September 13th, 2017 by Michaela Hickson.

MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor

The Supreme Court has unanimously overturned a decision of the Court of Appeal, making it more likely that a design and build contract will be construed as containing an express fitness for purpose warranty, even where it appears inconsistent with elements of the design imposed by the employer. Contractors, designers and insurers beware.

Background

A contractor’s design responsibility may be based upon:

1. a skill and care obligation;
2. an overarching fitness for purpose warranty (the purpose being defined by the contract and/or determined by the circumstances);
3. a similar fitness for purpose warranty in respect of part(s) of the works; and/or
4. a warranty that the works will achieve particular performance or other criteria and so are fit for purpose in that particular sense. Common examples of performance criteria include durability (or ‘service life’) and performance in service, ie. consumption of utilities or materials, output, structural performance, functionality.

A contract may contain one or more of the above. Indeed, the variants of fitness for purpose obligation may be more distinct in principle than in practice.

In addition to any such prescribed criteria for the end result, the contractor may also be obliged to design in accordance with prescriptive requirements, such as designs produced for the employer (for which the contractor may not be responsible) or to industry standards. Previous case law confirms that if, on its true construction, a contract is one of ‘double (or dual) obligation’ and if the express obligations are in conflict, the contractor may be held to the fitness for purpose warranty (prescribed criteria) even where it is without fault and where it could not be achieved by complying with the employer’s prescriptive requirements.

The case MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59 arose out of the failure of the connection between the foundations and tower of off shore wind turbines. The connection failed because of an error within an internationally recognised design standard, ‘J101’. The designers were held not to have been negligent in this respect. Consequently, focus fell on MTH’s strict contractual liability as main contractor. The contract was described as being one in which the ‘purpose’ was described in the technical requirements appended to conditions of contract. Among others, the conditions of contract contained the following obligations:

The Contractor shall, in accordance with this Agreement, design, manufacture, test, deliver and install and complete the Works:
(i) with due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors (as the case may be). …
(viii) so that the Works, when completed, comply with the requirements of the Agreement.…
(x) so that each item of Plant and the Works as a whole shall be fit for its purpose as determined in accordance with the Specification [agreed to encompass the Employer’s Requirements] using Good Industry Practice. …
(xv) so that the design of the Works and the Works when completed by the Contractor shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement…” (emphasis added)

The conditions also contained a definition of fitness for purpose as “fitness for purpose in accordance with, and as can properly be inferred from, the Employer’s Requirements“. The Employer’s Requirements contained a set of Technical Requirements (“TRs”), which required a ‘design life’ of 20 years (the period that designers would expect the works to last within specified parameters) and that the design be in accordance with J101 (a standard based on principles expected to achieve a high probability of success, but recognising the inherent possibility of failure in some instances). However, the TRs also contained the following provisions:

“3.2.2.2 …The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. …”

 “3b.5.1 Scope The design of the structures addressed by this Design Basis shall ensure a lifetime of 20 years in every aspect without planned replacement. …” (emphasis added)

E.ON argued that these provisions and others defined the purpose as being a ‘service life’ of 20 years and so, on its true construction, the contract was one of ‘double obligation’ containing a warranty as to service life. E.ON argued that this was ‘complementary’ and not inconsistent with MTH’s lesser obligations, including to design with reasonable skill and care and to J101. They cited numerous references to the prescriptive requirements in the contract as being a “minimum” and argued that the contract allocated the unlikely (so it was perceived to be) risk that design to J101 would not achieve a service life of 20 years to MTH. MTH argued that these obligations were inconsistent, that the scheme of the contract was an optimised design produced to J101 and that two provisions buried within the TRs could not override this.

The decision

E.ON’s arguments prevailed at first instance, but were overturned on appeal. The Court of Appeal described the provisions in question as “too slender a thread” on which to fix MTH with a strict service life warranty. However, this has been overturned by the Supreme Court. The Supreme Court held that these provisions should be given their natural and ordinary meaning, the effect of which was to provide a fitness for purpose warranty, which on any view (see penultimate paragraph below) MTH had breached.

The Supreme Court’s decision is somewhat easier than the Court of Appeal’s decision had been, to reconcile with the recent decision in 125 OBS (Nominees1) & Anor v Lend Lease Construction (Europe) Ltd & Anor [2017] EWHC 25 (TCC), concerning broken glass panes on an office building in London. Ostensibly applying the Court of Appeal’s reasoning, the court in that case reached the opposite conclusion to the Court of Appeal in MTH: that an obligation to carry out and complete works in accordance with the Employer’s Requirements (“ERs”) amounted to a warranty in respect of a service life requirement contained in the ERs (in somewhat clearer terms than in MTH). This was held not to have been qualified by a prescriptive requirement to heat soak the glass. The court in 125 OBS considered inconsistency to be a useful indicator of intention, in the sense that if obligations are consistent, good reason would be needed not to give effect to both as ‘double obligations’. The Supreme Court in MTH appears to have taken a similar line in the sense that it did not equate inconsistent technical requirements with inconsistent legal obligations. It said that: “…in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed. While each case must turn on its own facts … 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.”

What this means for you

The Court of Appeal decision in MTH had given reason to believe that if a client wanted to ‘have their cake and eat it’, they would have to use clear terms, at least where the purpose (including any prescribed criteria) was only found within technical documents. It also strengthened arguments that detailed prescriptive requirements might qualify rather than add to that obligation. The Supreme Court’s decision offers no such encouragement. Consequently, both MTH and 125 OBS send a clear message to design and build contractors: scrutinise all contract documents, especially technical requirements, for strict obligations that may not stand out from the conditions of contract themselves. Assume that you will be held to the higher standard unless there are clear terms to the contrary. The potent effect of seemingly inoffensive terms requiring the works to be “in accordance with this agreement” or “in accordance with the Employer’s Requirements” and the like, should not be overlooked. Where a warranty in respect of ‘service life’ is an inescapable requirement, there are several ways to mitigate the risk, including:

• Clear division of design responsibility, so as to exclude liability for elements of the design not produced under the main contract;
  Agreed assumptions, the risk of which rests with the employer (or is otherwise assumed only at a price);
• Limitations on liability and/or the period in which a claim may be brought; and possibly
• An order of precedence provision to deal with inconsistencies between contract documents (although this would not resolve inconsistencies within the same document and it will only operate if terms are found to be inconsistent).

Careful attention to the wording of any warranty is also required. Having found that a warranty had been given, the Supreme Court does seem to have been receptive to an alternative argument that the warranty was that the foundations had been designed to last for 20 years, rather than that they actually would. This made no difference to the outcome of this case because the non-negligent error was such that either warranty would be breached.

Designers appointed by contractors should be mindful of these risks and in particular, to consider: (a) the effect of the main contract terms on the standard of care to which they may be held; (b) how the terms of their contract may be construed, taking particular care to consider any term seeking to incorporate the terms of the main contract or otherwise to require compliance with them; and (c) whether the terms and circumstances are such that an implied fitness for purpose warranty could arise (as in Greaves & Co Limited v Baynham Meikle [1975] 1 WLR 1095). Post contract as the design develops and changes are made, the main contractor’s obligations should be kept in mind, particularly during any value engineering exercises.

Peter Stockill, Partner at BLM

See original article here.

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of Global Insurance Law Connect. Specialist legal advice should always be sought in any particular case.