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what happens when complying with performance specifications does not achieve the required result?

8 June 2015

In MT HØjgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd and another [2015] EWCA Civ 407, the Court of Appeal has provided important guidance regarding the interaction between reasonable skill and care obligations and other requirements in a contract (such as a requirement to comply with a performance specification).

The issue

The case relates to the design and construction of an offshore wind farm by MT HØjgaard A/S (MTH) for E.ON. MTH had designed and built the wind turbine foundations in accordance with international standards and with reasonable skill and care. However, an error in a relevant international standard meant that well within the 20 year lifespan, defects emerged, requiring remedial work costing €26.25 million. MTH applied for declarations regarding who should bear the cost of that work. Was it enough that MTH had exercised reasonable skill and care, or was it bound by a more onerous obligation in the performance specification in the contract for the foundations to last 20 years?

This case raises issues relevant to any companies using a construction contract which seeks to impose a double obligation upon the contractor or consultant (e.g. both to exercise reasonable skill and care and to achieve a particular result through a performance specification) - for example the JCT Major Projects Form and the amendments many companies seek to make to other standard forms.

The contract

The parties contract included the following terms:

"8.1 GENERAL 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)

(iv) in a professional manner… in accordance with… Good Industry Practice

(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 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."

Further, the employers requirements included detailed technical requirements. Amongst other things, the requirements provided that:

  • MTH prepare its detailed design in accordance with international standard DNV-OS-J101 for the design of offshore wind turbines (the J101 International Standard)
  • "the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement…" (paragraph 3.2.2.2, the 20 year requirement)
  • MTH demonstrate with test data that certain aspects of its design were appropriate (paragraph 10.5.1, the requirements) and provide experimental verification of that aspect of its design if sufficient documentation was not available (paragraph D101, section 9, J101).

First instance decision

At first instance the court decided that MTH was liable for the cost of the remedial work. It considered that the 20 year requirement required MTH to achieve foundations with a service life of 20 years and that this provision was additional to, but not inconsistent with, MTHs other less onerous obligations such as compliance with J101 International Standard.

MTH appealed. Whilst E.ON also cross appealed, alleging that the judge should also have found that MTH had committed further breaches of contract, details of that cross-appeal are beyond the scope of this bulletin.

The Court of Appeals decision

The Court of Appeal confirmed that construction contracts, if worded with sufficient clarity, could impose a double obligation upon the contractor, e.g. to (a) comply with certain specifications and standards and (b) achieve a particular result. The question was whether or not the contract imposed such a double obligation.

In seeking to answer this question, the court had to put itself in the position of a reasonable person having all the knowledge available to MTH and E.ON. It had to consider what a reasonable person would have understood clause 8.1 of the conditions and the 20 year requirement to mean. This was an iterative process, requiring checking each of the rival meanings against the other contractual provisions and investigating its commercial consequences. The court had to accept that there are likely to be ambiguities and inconsistencies within the documents, but it must not allow itself to be led astray by those ambiguities and inconsistencies.

The question here was whether clause 8.1 of the contract, in conjunction with the 20 year requirement, required MTH not only to comply with the J101 International Standard, but also to achieve a result, namely foundations with a service life of 20 years. The starting point was the 20 year requirement. Whilst that paragraph undoubtedly says that the foundation design shall ensure a lifetime of 20 years (and was therefore at first sight a warranty that the foundations will function for 20 years), the court noted that significantly, all of the other provisions in the requirements are directed towards a design life (which did not mean that inevitably it will function for 20 years (although it probably will)) rather than a service life.

The court thought that if the contract had required an absolute warranty of quality, it would have been in clause 8.1, not in the requirements (which came fourth in the contractual order of precedence). Whilst clause 8.1(x) required that the works as a whole be "fit for purpose", those words were qualified by the phrase "as determined in accordance with the specification using Good Industry Practice" and the phrase "Good Industry Practice" was defined to mean "those standards, practices, methods and procedures conforming to all legal requirements to be performed with the exercise of skill, diligence, prudence and foresight that can ordinarily and reasonably be expected from a fully skilled contractor who is engaged in a similar type of undertaking or task in similar circumstances in a manner consistent with recognised international standards."

The court thought that a reasonable person in the position of E.ON and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with the J101 International Standard and that such compliance was expected, but not absolutely guaranteed, to produce a life of 20 years. It did not see how a contractor proceeding in accordance with the J101 International Standard and the requirements (excluding the 20 year requirement) could ramp up its activities so as to achieve a guaranteed operational life of 20 years. Had E.ON wanted such a guarantee, it should have been clearly flagged up in the contract documents. It was not.

The court concluded that there was an inconsistency in the contract. However, the provisions which apparently required a warranty of 20 years service life for the foundations were "too slender a thread" upon which to hang a finding that MTH gave such a warranty. Accordingly, the court allowed MTHs appeal.

Comment

This is the second of two recent cases addressing the interaction of differing types of obligations in contracts. In MW High Tech Projects UK Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152 (TCC), the TCC drew a distinction between primary and secondary obligations. It considered that the contract in question imposed an over-riding obligation to take reasonable skill and care and all specific duties in the contract were subject to that over-riding duty. Accordingly, if a specific duty would place the consultant in breach of the over-riding obligation of reasonable skill and care, the consultant was obliged not to comply with that specific duty.

The MT HØjgaard dispute is slightly unusual in that its cause was an error in an international standard. However, both that case and MW High Tech highlight the uncertainty and conflict which can arise in the event that each partys duties and obligations are not clear (in MT HØjgaard whilst parts of the requirements provided that MTH achieve a foundation design ensuring a lifetime of 20 years, all of the other provisions in the requirements are directed towards a design life of 20 years, which the court did not think was the same thing).

Its not difficult to envisage that a similar issue could potentially arise with the JCT Major Projects Form, where clause 11.2 provides that "the contractor warrants that the design of the project will: .1 comply with the statutory requirements … [and] .2 satisfy any performance specification contained within the requirements" and clause 11.3 contains a warranty from the contractor that he will perform his design obligations with what amounts to reasonable skill and care. Similarly, we see many bespoke contracts and amendments to standard forms which seek to impose similar dual obligations.

So, practically, what can parties do to avoid costly and time consuming disputes? Clearly, the meaning of any particular contract will depend on the drafting it contains and accordingly you should seek to draft a document which, taken as a whole, is consistent and easy to understand. But how can you achieve this? We set out some thoughts below.

  1. If you require a warranty, set it out expressly in the conditions rather than burying it in the specifications.
  2. Make sure that any absolute obligations are clearly and consistently drafted.
  3. Make clear which obligations are absolute and which are subject to reasonable skill and care.
  4. If you include a priority list of documents to aid interpretation, then make sure that particularly important obligations are contained in documents at the top of that list.
  5. Take time to read the technical documents alongside the contract conditions to ensure that they work together to achieve the result you want. This is likely to be time consuming, and therefore costly - but bear in mind that it is considerably less expensive than a trip to the Court of Appeal.

The above elements are particularly important in construction and engineering given the approach that many parties take to their contracts, with conditions of contract interacting with numerous other lengthy documents, often including minutes of meetings and contract amendments.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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