Contractors - Beware of ‘Fit For Purpose’ Obligations In Construction Contracts

18/08/2017

MT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd and another

The Supreme Court decision of MT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd and another[1] found a contractor liable for works which were not fit for purpose despite it having met all of its other contractual obligations.

The case highlights the importance of seeking legal advice when entering into a construction contract, especially one that involves multiple parties.  MT Højgaard confirms the English courts’ growing stance that when required to reconcile provisions which necessitate the contractors to not only comply with particular specifications but also achieve a particular result, the courts will be even more inclined to give full effect to the requirement to achieve the specified result. 

The facts of the case

In May 2006, the appellants, two companies in the E.ON group (“E.ON”), sent tender documents to various parties including MT Højgaard, who in due course became the successful bidders. The tender documents included E.ON’s “Technical Requirements.”

The Technical Requirements laid out minimum requirements that were to be considered by the contractor.  Amongst other things, the Technical Requirements called for the foundations to be in accordance with a document known as J101. J101 was a reference to an international standard for the design of offshore wind turbines published by an independent classification and certification agency.

J101 provides mathematical formulae used to calculate the required specification of the foundation structures. One such formula included “δ,” which was given a specific value. Only later, a review showed that the value given for δ was wrong by a factor of about ten.  This error meant that the strength of the foundation structures had been substantially overestimated.

E.ON and MT Højgaard entered into a contract under which MT Højgaard agreed to design, fabricate and install the foundations for the proposed turbines.  Clause 8.1(x) of the contract stated that MT Højgaard should carry out the works so that they shall be “fit for its purpose.”  Para 3.2.2.2(ii) further stated that the design of the foundations and structures ‘shall ensure a lifetime of 20 years in every aspect without planned replacement’.

Just over a year after the wind turbines were completed, the design failed due to the error incorrect value given for δ.

The remedial cost of the design failure was £26.25 million.

Technology and Construction Court (TCC) and Court of Appeal decisions

At first instance, the TCC found for E.ON group. Although MT Højgaard had not been negligent, having followed the mathematical formula which unbeknown to all parties at the time was incorrect, the contractors had a fitness-for-purpose obligation to ensure that the foundations would have a lifetime of 20 years. 

This decision was reversed by the Court of Appeal who held although para 3.2.2.2(ii) of the Technical Requirements appeared to be a warranty on the part of MT Højgaard, it was inconsistent with all the other contractual provisions and was ‘too slender a thread’ upon which to hang a finding that the contractors had given such an onerous warranty. 

The Supreme Court’s decision

The main issue for the Supreme Court was, in the light of para 3.2.2.2(ii), were MT Højgaard in breach of contract despite using due care and professional skill, adhering to good industry practice, and complying with J101?

It was decided unanimously by the court that para 3.2.2.2(ii), taken at face value, was either;

a)    a warranty that the foundations would have a lifetime of 20 years, or

b)    an agreement guaranteeing that the design of the foundations would be such that they would have a lifetime of 20 years

The judges then went onto conclude that the warranty or agreement was effective because the ‘fitness for purpose’ obligation trumped all other obligations.

“It is by no means improbable that [the respondent] could have agreed to a 20-year warranty provided that it could have the benefit of a two-year limitation period, save where misconduct was involved. It would simply mean that the rights given to [the appellants] by para 3.2.2.2(ii) were significantly less valuable than at first sight they may appear, because any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the works would normally be barred by clause 42.3. In this case, of course, there is no problem, because the foundations failed well within the 24-month period.”

What this decision means for contractors

Because of this decision, contractors should consider carefully before agreeing to ‘fit for purpose’ obligations in a construction contract.  If they do agree, then it may be wise to state that ‘fit for purpose’ obligations are not applicable in circumstances where other stated requirements specified by the owner have been complied with.  In addition, it may be prudent to negotiate collateral warranties from any professional consultants who carried out or verified the design and/or insist on a cap on liability.