This month the Supreme Court settled a long-running contract dispute between Nordic construction group MT Højgaard (MTH) and energy provider E.On, finding MTH liable to pay €26.25m of repair costs at a Scottish offshore wind farm ϯ.
Ruling in favour of E.On, the Court asserted that it was ultimately MTH’s responsibility to deliver a sound end product, regardless of the detail of the design and technical specifications in the agreed contract.
The foundations of 60 wind turbines installed by MTH failed shortly after completion, due to a calculation error in an international design standard contained in the employer’s technical requirements. This required MTH to comply with the international standard as a minimum (which referred to a 20-year lifespan) and also made it clear that it was MTH’s responsibility to identify whether there was a need for a more rigorous requirement.
The Supreme Court ruled that as a matter of basic principles of contractual interpretation (applying the natural meaning of the words in the contract), MTH should have ensured that the design was satisfactory; it had provided a warranty that the foundations would have a design or service life of 20 years; and that E.On was entitled to rely on that warranty.
The Supreme Court’s judgment is a stark reminder that the courts are reluctant to interfere in the bargain struck between parties if the words in the contract, when taken as a whole, are clear and consistent. Even if some conditions are “tucked away” (the Court of Appeal’s words) the Supreme Court judgment makes it clear that Contractor could still be liable, as MTH found.
With this in mind, there are some practical steps contractors and employers should take to manage design-related risk.
Tips for contractors
- Before contract drafting begins, take the opportunity to scrutinise and query the employer's design and be on the look-out for any onerous or competing obligations.
- Ensure that the parties drafting or checking the contract at the tender stage have all the documentation they need, including the project’s technical requirements, for cross referencing.
- If the contract doesn’t specify a design standard for you to work towards on appointment, you still need to be clear on whether you’re obliged to deliver work that meets a ‘fitness for purpose’ warranty - which means the end-product has to perform a specified function when it is completed.
- If you are giving an express warranty that the design will achieve a particular result (e.g. a 20-year design or service life), be aware of exactly what this will mean in practice. You will not necessarily avoid liability for any faults further down the line by pleading that, for example:
- You have discharged the services with reasonable skill and care (if that was the standard expressed in the contract)
- Failures were based on the quality of the employer's contribution to the design
- The design was 'state of the art’.
- When ‘fitness for purpose’ clauses are included in the draft contract, check the wording with your insurer. Make sure you are covered. It is worth bearing in mind that professional indemnity insurers prefer to cover against the less onerous (lower risk) standard of ‘reasonable skill and care.
- If you have a reasonable skill and care obligation in your contract, make sure that a ‘fitness for purpose’ clause is not introduced by the back door, causing ambiguities which could be legally challenged.
Tips for employers
- If you want the full protection of a ‘fitness for purpose’ type warranty, you need to make sure that the language is clear and unambiguous. Avoid it being tucked away in contract documents like the technical requirements and make sure all documents are consistent with each other in terms of obligations imposed on the contractor.
- Always check the solvency of the contractor during the tender process. If you eventually choose to include a ‘fitness for purpose’ clause in the contract and it is breached, there will be little benefit in progressing a claim to recover remedial costs if the contractor has gone bust.
It is in the interest of contractors and employers alike to ensure that what has been agreed at the outset of a project is clear to everyone involved. By doing so, you leave yourself with a fighting chance of avoiding resource and costs draining legal disputes like MTH v E.On
About the author: Colette Morgan-Ford is a partner in Weightmans LLP’s Built Environment team. She acts for contractors, subcontractors, consultants, employers and developers through adjudication, litigation, mediation and arbitration.