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Supreme Court confirms breach of contract despite the absence of negligence

03 August 2017

The Supreme Court has today handed down judgment in the high-profile case of MT Højgaard v. E.ON Climate & Renewables. The Supreme Court has overturned the Court of Appeal's decision and - in so doing - has provided useful clarification in respect of various important principles.

Background

In December 2006, E.ON Climate & Renewables (E.ON) engaged MT Højgaard (MTH) to carry out the design, fabrication and installation of the foundations for 60 wind turbine generators at an offshore wind farm, known as Robin Rigg, in the Solway Firth.

The installation of the foundations was completed in February 2009 and, shortly thereafter, serious failures in the grouted connection of each foundation came to light. It was subsequently established that the grouted connection problems were being encountered across the industry and had arisen - to no small degree - due to a fundamental failure in the industry standard design code (J101) that E.ON had specified for use. Remedial works were required to each of the foundations. By agreement, E.ON proceeded to undertake this work.

In parallel with the remedial works, legal proceedings were commenced to determine contractual responsibility for the problem. Ultimately in issue in the proceedings was responsibility for the cost of the rectification - which the parties had agreed in the sum of €26.25m.

The allegations made by E.ON were essentially twofold:

  • that MTH had been negligent in the design of the foundations, in that it had failed properly to apply the requirements of J101; and
  • that MTH was in any event responsible for the problem, pursuant to an overriding fitness for purpose obligation.

E.ON's fitness for purpose argument centred upon a fairly standard fitness for purpose obligation in the conditions, and asserted that the identification of that purpose could be found (most prominently) in para. 3.2.2.2 of the Technical Requirements (i.e. the Employer's Requirements). This paragraph provided that the "… design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement."

MTH relied upon a series of other provisions contained in the Technical Requirements, which imposed a 'design life' of 20 years and maintained that the essence of its contractual obligations was limited to complying with J101, with a 20-year design life in mind, and to otherwise carry out its work non-negligently. MTH argued that para. 3.2.2.2 of the Technical Requirements had to be read in the context of the other obligations and was insufficient by itself to amount to a fitness warranty. MTH maintained that it had complied with its obligations and that responsibility for the problem encountered therefore rested with E.ON.

Decision of the Technology and Construction Court - first instance

At first instance, the Technology and Construction Court (TCC) found that - although MTH had not been negligent (i.e. it had performed its duties appropriately skilfully, and in accordance with J101), MTH was nevertheless contractually responsible for the problem encountered, as it had failed to deliver up foundations that were fit for their purpose - i.e. the foundations self-evidently did not have a service life of 20 years as required by para 3.2.2.2 of the Technical Requirements. The fact that the breach was caused or contributed to by the error in J101 did not assist MTH. MTH was therefore found to be liable for the cost of the remedial works.

Decision of the Court of Appeal

MTH appealed. In 2015, the Court of Appeal (CA) overturned the TCC's judgment. In doing so, the CA rejected the notion that there was an absolute fitness for purpose warranty and focused on the distinction between a design life of 20 years and a service life of 20 years. The CA held that, in this contract, the Technical Requirements simply required MTH - when carrying out its design - to adopt a design life of 20 years. Having done so, it found that MTH was not responsible for the problem encountered. In the CA's view, the obligation in para 3.2.2.2 of the Technical Requirements - to provide a service life of 20 years - was "tucked away", was inconsistent with the general theme of the contract and was "too slender a thread upon which to hang a finding that [MTH] gave a warranty of 20 years life for the foundations".

Decision of the Supreme Court

E.ON appealed. In a unanimous decision promulgated today, the Supreme Court has overturned the CA's findings and has reinstated the findings of the Judge at first instance.

In his Judgment (with which the other Justices - Lords Hodge, Sumption, Mance and Clarke all agreed), Lord Neuberger considered whether para. 3.2.2.2 of the Technical Requirements comprised a warranty that the foundations would have a lifetime of 20 years or whether - in fact - this amounted to a term that the foundations would be designed to have such a lifetime. In his view "there [was] room for argument as to [the term's] precise effect". Whilst Lord Neuberger inclined to the latter interpretation, he also found that the issue did not have to be resolved as - on the facts of this case - the term had been breached by MTH "whichever meaning it has".

When considering the ostensibly competing obligations, namely to comply with the defective standard (J101) and to deliver up foundations that were fit for their purpose, Lord Neuberger stated 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."

In other words, despite its imposition by E.ON, the failings within J101 were matters for which MTH took the contractual risk.

In relation to the CA's decision (and MTH's continuing contention) that the Technical Requirement was "too slender a thread upon which to hang a finding that [MTH] gave a warranty of 20 years life for the foundations", Lord Neuberger further stated:

" … In this case, para 3.2.2.2(ii) is clear in its terms in that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years … I do not see why that can be said to be an "improbable [or] unbusinesslike" interpretation, especially as it is the natural meaning of the words used and is unsurprising in the light of the references in the TR to the design life of the Works being 20 years, and the stipulation that the requirements of the TR are "minimum"."

MTH had further argued that the interpretation of para. 3.2.2.2 should take into account the fact that it was not included in the conditions, but was found in a technical document (the CA's "tucked away" point). Lord Neuberger explained that he was "not impressed" by that argument. It was clear that the technical documents were intended to be of contractual effect and so the argument was rejected.

Contracts - ensure wording reflects intentions

In this decision, the Supreme Court was willing to render MTH - as contractor - responsible for the failure in an imposed design code, finding that this was a risk that the contractor had agreed to take. In keeping with its recent decisions, the Supreme Court further strived to give effect to the natural meaning of the contractual wording that the parties had used.

The message from the Supreme Court is becoming increasingly clear: parties should expect to be bound by the terms of their contracts. If costly disputes are to be avoided, then parties must ensure that their agreements clearly reflect their intentions. Whilst we have known this for some time, Lord Neuberger's comments illustrate that parties must be careful to extend their consideration to specifications and the like - documentation that may not historically have attracted the same level of scrutiny.

Gowling WLG acted for E.ON, the successful Appellants, throughout the proceedings.


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