Are your contractual design obligations fit for purpose?

The Supreme Court ruling in Mt Højgaard v E.On last week held that a “fitness for purpose” obligation in a schedule to a construction contract should be given its natural meaning and effect, so confirming an earlier decision of the Technology and Construction Court (TCC) that there was a fitness for purpose obligation which required the contractor to produce foundations which would last for 20 years.  Separately, in July another TCC decision in 125 OBS (Nominees 1) Ltd v Lend Lease Construction (Europe) Ltd concerning the relationship between general and specific design obligation in a specification held that the contract contained multiple design obligations.  In light of this important new case law, what should parties to a construction contract be looking out for?

Supreme Court decision in Mt Højgaard v E.ON

The Mt Højgaard v E.ON case relates to an off-shore wind farm constructed by Mt Højgaard for E.ON.  The wind turbine foundations consisted of monopiles connected to transition pieces by grouted connections, which failed due to a defect.  The parties were in dispute over the contractual responsibility for the defect.

In 2013 the TCC held that Mt Højgaard was not negligent in its design of the grouted connections, but it did breach a specific fitness for purpose obligation, contained in a technical schedule to the Contract, that the foundations should have an operational life of 20 years.

Mt Højgaard appealed the TCC decision and in 2015 the Court of Appeal held that there was no fitness for purpose obligation, so overturning the decision of the TCC.  The industry expected compliance with the J101 industry standard, but it was generally known that J101 did not guarantee a 20 year operational life.  Although 2 paragraphs of the technical schedule referred to a 20 year warranty, the rest of the contractual design provisions were said to comprise general obligations referring to the industry standard and a general obligation to exercise reasonable skill and care.  In that context, the two paragraphs were deemed by the Cpurt of Appeal to be “too slender a thread” to allow the contract to be interpreted as imposing a specific fitness for purpose obligation on Mt Højgaard.

E.ON appealed to the Supreme Court and in a judgment given last week, the Supreme Court overturned the Court of Appeal decision, restoring the 2013 TCC decision.  Lord Neuberger considered that there were only two arguments as to why the two paragraphs in the technical schedule should not be given their natural meaning.

• The warranty would be inconsistent with the obligation to comply with J101

The Supreme Court concluded that the courts were generally inclined to give full effect to specific requirements that products comply with specified criteria on the basis that even where an employer specified the design, the contractor was expected to take the risk.  In this case, the contract contained different standards but compliance with J101 was stated to be a “minimum requirement”.  The correct analysis was therefore to give effect to the specific, more onerous standard, as the less rigorous obligation could properly be construed as a minimum requirement.

• The two paragraphs in the technical schedule were “too slender a thread” on which to hang such an important and onerous obligation

Lord Neuberger considered that the wording of one of the two paragraphs was clear in its terms that it was imposing a duty on MT Højgaard that the foundations would have a 20 year operational life.  It was not improbable or unbusinesslike to give the paragraph its clear and natural meaning.  Equally, it did not matter the paragraphs were in a technical document rather than the main contract terms, because it was clear that the provisions of the technical schedule were intended to be of contractual effect.

MT Højgaard were therefore in breach a contractually binding fitness for purpose obligation, contained in a technical schedule to the Contract, that the foundations should have an operational life of 20 years.

TCC decision in 125 OBS (Nominees 1) Ltd v Lend Lease Construction (Europe) Ltd

125 OBS engaged Lend Lease under a JCT Standard Building Contract with Contractor’s Design (1998) to redevelop a property to provide office and retail space.  Following completion of the works, glass panes on the outside of the building failed due to nickel sulphide inclusions.  125 OBS claimed the cost of the remedial works from Lend Lease.

The contract did not specify a hierarchy of contractual documents, and contained a number of different provisions relating to the standard of the glass panels:

• The materials used should be “of good quality” and “appropriate for their purpose” (clause 8.1.1)
• The “service life” (i.e. the period during which no excessive expenditure is required for operation, maintenance and repair) of the glass was to be no less than 30 years (Employer’s Requirements)
• The glass was to have a “design life” of at least 30 years (Contractor’s Proposals)
• The glass was to be “heat soak tested to reduce the risk of failure due to [nickel suphide] inclusions”, in accordance with a specific British Standard but for 4 hours instead of the 2 hours required by that standard (specification document in Contractor’s Proposals)

The main contractual issue was whether Lend Lease fulfilled its glass quality obligations by complying with the heat soak testing, or whether the other fitness for purpose and lifespan obligations applied as well – that is, whether Lend Lease could still be liable for the failures if it had heat soaked the panels in accordance with the specification?

The TCC found that the obligations for the materials to be “of good quality” and “appropriate to their purpose”, together with the lifespan obligations, were separate obligations and applied in addition to the obligation to heat soak the panels.  The key reasoning was that there was no inconsistency between the relevant terms.

The TCC also held that the fitness (or “appropriate”) for purpose obligation was to be interpreted in light of the stated purpose of the panels to be used in providing an outer skin with a service life of 30 years.  The service life of the glass therefore also had to be 30 years.  More broadly, the purpose of the works was “self-evident”, even if not stated in the contract, given the position and prestige of the building.

The specific requirement to heat soak test the panels in accordance with (but for a longer time and therefore more stringently than) the British Standard did not justify interpreting the other obligations as being less strict than their wording suggested.  The requirement of more stringent heat soak testing indicated that the intention was to reduce 125 OBS’s risk as far as possible, and therefore supported the court’s interpretation that the various obligations were cumulative.

Practical implications

It is clear that courts will interpret contracts to give clauses their natural effect.  In practice, this means that:

• The court will seek to give full effect to requirements that a product or element of works complies with specific contractual criteria; and
• Where there are inconsistent requirements, the more rigorous obligation will prevail, with the lesser obligation being construed as a minimum requirement (particularly if it is expressed to be a minimum standard).

All parties to a construction contract should therefore consider ensuring that the contract conditions make clear the extent to which technical schedules affect design and workmanship obligations.

Employers may take comfort that, absent specific wording to the contrary, clearly worded obligations anywhere in the contract documents will likely be found to be effective; however, it is important that obligations to achieve specific criteria are clearly worded and that obligations to adhere to certain standards or designs are expressed as minimum requirements.

Contractors should ensure that they check all sections of contracts carefully to identify design obligations (which may be in technical documents appended to the contract, rather than in the main contract terms), and seek to ensure that nothing in the schedules to the contract impose design obligations greater than the taking of reasonable skill and care.