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Supreme Court rules on contractor's liability for design

Out-Law News | 03 Aug 2017 | 4:30 pm | 4 min. read

A warranty provided by construction company MT Hojgaard (MTH) that the underlying works would have a service life of 20 years took precedence over conflicting terms in the contract, including adherence to industry standards, the UK's highest court has ruled.

In a unanimous judgment, the Supreme Court found that the contractor was bound by the warranty even though its design was carried out using due care and requisite skill, adhered to good industry practice and complied with the industry design standard, which contained a serious error and was subsequently corrected.

Construction disputes expert Alexander Grant of Pinsent Masons, the law firm behind Out-Law.com, said that the eagerly anticipated decision confirmed the general principle of English and Canadian law that where a contract includes two terms, one requiring the contractor to provide a structure which is produced in accordance with a specified design standard and the other requiring it to satisfy a stated performance criteria, it is the performance criteria that takes precedence.

"The Supreme Court found that the requirement to use reasonable skill and care in design was a minimum requirement in circumstances where the contract specifies particular performance criteria, such as a stated design life. Obligations to perform work with reasonable skill and care in accordance with a design, or design standard, can co-exist with, and be superseded by, an obligation to achieve a result," he said.

Reconciliation of the two terms must be considered in accordance with the normal rules of contract construction in each case, but the onus would fall on the contractor to show that the general principle did not apply on the specific wording of their contract,. In this case, it was a burden that the contractor was unable to discharge, but whether this would be the position in other cases would "depend on the wording of the contract", he said.

MTH had successfully tendered to design and install two offshore wind farms in the Solway Firth for companies in the E.ON group. The tender documents included E.ON's 'technical requirements', which amongst other things called for the foundations structures to be built in accordance with a document referred to as J101. J101 was a reference to an international standard for the design of offshore wind turbines. However, one of the figures in the document was wrong by a factor of about 10, and meant that the strength of the foundation structures had been substantially over-estimated and it subsequently failed.

E.ON and MTH entered into a contract under which MTH agreed to design, manufacture and install the foundations for the proposed turbines in a way that was 'fit for [their] purpose'. This was ultimately defined as adhering to the technical requirements. The technical requirements provided that the foundations be designed so that they would have a lifetime of 20 years alongside other provisions requiring the design to be carried out by reference to design standard J101.

The parties agreed to carry out remedial work immediately after the foundation structures started failing, but disagreed over who should bear the estimated £26.5 million cost of the works.

The High Court had previously reviewed the potentially conflicting requirements in the contract and technical specification and found MTH liable for failure to meet a fitness for purpose obligation under clause 8.1 of the contract, which incorporated the 20 year warranty. This was despite having not been negligent in its design of the foundations. That decision was overturned by the Court of Appeal, which said that although the relevant clause appeared to be a warranty, all the other relevant contract terms pointed to MTH not being liable.

As is frequently the case, the standard of performance required of the contractor was to be found in a variety of places throughout the contract, in both the contract terms and the technical requirements. Those terms were difficult to reconcile. In its judgment, the Supreme Court in part took a different view to the meaning and impact of them from the parties themselves, and from the judges in the lower courts. It found that the terms should be "decided by reference to ordinary principles of contractual interpretation … and therefore by reference to the provisions of the particular contract and its commercial context".

"It seems to me that MTH's case, namely that [the 20 year warranty] is inconsistent with the obligation ... to comply with J101, faces an insurmountable difficulty," said Lord Neuberger, giving the judgment of the court.

"[W]here two provisions of section 3 impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis … is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement. Further, if there is an inconsistency between a design requirement and the required criteria, it appears to me that the effect of [the contract] would be to make clear that, although it may have complied with the design requirement, MTH would be liable for the failure to comply with the required criteria, as it was MTH's duty to identify the need to improve on the design accordingly," he said.

In other words, the Supreme Court dismissed MTH's arguments on the basis that it would mean treating the 20 year warranty as redundant, and sought to give effect to the requirement that the structure would comply with the prescribed performance criteria. This was on the basis that even if the employer had specified or approved a basis of design, it is the contractor who can be expected to take the risk if it agreed to work to a design which would render the item incapable of meeting the criteria to which it had agreed.

The court agreed that the warranty gave rise to a higher obligation than other references to design life elsewhere in the contract. However, this was consistent with the other obligations, which were treated as minimum standards to be achieved.

"The Supreme Court has followed the recent trend in court decisions in seeking to give effect and meaning to seemingly conflicting provisions, some of which may be found in technical documents drafted by non-lawyers," said construction disputes expert Alexander Grant.

"Employers will, of course, be very pleased with this decision, but there is a sting in the tail: the Supreme Court indicated that the type of warranty at issue in this case may in fact by a warranty that works have been designed to achieve the performance criteria, rather than a warranty of actual performance. That being so, employers will need to identify design failings prior to the expiry of the liability periods under the respective contract, at a point in time when actual defects may not be manifest," he said.