When does a building contract require a “fitness for purpose” or, a less onerous, “reasonable skill and care” obligation?

In a recent decision[1], the Supreme Court unanimously decided that the more onerous fitness for purpose obligation applied –  even though this conflicted with an obligation to design and construct to a specific industry standard. As a result, the contractor was found liable for defects, even though it had displayed requisite skill and care, adhered to good industry practice and complied fully with the specified industry standard.

Background

E.on engaged MT Højgaard to design, fabricate and install sixty wind turbine foundations for the Robin Rigg offshore wind farm in the Solway Firth. Shortly after completion of the project, the turbine foundations failed. The 26 million Euro question was who carried the risk for the failure.

The contract required the works as a whole to be fit for its purpose, as determined in accordance with the specification, using good industry practice. The phrase “as determined in accordance with the Specification using Good Industry Practice” was found by the lower Appeal Court to qualify the fitness for purpose obligation, as the Contract defined “Good Industry Practice” as exercising reasonable skill and care.

However, tucked away in the contract’s Technical Requirements was an onerous obligation on the contractor to ensure the foundations had a 20 year lifespan.

Following completion, the industry standard was found to contain an error, which meant that the 20 year lifespan could not be achieved.

Decision

Due to the complexity of the contract and the conflicting provisions across various documents forming the contract, the lower courts reached different conclusions on the applicable standard and, accordingly, liability of the contractor.

The Supreme Court sympathised with the contractor’s position but it strictly applied the legal authorities and rules of contractual interpretation in coming to the following conclusions:

  1. “…the message …. is that courts are generally inclined to give full effect to the requirement that the item [the foundations] 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”.
  2. Where two provisions impose different or inconsistent standards, the more rigorous or demanding of the standards must prevail.
  3. It was the contractor’s duty to identify the need to improve the design to achieve the performance criteria (20 year lifespan).
  4. Clumsy and badly drafted contracts were not a reason to depart from the rules of contractual interpretation in determining liability. The Supreme Court was not impressed with the argument that such a fundamental obligation tucked away in the Technical Requirements was “too slender a thread on which to hang such an important and potentially onerous obligation”.

Commentary

For employers, the judgment is a welcome decision on the perennial debate between employers and contractors on liability for remedying defects. From the employer’s perspective, the employer contracted with a contractor to construct foundations that would last 20 years. The foundations failed to achieve the intended purpose of the contract and, as such, the contractor should be liable for the remedial solution.

For contractors, the take-away point is that specifications and standards should be carefully reviewed ahead of entering into a contract. Where a specification contains absolute obligations such as performance criteria, contractors should consider the liability and insurance implications of accepting such obligations.

Many of the leading standard form contracts will, as an absolute obligation, require the contractor to carry out the works in accordance with the specification. Specifications often contain absolute obligations or performance criteria, which could mean a contractor is liable, even where it has complied with industry standards and has exercised reasonable skill and care.

It will be interesting to see how the market and contract drafters react to this decision. Conflicting understandings of who holds the risk may arise when a contractor is required to comply with a particular standard and, at the same time, achieve a performance criteria as an absolute obligation.

 

This post was written by trainee solicitor Rohan Cordeiro.

 

[1] MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.