Fit for purpose provisions in offshore wind construction and installation contracts

In the last couple of years two cases have been heard by the English Courts which consider the meaning and scope of fitness for purpose provisions in offshore wind construction and installation contracts. Although similar in some respects the cases differ both factually and legally but demonstrate the type of issues contractors can face in relation to offshore wind construction contracts and renewables projects more generally.

Service -v- Design life

(MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59)

In the first case the Contractor was retained to design, fabricate and install foundations for 60 offshore wind turbines off the coast of Scotland. Not long after completion of the work it was discovered that the grouted connections in the foundations had failed. Surprisingly the defect discovered was present in the international design standard itself, J101, which the Contractor had designed in compliance with. The cost of remedying the fault came to approximately EUR 26 million, a substantial sum, which the Company believed was to be borne by the Contractor. 

The first judge held that a construction and engineering contract referred to obligations to exercise reasonable skill and care, to perform work in a workmanlike manner and importantly, to achieve a particular result; in this case, foundations with a service life of 20 years. The view of the judge was that the warranty for service life took precedence over other obligations including the key requirement to comply with the international standard J101. The Contractor was found to have breached the warranty and was liable to remedy the defects.

The decision was appealed to the Court of Appeal who considered the question as to whether the contract imposed a double obligation upon the Contractor requiring it not only to comply with J101 but also to provide foundations with a service life of 20 years. The Court’s view was that a fitness for purpose obligation contained within a schedule to a construction contract would need to be sufficiently clear in order not to be read subject to more general obligations to exercise reasonable care and skill and comply with international standards found elsewhere in the contract. In the present case they were not and it was held that the double obligation was not imposed on the Contractor and there was no breach. 
That was not the end of the road as the case was taken to the Supreme Court who overturned the judgment by unanimous decision. The Contractor was held liable for breach of the fitness for purpose obligation. By agreeing to produce a specified design and to achieve a specified result, the Contractor was in breach if the design does not achieve the specified result. In addition the J101 standard was expressed to be a minimum standard, meaning that it was the Contractor’s responsibility to identify any necessary requirements beyond that. The contract clearly indicated that the Contractor was to achieve a 20 year design life and it was wrong to say that the provisions regarding service life were not prominent or pervasive enough to take precedence over the provisions concerning design life.

Checking fitness for purpose2

Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd [2016] EWHC 2062 Limited and another (Appellants) [2017] UKSC 59

In the second case the Contractor, was required to engineer, procure and construct the foundations and infrastructure for 140 wind turbine generators, to be installed in the North Sea. The foundations were manufactured in China and the Contractor was obliged to carry out non-destructive testing (‘NDT’) on the monopiles and transition pieces to ensure the quality of the welds. During the testing by the Contractor many welds were passed as satisfactory when they contained defects. Later testing by the Company detected transverse cracking. Notwithstanding this the Contractor took delivery of the ­foundations from the Builder without requiring a full investigation to be carried out or reserving any right to claim for lack of fitness for ­purpose. 

The decision for the Court was whether the monopiles were fit for ­purpose and if they were not then who as between the Contractor and the Chinese builder was responsible for the substantial costs of repair. The Court held that the transverse cracking was a result of failure by the Chinese builder to maintain correct preheat temperature of the welds to the monopiles. However the Court found that the relevant test for fitness for purpose was whether the goods were in a condition that a buyer who was fully acquainted with the facts, and in particular who knew what hidden defects existed, went ahead and bought them without a reduction in the price.
Given that the Contractor in this case was fully aware of the defective welds on the monopiles and transition pieces but had nevertheless taken delivery without requiring a full investigation be carried out to check whether the defects would affect their performance, they had no basis to claim that the foundations delivered were not fit for purpose. To maintain such a claim what the Contractor should have done prior to taking delivery was to carry out a full investigation into the true condition of the monopiles, regardless of the expense, in order to establish to what extent this would affect their performance in service. The Contractor was therefore liable to the Company for the costs of additional testing and repair but this was not a claim that they could pass back to the Builder because they could not show that they had checked whether the foundations were fit for purpose before they took delivery.

Comment

In terms of litigation disputes in the offshore wind sector are still relatively uncommon. However, as these two decisions reveal, mistakes are expensive and the application of general contract principles under English law such as “service life” and “fitness for purpose” can lead to unexpected results.

To date the English Courts have been reluctant to impose an objective test for fitness for purpose and this makes life hard for the supplier of goods and equipment. This is because where ­legitimate concerns arise regarding fitness for purpose, a buyer may be justified refusing delivery until it is established that the goods are fit for their intended purpose, potentially at ­significant cost to the supplier. Equally Contractors should be aware that where they have agreed to achieve a specific result regarding ­fitness for purpose, but fail to do so, then even though the required standard has been met and reasonable skill and care has been exercised, they will be held to account for that failure.

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