Inconsistent contractual provisions and erroneous industry standards – WHO IS TO BLAME?

A recent English case MT Højgaard A/S v E.ON Climate and Renewables UK ([2015] EWCA Civ 407) has highlighted the significant risk contractors can be exposed to when taking on complex offshore construction projects under contracts containing inconsistent provisions.

E.ON engaged MT Højgaard (the “Contractor”) to design, fabricate and install the foundation structures for 60 ­offshore wind turbines for Robin Rigg, an offshore wind farm in the Solway Firth off the coast of Scotland. Shortly after completion in 2009 the works were found to be defective. The problem arised from a significant error identified in the international design standard DNV-OS-J101 (“J101”), a standard to which the Contractor was required to and did design the offshore turbines and not from the Contractor’s negligence. The necessary remedial works were agreed between the parties at a cost of approximately Euros 26 million and the question for the English courts was whether the Contractor was liable for such costs.

The decision at first instance

At first instance the Court held that a construction and engineering contract could refer to obligations to exercise reasonable skill and care, to perform work in a workmanlike manner and importantly also to achieve a particular result. On his interpretation of the contract the judge found that this was such a case given the co-existence of the general performance obligations (set out in clause 8.1 of the Contractual Conditions) and a specific warranty given by the Contractor (in paragraph 3.2.2.2 of the Technical Requirements section) that the foundations would have a service life of 20 years. He considered that the specific warranty took precedence and that the Contractor was in breach of such warranty and liable for the cost of the remedial work.

This decision was appealed and the question for the Court of Appeal was whether the contract imposed a ­“double obligation” upon the Contractor requiring it to (1) comply with J101 in designing the foundations and (2) provide foundations with a service life of 20 years, notwithstanding that the defect identified in J101 made it impossible for the Contractor to do so.

The decision of the Court of Appeal

The Appeal Court determined that where there was sufficient clarity in the contractual wording a Contractor could be required to comply with relevant specifications and standards and achieve a specific result i.e. the Contractor would be liable for failing to achieve a particular result even if it complied with the relevant standards of design/construction. In the present case the Appeal Court did not consider that the contract imposed such a “double obligation” on the Contractor as on its interpretation of the relevant contractual clauses there was no requirement to achieve a service life of 20 years in respect of the foundations.

In concluding that there was no absolute warranty in the contract the Appeal Court reasoned that although clause 3.2.2.2 clearly required the design to ensure that the foundations had a service life of 20 years it was the only such reference in the contract and was “tucked away” in the Technical Requirements. All other references in the specifications were to the foundations having a design life of 20 years, a less onerous obligation where the foundations were expected, but could not be guaranteed, to last for such period, and clause 3.2.2.2 should not override such provisions.

Further the Appeal Court held that the general performance obligations set out in clause 8.1 of the Contractual Conditions took priority over the other contractual provisions including the Technical Requirements which were fourth in the order of precedence. Had the parties wished to provide for an absolute warranty of quality it would be expected to be set out in that clause. In fact it did the opposite requiring the Contractor instead to exercise reasonable skill and care and compliance with J101 when designing the foundations.

Based on this analysis the isolated provisions of clause 3.2.2.2 were “too slender a thread” on which to find that the Contractor gave a ­warranty of 20 years in respect of the foundations.

Comments

Whilst the decision of the Appeal Court was a victory for the Contractor the case clearly demonstrates some of the difficulties that can arise where there are ambiguities and inconsistencies in the drafting of complex offshore construction contracts and in particular where, as is often the case, they are compiled from numerous documents with multiple authors. 
Where a contract is sufficiently clear, the court may impose a ­double obligation on a contractor who has agreed but failed to achieve a ­specific result, even though the required standard has been complied with. The decision is therefore a timely reminder of the need for drafting with absolute clarity the standard which the contractor is required to achieve under the contract. In particular it demonstrates the importance of distinguishing clearly between absolute obligations and those that are subject to reasonable skill and care.

Precise and clear wording will ensure that the parties’ intended allocation of risk is correctly defined, which will avoid the contractor taking on unexpected and potentially uninsured risks with far-reaching consequences. This is particularly critical in industries concerned with relatively new technology, such as offshore wind where designs being worked to are relatively unproven.

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