‘Double’ or ‘qualified’ contractual obligations – which?
MT HØJGAARD v E.ON CLIMATE AND ROBIN RIGG (CA) [2015]
Typically contracts contain a multitude of contractual warranties and obligations. Often these are included by the purchaser/customer on the ‘kitchen sink’ principle but, as this case demonstrated, that may not always have the effect that was intended. A dispute arose over the standards of performance required and the nature of warranties contained within several documents which together formed a construction contract.
Facts:
- MT Højgaard (MTH) entered into an agreement with E.ON Climate (E.ON) to design and install the foundation structures for some wind turbines. The contract was comprised of several parts including a Part D which contained the Conditions of Contract and Part I which set out detailed technical requirements which formed part of E.ON’s specification (Technical Requirements).
- The Technical Requirements, amongst other things, required MTH to prepare its design in accordance with an international standard known as ‘J101’. Another requirement provided that the design should have a ‘lifetime’ of 20 years and there were other references to a required ‘design life’ of 20 years.
- Clause 8.1 of Part D contained terms requiring MTH to design, manufacture, test, install and complete the Works:
- with due care and diligence expected of appropriately qualified and experienced designers and engineers;
- in a professional manner in accordance with internationally recognised standards and Good Industry Practice;
- so that each item of Plant and the Works as a whole would be free from defective workmanship and fit for its purpose in accordance with the Technical Requirements using Good Industry Practice;
- so that the design of the Works and the Works when completed would be wholly in accordance with the Agreement and would satisfy any performance specifications or requirements of E.ON as set out in the Agreement (ie including the Technical Requirements).
- Another clause in Part D set out the order of precedence if there was any inconsistency or ambiguity - this placed the contract conditions in Part D (and therefore clause 8.1) higher in the list than the Technical Requirements in Part I.
- Shortly after completion the foundation structures failed due to an important error in J101. It was agreed that E.ON would develop a scheme of remedial works which cost over €26 million although the parties left it to the Technology and Construction Court (TCC) to decide who should bear that cost:
- E.ON alleged that MTH was in breach of contract for the failure of the foundation structures to achieve an operational life of 20 years and was accordingly liable for the remedial costs;
- MTH contended that it had exercised reasonable skill and care and had complied with its contractual obligations and it should therefore have no liability for the cost of the remedial works.
TCC Decision:
- The TCC decided that, as the foundation structures had failed early on, MTH was liable to E.ON for breach of contract because it had warranted that the foundation structures would have a service life of 20 years. MTH was found to have breached the applicable provisions in clause 8.1 because its design was not fit for purpose and was not wholly in accordance with the requirements of the contract as these included the Technical Requirements, and specifically to achieve a result that the foundations would have a service life of 20 years. The service life provision was considered to be additional to, and not inconsistent with, MTH’s other obligations such as the requirement to comply with J101.
- MTH appealed to the Court of Appeal (CA).
CA Decision:
- Importantly, the CA held that there had been no negligence or want of professional skill on either side.
- The CA accepted that, under certain contracts, a contractor is required to comply both with particular standards and achieve a particular result. In those situations the contractor has a double obligation, “He must as a minimum comply with the relevant specifications and standards. He must also take such further steps as are necessary to ensure that he achieves the specified result."
- MTH’s claim was that the contract simply required the foundations to have a design life of 20 years. As it had designed the foundations in accordance with J101, even though this contained an error which led to the failure, MTH argued that the foundations had the required design life and it was therefore not in breach.
- Apart from one reference to a “lifetime of 20 years”, the CA found that all the other requirements referred to a design life of 20 years. It pointed out that, “if a structure has a design life of 20 years, that does not mean that inevitably it will function for 20 years, although it probably will".
- The CA said that if the contract required an absolute warranty for the 20 year period, it would be expected to be seen in clause 8.1, not tucked away in the Technical Requirements, which were much lower in the order of priority between the different parts of the contract.
- Clause 8.1 required that the works as a whole would be ‘fit for purpose’ which was qualified as being determined in accordance with the Technical Requirements using Good Industry Practice. ‘Good Industry Practice’ required the exercise of reasonable skill and care, as well as compliance with J101. It did not require or impose any form of warranty as to the length of operational life.
- The conclusion of the was that the requirements for a ‘lifetime’ of 20 years were inconsistent with the remainder of the Technical Requirements and J101. It said, “They are too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations”.
- MTH's appeal was therefore allowed.
Points to note:
- The case turned on the CA’s interpretation of the contract as a whole. Where particular provisions appear probably shouldn’t be important but, on occasions, it is.
- Many contracts include a multitude of different, potentially overlapping warranties of compliance with specification, fitness for purpose, reasonable skill and care, good industry practice etc. No doubt they are included by purchasers in an attempt to provide a degree of additional comfort. However, what this decision indicates is that compliance with the detailed specification and such additional general warranties will often be interpreted as being subject to additional more general and less absolute warranties. Clause 8.1 not only failed to impose an absolute obligation of quality, but in fact it did the complete opposite.
- Compare this decision with MW High Tech Projects UK v Haase Environmental Consulting [2015]:
- A warranty to meet a particular specification in a building contract appeared together with a reasonable skill and care obligation. The contractor argued that the design consultant had two separate duties:
- to use reasonable skill and care in carrying out the services; and
- to design the work in accordance with the EPC Requirements.
- According to the contractor, the latter requirement was a strict obligation and failure to comply with it, even if could not be shown that the consultant had been negligent, would be a breach of the consultant’s appointment.
- The Court decided that the consultant’s overriding obligation to the contractor was to carry out its services with reasonable skill and care and that the requirement to comply with the EPC Requirements could be read independently from that overriding obligation. The only qualification to the consultant’s strict duty to comply with the EPC Requirements was that it would not be obliged to comply with those Requirements if it meant breaching its duty to act with reasonable skill and care. In that case it would not be required to comply with that part of the EPC Requirements.
- The lesson for both suppliers and customers is that close attention needs to be paid to the precise wording of such clauses to assess whether there is a double or a qualified obligation. This distinction may be crucial given that failure to comply with an absolute obligation may not be backed by PI insurance. It is natural that customers will typically want suppliers to commit to strict, objective compliance obligations.
- In 2017 the Supreme Court allowed EON's appeal and restored the first decision by the TCC.