Fitness for purpose
MT HØJGAARD v E.ON CLIMATE (SC) [2017]
The Supreme Court (“SC”) upheld a customer’s appeal and found that a contractor was liable to comply with a fitness for purpose type obligation which took priority over a duty to comply with an international standard. This will have significant consequences for the interpretation of complex project contracts, which often incorporate technical schedules and other specification documents.
Facts:
- The facts are as set out in the Court of Appeal (“CA”) decision which we previously reported on (see here).
- Initially the Technology and Construction Court (“TCC”) found that a contractor, MT Højgaard (“MTH”), was liable to its customer, E.ON, to meet a fitness for purpose type obligation contained in a technical schedule despite obligations elsewhere in the contract to exercise reasonable skill and care and to comply with an international standard.
- MTH appealed to the CA which held that it was not legally responsible. Then, in a unanimous decision, the SC allowed E.ON's appeal and restored the TCC’s ruling that MTH was liable to E.ON after all.
Decision:
- The SC had to consider whether MTH was in breach of contract, despite the fact that it had “used due care and professional skill, adhered to good industry practice, and complied with [the international standard] ”.
- A number of cases were reviewed involving “… contracts which include two [conflicting] terms, one requiring the contractor to provide an article which is produced in accordance with a specified design, the other requiring the article to satisfy specified performance criteria and where those performance criteria cannot be achieved by complying with the design”.
- Although each case will always turn on its facts, the SC concluded that the Courts' approach is to require the contractor to ensure that the item produced complies with the prescribed performance criteria even if the customer has specified or approved the design. It is the contractor who is taking the risk that by working to the design, it may be incapable of meeting the performance criteria.
- In this case, the requirement to comply with the international standard was expressly stated to be a minimum requirement and the onus was explicitly on MTH to identify any areas where the works needed to be designed to additional or more rigorous requirements or parameters. The SC found that:
- where there are two inconsistent provisions or standards, rather than concluding that they are inconsistent, the correct analysis is that the more rigorous of the two standards or requirements must prevail. The less demanding provision will be treated as a minimum requirement;
- if there was an inconsistency between the design requirement and the required performance criteria, it was made clear in the technical requirements that, even if MTH complied with the design, it would be liable for the failure to comply with the required performance criteria because it had a duty to identify the need to improve on the design.
- The SC judgment did not expressly refer to the agreed order of priority set out in the contract probably because the technical requirements document, although set out in a schedule, was explicitly referenced as part of the definition of ‘fitness for purpose’ which itself appeared in a clause in the main conditions of the contract.
Points to note:
- The judgment illustrates the confusion that can arise from including a bundle of different obligations which potentially point in different directions. Deciding which obligation takes precedence can be tricky and which obligation will actually prevail over other requirements will depend on the contract drafting.
- It is sensible to draw a clear distinction in contracts between those obligations that are absolute and those that are only subject to a reasonable skill and care or ‘endeavours’ type commitment.
- The SC was seemingly happy to give effect to the fitness for purpose requirement taking priority despite the fact that it was somewhat hidden away in a technical schedule rather than being given greater prominence in the main contract terms and conditions. This emphasises the importance of agreeing the entirety of the documentation which is to have contractual force, even the parts which are primarily technical in nature.
- If a customer specifies a particular design, design standard, methodology or condition in addition to a performance objective to be achieved, it will be incumbent on the supplier to scrutinise whether the design standard or methodology in question prevents the performance objective from being achieved. If in its opinion it does, the supplier would be well advised (hopefully by agreement) to consider departing from the mandated standard. Otherwise sticking strictly to it will seemingly provide no defence if ultimately, the overall performance objective is not met.