Introduction
On 3 August 2017, the Supreme Court of England and Wales handed down its decision in the case of MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another – [2017] UKSC 59, finding in favour of the project owner and Appellant, E.ON Climate & Renewables UK Robin Rigg East Limited and an affiliated company (together, “E.ON”), reversing the decision of the Court of Appeal and restoring the first-instance decision of the High Court. Broadly, this case concerns the enforcement of a contractual provision in accordance with its terms. The central issue relates to a contractual provision in a construction contract requiring the works to achieve specified performance criteria (here, a design life of 20 years) despite the contract also requiring the contractor to design the works according to design specifications which are not capable of achieving the performance criteria. In addition, this decision also provides guidance on (i) the enforceability of technical annexes and schedules in construction contracts and (ii) the interaction between extended design life requirements, on the one hand, and defect warranty periods much shorter in time, on the other hand.
Facts
In 2006, MT Højgaard A/S (“MTH”) responded to a tender from, and was subsequently selected by and entered into a contract (the “Contract”) with E.ON relating to the design, manufacture, delivery, installation and commissioning of the foundations for 60 wind turbine generators and two substations for the Robin Rigg offshore wind project in the Solway Firth, United Kingdom (the “Project”). The Contract comprised a set of terms and conditions together with technical appendices and schedules, including the “Employer’s Requirements” and the “Technical Requirements.” Amongst other things, the Contract required MTH to (i) prepare the detailed design for the foundations in accordance with an international standard for the design of offshore wind turbines known as ‘J101’ (the “Specified Design Obligation”) and (ii) prepare a design for the foundations which ensured a lifetime for the foundations of 20 years (the “Specified Performance Obligation”).
MTH prepared a design for the foundations based on J101 and constructed and installed the foundations according to that design. The design provided for grouted connections without components known as ‘shear keys.’ MTH’s design omitted these components because, in simple terms, a formula in J101 indicated that shear keys were not necessary for the Project. However, shortly after completion, the grouted connections began to fail. It was subsequently discovered that the formula in J101 concerning the design of grouted connections was, itself, incorrect. The correct formula would have indicated that shear keys were in fact necessary to ensure a design life of 20 years for the Project.
MTH and E.ON agreed on a programme of remedial works costing €26.25 million, but disagreed on who should bear this cost. MTH claimed that it had exercised reasonable skill and care in the performance of the works and had complied with all contractual requirements. E.ON argued, amongst other things, that the remedial work arose out of a breach by MTH of its obligation to prepare a design for the foundations which ensured a lifetime of 20 years, because a design which adhered to J101 was, due to the mistake within J101, not capable of ensuring a 20 year life.
Key Issues
1. Inconsistency between design specifications and performance criteria.
The central issue of the case concerned the apparent conflict between the Specified Design Obligation and the Specified Performance Obligation. The court therefore had to decide if these obligations were inconsistent and, if so, which obligation had priority. Lord Neuberger, giving the leading judgement, stated that the reconciliation of such inconsistencies must, as a matter of first principles, be decided by the ordinary principles of contractual interpretation and therefore by reference to the provisions of the particular contract in the commercial context.
On the matter of inconsistency itself, Lord Neuberger held that it does not necessarily follow that two terms, one a design specification and the other a performance criteria, would be mutually exclusive just because the performance criteria cannot be achieved on the basis of the design specified. He said “…in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed.” In any event, Neuberger relied upon a long list of past precedent, including the decision of the House of Lords in Cammell Laird and Co Ltd v The Maganese Bronze and Brass Co Ltd [1934], in reaching the conclusion that, in the case of conflicting design obligations, courts will give full effect to performance criteria, stating “…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.”
On the particular facts, however, Lord Neuberger decided that the Specified Design Obligation and the Specified Performance Obligation were not inconsistent with one and other. He reached this conclusion by reference to the particular provisions of the Contract imposing the Specified Design Obligations – which expressly stated that the obligations to design the works in accordance with J101 were “minimum requirements” and that it was “the responsibility of the Contractor to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters.” Therefore, in the circumstances, Lord Neuberger found that rather than being inconsistent, the correct analysis was that the more rigorous requirement (the Specified Performance Obligation) should prevail and the less rigorous standard (the Specified Design Obligation) constitutes merely a minimum requirement. Therefore, we note that a minimum requirement, in effect, becomes irrelevant for any purpose other than establishing the priority of other requirements in that the contractor does not avoid breach of contract by complying with a “minimum” requirement if it fails to comply with another, more rigorous, requirement.
2. Inconsistency between the defects notification period and the 20-year design life obligation.
In an attempt to argue that the parties had not intended the Specified Performance Obligation to take effect as an overriding “warranty” that the foundations would function for 20 years, MTH submitted that there was no room to infer such a warranty in light of express “defects liability” provisions in the Contract which provided that MTH was only required to rectify “any defect…or damage” arising from “defective materials, workmanship or design” discovered during a “Defects Liability Period” which expired 24 months after completion of the works. The Contract expressly excluded E.ON’s rights to have recourse to any other remedy at law (save in the case of misconduct, which was not alleged here).
Lord Neuberger firstly noted it was perfectly possible for MTH and E.ON to have agreed, as a matter of commercial negotiation, to a 20 year warranty period which was subject to a 24 month contractual limitation period – as Lord Neuberger put it “it would simply mean that the rights given to E.ON by [the defects liability provisions of the Contract] were significantly less valuable than at first sight they may appear...”. Nevertheless, Lord Neuberger decided that it was possible to give effect both to a 20-year design life “warranty” and to the exclusive defects liability regime: based on the reference to “design” in the Specific Performance Obligation, Lord Neuberger was of the view that “rather than warranting that the foundations would have a lifetime of 20 years, [the Specific Performance Obligation] amounted to an agreement that the design of the foundations was such that they would have a lifetime of 20 years[.]” The effect of this distinction is that, even if the foundations had not as a matter of fact failed during the 24 month Defect Liability Period, it would have been sufficient for E.ON to discover during such period that the foundations had not been designed to last for 20 years. Ultimately, however, it was not necessary for the court to decide the point (given that the foundations failed well within the 24-month Defects Liability Period).
3. Incorporation of technical schedule and annexes into the contract.
The court also addressed whether the Specific Performance Obligation was properly incorporated into the Contract (and therefore, whether a failure to meet a 20-year design life was a breach of contract).
E.ON argued that it was incorporated by way of reference, as the Contract required fitness for purpose and compliance with the Employer’s Requirements, which in turn included the Technical Requirements (a technical annex to the Contract which contained the specific reference to a 20-year design life requirement). MTH contended that the contractual documentation was “of multiple authorship [and] contain[ing] much loose wording” including many “ambiguities, infelicities and inconsistencies[,]” and that if the parties had intended such an onerous obligation as a 20 year design life, it would have been included in plain terms in a more prominent part of the Contract. In effect, MTH’s argument was that the true agreement between the parties was set out the terms and conditions of the Contract, not the many technical annexes and schedules which were bolstered to the back-end of the contract documentation without much thought being given to them. Unsurprisingly, however, Lord Neuberger noted that poor drafting and contractual structure “does not alter the fact that the court has to do its best to interpret the contractual arrangements by reference to normal principles[.]”
The court agreed with E.ON that the terms of the Technical Requirements were effectively incorporated into the Contract by way of reference in the terms and conditions. The fact that the Technical Requirements formed part of the Contract was also apparent since they were physically included in the contractual documentation at Part I of the Contract. MTH’s argument that the Specific Performance Obligation should not be enforced due to its being “tucked away” in the detailed technical requirements found no sympathy with the court. Accordingly, it was held that a failure to comply with the Specific Performance Obligation amounted to a breach of the Contract.
Conclusion
It may seem draconian to hold a contractor legally liable for defective works which resulted from an international design standard which the contractor was required to follow and which itself turned out to be fatally flawed. Fundamentally, however, the Supreme Court held the contractor to the bargain it had made at the time of entering into the Contract. This case is a helpful addition to the body of law which tells us that in the event of a contractual conflict between an obligation requiring adherence to a certain specification, on the one hand, and an obligation requiring adherence to certain performance criteria, on the other, the performance criteria obligation will generally prevail. More generally, however, this case reminds us that the English courts will always seek to give effect to, and not interfere with, the freedom of reasonable parties to reach their own commercial agreements (whether good or bad) – it is up to those parties to know, understand and fulfil the agreements they make.
