Offshore construction contracts – “fit for purpose” and other potential onerous warranties

Mt Højgaard A/S v. E.ON Climate & Renewables UK Robin Rigg East Limited [2017] UKSC 59
The Supreme Court has in a recent decision decided on a contractor’s liability in a contract where there is potential conflict between a contract provision requiring the contractor to apply specified standards and a provision requiring the contractor to obtain a particular result. In the case at hand, the contractor’s compliance with the standard required by the contract prevented the contractor from obtaining the result required by the contract.

After a tender process, E.ON (through two E.ON companies, jointly referred to as “E.ON”) entered into a contract with MT Højgaard A/S (“MTH”) in 2006, where MTH agreed to design, fabricate and install foundations for an offshore wind farm.

In performing their obligations MTH, as required by the contract, relied on an international standard for the design of offshore wind turbines (J101) published by Det Norske Veritas (“DNV”). The J101 contained an equation that showed how the interface shear strength due to friction was to be calculated. The detailed design was prepared by MTH’s subcontractor and was submitted, as required by the contract, to DNV as an independent certifying authority for evaluation and approval. MTH completed installation of the works in February 2009.

In the summer 2009, it was discovered that there was an error in the J101 equation showing how the interface shear strength was to be calculated. The error in the equation resulted in substantial over-estimation of the axial capacity of the grouted connection in the wind farm foundations.

In April 2010, the wind farm foundations designed, fabricated and installed by MTH started to fail. Remedial works were performed, and the question decided by the Supreme Court was whether the contractor MTH was liable for the failure, and hence obligated to bear the costs of the remedial works.

The Contract
The tender documents included a document called “Technical Requirements” (“TR”). The TR included a “General Description of Works and Scope of Supply”, which stated e.g. that the work elements were to be designed for a minimum site specific design life of 20 years without major retrofits or refurbishments. The TR further required MTH to prepare the detailed design of the foundations in accordance with J101, as well as stating that the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned maintenance or replacement.

The contract that was entered into between MTH and E.ON contained a “fit for purpose” obligation, where the foundations were to be designed, fabricated and installed fit for purpose. “Fit for Purpose” was a defined term in the contract as “fitness for purpose in accordance with, and as can properly be inferred from, the Employer’s Requirements [which included the TR].” There was a further provision in the contract that required MTH to make good defects or damage arising out of “Works not being Fit for Purpose” that arose within the defects liability period. The liability period was defined as 24 months from the date E.ON took over the works from MTH.

The question to be decided was whether an enforceable 20-year warranty had been given by MTH.

In the lower courts, there had been a discussion about whether the potential warranty was a warranty for 20 years operational life or only a warranty for 20 years design life. The Supreme Court did not find it necessary to address this point, or whether the defect must have been discovered within the first 24 months. This was because the foundations failed within 24 months in any event, thus the foundations would never have had an operational life or design life of 20 years.

The arguments
E.ON argued that the TR amounted to a warranty that the foundations would last for 20 years. E.ON based their argument on the TR having been incorporated into the contract because the main body of the contract required the work to be fit for purpose. That in turn equated to compliance with the Employer’s Requirements defined in the contract as including the content of the TR which explicitly referred to the foundations having a life of 20 years. E.ON argued that MTH had breached the TR insofar as the foundations did not have a life of 20 years, and that MTH was therefore liable for breach of contract.

MTH on the other hand, argued that the works were to be constructed in accordance with the requirements of J101. A provision in the tender documents catering for a 20-year design life, cannot render the contractor liable for faulty construction when the work was actually performed in accordance with the required standard. The nature of the TR was technical, not legal. If the parties had intended that MTH was to warrant a 20-year lifetime, a term to that effect would have been included.

The Award
The Supreme Court found in favor of E.ON and held that MTH were liable for the cost of remedial work of the foundations.

In their decision, the Supreme Court established, based on an analysis of previous case law, that the courts are generally inclined to give full effect to requirements in a contract setting out prescribed criteria for the item to be produced, even if the customer has specified or approved the design of the item. It was emphasized that it is the contractor who can be expected to assume the risk of complying with the prescribed criteria if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed. MTH could therefore not be heard with their argument that the failure was due to their compliance with J101, which was required by E.ON. It was specified that the resolution of this issue may turn on the particular wording of the contract. In the relevant contract, the Supreme Court emphasized that the obligation to comply with J101 was a minimum requirement, with a further obligation for MTH to identify any areas where the works needed to be designed to any additional or more rigorous requirements or parameters so as not to conflict with the obligation to provide foundations that would last for 20 years.

The Supreme Court did not have much sympathy for MTH’s argument that an enforceable 20-year warranty would not be as diffuse or unsatisfactorily drafted and tucked away in a technical tender document. The fact that the contract and the TR were tainted by being drafted by several authors with diffuse and long, detailed descriptions in the TR, did not give a reason for departing from the fundamental rules of construction. When using the rules of construction, the Supreme Court found that the TR did contain a 20 year-warranty, and that the TR was incorporated in the contact through the main terms of the contract.

As highlighted by the award, it may not be sufficient for a contractor to apply the required standards, complying with the specifications or design approved by the customer if the contract contains an obligation to obtain a particular result, in this case to achieve a particular purpose or service life. Care should be taken by contractors to identify any obligation to obtain a particular result, achieve a particular purpose or service life, before entering into the contract.

Offshore engineering and construction contracts, both in the oil and gas industry and in the windfarm industry frequently contain absolute warranties as to fitness for purpose or other similar warranties to achieve a particular purpose. Also in charter parties for vessels used in the offshore industry, owners’ obligations often extend beyond simply providing a vessel; the scope of work may include engineering and construction elements and owners should be acutely aware of the potential exposure of such absolute warranties, which may well be tucked away in the technical documents in the tender package. The risk of such warranties being applied has now been clarified by the Supreme Court.