MT Højgaard v. E.ON Court of Appeal decision
MT Højgaard v. E.ON Court of Appeal decision: a shot across the bows for any builder using third party specifications and allowing fitness for purpose into their contracts
Yacht builders frequently need to rely on specifications developed by third parties, which may contain hidden flaws. To limit exposure, yards should consider keeping contractual warranties relating to a yacht’s fitness for purpose to a minimum, and should also remain aware that it can be very difficult for yards to pass legal responsibility down the chain to designers. Buyers may want to take the opposite approach. The case is a good example of how construction law developments in one seemingly unrelated sector can affect builders and buyers of all kinds.
The background facts and the contract
In 2006 MT Højgaard (MTH), a major player in wind farm construction, agreed to design, fabricate and install 60 wind turbine foundations at the Robin Rigg offshore wind farm for E.ON Climate and Renewables (E.ON, the employer).
MTH’s design sub-contractor, Rambøll, relied on the international standard DNV-OS-J101 (J101). But J101 contained a fundamental error (of which Rambøll could not reasonably have been aware) that led to the structure installed by MTH subsiding soon after installation. All of the foundations required remedial work, at an agreed cost of €26.25 million.
The contract stated at clause 8.1 that, amongst other things, MTH “shall … complete the Works”:
- “with due care and diligence”;
- “in a professional manner in accordance with … Good Industry Practice”;
- “so that the Works, when completed, comply with the requirements of this Agreement”; and
- “so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification”.
This suggested that MTH’s duties under the contract were qualified, rather than absolute. Most of the technical documentation that was incorporated into the contract, including specification J101, also suggested this: J101 was intended to ensure a design life of 20 years, meaning that it provided an acceptably high chance that the turbine foundations would function for 20 years, but not an absolute commitment on MTH’s part.
There were, however, a handful of clauses in the very lengthy contract that suggested the opposite: MTH had warranted that the foundations would function for 20 years. The judge in the first court, the Technology and Construction Court, interpreted the contract this way, making MTH liable for the repairs even though it was not reasonable to expect that they or their design contractor could have known about the fundamental error in J101.
The Court of Appeal decision
The Court of Appeal overturned this decision, but only because it reinterpreted the wording of the contract. It did not comment on the finding of the lower court that where a builder incorporates a specification either from a third party, or from the buyers themselves, as well as warranting that the product will be fit for a certain purpose, the builder is in breach of the contract if a defect in the specification leads to the product being unfit for its particular purpose. MTH were therefore fortunate that the Court of Appeal found in their favour based on the specific wording of their contract, as the law in this area favours buyers.
MTH build wind turbine foundations, but the lessons from this case apply equally to yacht builders. They should be aware that adherence to technical specifications will not always in itself protect them from liability. The more complex or innovative the design, the more consideration should be given to taking defensive measures against the risk of it proving defective. If a contract relies on a technical specification and includes obligations as to fitness for a given purpose, builders should be aware that failure of the yacht to fulfil that purpose is likely to result in liability for them, regardless of the source of the specification. It may be commercially impossible to agree a contract that includes no elements relating to fitness for purpose, but these should be kept as limited as possible, for example by short warranty periods.
Yards should also be aware of the implications of the different types of liability generally imposed by design contracts on the one hand and build contracts on the other. If a third party designer is used, their contract will almost always oblige them to exercise reasonable skill and care, rather than containing warranties that their design will be fit for particular purposes. Any claim against designers will therefore need to show negligence on their part. Build contracts, however, will usually bind yards to results-focused warranties (maximum speed, cabin noise levels, etc.). It is easier to prove that these have not been met than to prove negligence on the part of a designer, which can make recovery against a third party designer whose design is the root cause of a breach of warranty impossible.
Partner, Ince & Co