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Fitness for purpose – to what extent do obligations in contractual specifications bite?

The extent and application of “fitness for purpose” obligations in construction contracts has again been before the Courts and on 3 August 2017 the Supreme Court handed down its judgment in MT Højgaard A/S –v- E.ON Climate and Renewables UK and others.  Lord Neuberger’s leading judgment overturned the Court of Appeal’s earlier decision and restored the position as set out by the TCC in the judgment of Edwards-Stuart J, handed down in April 2014 following an 8 day hearing in November 2013.

Whilst this case centred on fitness for purpose, the Supreme Court judgment will have wider implications for parties to construction contracts in relation to obligations on contractors to comply with specific requirements contained in contractual specifications and to how those obligations are incorporated into contracts and later interpreted by the Courts.   

The facts of the case

The case concerned defective foundation structures for two offshore wind farms, constructed in the Solway Firth pursuant to a bespoke contract signed on 20 December 2006.  The Works were completed in February 2009.  The contract defined “Fit for Purpose” as “fitness for purpose in accordance with, and as can properly be inferred from, the Employer’s Requirements.”  Clause 30 of Part D of the Contract stated that the Contractor was responsible for making good any defect arising from “Works not being Fit for Purpose”.  By late Summer 2009 serious defects in the wind farm’s foundations were discovered and remedial works were carried out by E.ON in 2014 at a cost of €26.25m.

The nature of the dispute

A dispute arose as to whether or not the contractor (“MTH”) was responsible for the cost of the remedial works.  MTH’s position was that it had exercised reasonable skill and care and complied with all of its contractual obligations.  The Employer, E.ON, contended that MTH had both been negligent and was in breach of contract (insofar as the foundations were not ‘fit for purpose’).   Although a number of E.ON’s claims failed, the ultimate outcome was that MTH was found liable for the cost of the remedial works.  The TCC and then the Supreme Court found that the contract required the foundations to be ‘fit for purpose’ with reference to the employer’s requirement document (incorporated into the contract) which required the foundations to be designed so that they would have a lifetime of 20 years.  The Supreme Court found that, although MTH had used due care and professional skill, had adhered to good industry practice and had complied with certain relevant provisions of the contract, their case failed on the ‘fitness for purpose obligation’.  Lord Neuberger gave extensive consideration to the differences between a guarantee that the foundations would last 20 years without replacement, and a guarantee that they had been designed to last 20 years without replacement.  By paragraph 32 of his Judgment, Lord Neuberger concluded that whichever interpretation of the relevant clause was correct, MTH had, in any event, breached that clause.   

Obligations within Employer’s Requirements

The important part of the Supreme Court Judgment for readers to note comes from paragraph 34 onwards and concerns the weight that the Court will give to obligations that are contained in the Employer’s Requirements to a design and build contract but not necessarily expressly provided for in the ‘legal body’ of the contract.  It should be noted that in this case, the Supreme Court was easily satisfied that the relevant part of the Employer’s Requirements had effectively been incorporated into the Contract (even though the document was only referred to in the definitions section).  This is not always straight forward and it is important always to take care to ensure that ‘contract documents’ are effectively incorporated into contracts: including a document in a folder or on a CD is not enough.

In MTH –v- E.ON the Supreme Court considered whether the ’20 year lifetime’ obligation was either (i) inconsistent with other contractual obligations or (ii) that the reference to the Employer’s Requirements (including the 20 year liftetime obligation) was “simply too slender a thread on which to hang such an important and potentially onerous obligation.” As to the first option, whilst the Court found that this did not apply so as to assist MTH, the Court noted that:

“While each case must turn on its own facts, the message from decisions and observations of judges in the United Kingdom and Canada is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, 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.”

MTH’s case therefore rested on the Court finding that the 20 year liftetime obligation was somehow too important only to be noted in the Employer’s Requirements and that it required an express contractual term (within the ‘legal portion’ of the documents) in order to be binding.  Lord Neuberger was “not impressed with that point”, noting that “it is clear from the terms of the Contract that the provisions of the TR [i.e. the relevant part of the Employer’s Requirements] are intended to be of contractual effect.”  MTH’s submissions in this respect did, to their Counsel’s credit, have six key elements.  Unfortunately for MTH, the Supreme Court was not persuaded by any of them, and MTH is left with a bill for €26.25m (and no doubt a hefty costs bill – both their own and that of E.ON).

Practical application of MTH –v- E.ON – recommendations for drafting construction contracts

Whilst E.ON was ultimately successful in this case, the Contract which was the subject of the litigation did come under heavy criticism from the Supreme Court.  Lord Neuberger took care to apply the usual rules of contractual interpretation, notwithstanding the “complex, diffuse and multi-authored nature of this contract”.  One wonders whether the (no doubt significant) costs of litigating this case could have been avoided by clearer drafting, although of course the level of detail in a contract should always be proportionate to the nature and value of the works and the relationship between the parties.   

In any event, lessons to learn from MTH –v- E.ON should include:

  1. Always ensure that all documents intended to be “Contract Documents” are properly incorporated into your contract (both by reference within the ‘legal portion’ and by including a copy initialled by the parties within the contract folder or CD); 

  2. Take great care to eliminate conflicts or discrepancies between obligations in the ‘legal portion’ and the other contract documents (and indeed, between the contract documents themselves);

  3. Whilst no substitute for following Rule 2 properly, a ‘belt and braces’ approach which is useful where the parties cannot be 100% certain that there are no conflicts and/or discrepancies, is to include in your contract a clear “Priority of Documents” clause (and ensure that the order of priority is correct and agreed); and

  4. Consider reflecting critical obligations detailed in the other contract documents in the ‘legal portion’ of the contract, with clear and unambiguous wording to clarify the nature of the obligation and the consequences of a breach of that obligation. 

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.