In construction contracts nowadays it has become fairly common practice for the drafters to include express obligations and undertakings from contractors in respect of the design or suitability.

In many cases these obligations and their implications are not entirely understood by the parties, giving rise to disputes in situations where the contract also has express obligations to perform or produce works in line with specific standards or specifications.

Two very interesting cases that I have been discussing with clients offline recently has prompted me to produce an article.

The cases in question were:

MT Højgaard A/s v E.ON Climate And Renewables & Ors [2014] EWHC 1088 (TCC)

Mw High Tech Projects UK Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152 (TCC)

In this first of two articles I will deal with the first case.

The Background to the case…

In the case of MT Højgaard A/s v E.ON Climate And Renewables & Ors [2014] EWHC 1088 (TCC), the contractor constructed foundations for wind turbines to a specified international standard, provided by their designer Ramboll Denmark A/S. In doing so the contractor fulfilled its obligations in respect of reasonable skill and care.

The problem begins in 2004 when an organisation called Det Norske Veritas (“DNV”), an independent classification and certification agency, produced this international standard. Unfortunately, the value attributed to a variable used in one of the equations in the standard was underestimated by a factor of about 10. MTH’s designer, Rambøll Danmark A/S (“Rambøll”), like everyone else at the time, was unaware of this error when it carried out the design.

This unknown error in the DNV standard meant the foundations for the wind turbines failed to last the required service life of 20 years (“service life” means in plain terms, they would not need to be replaced before 20 years had elapsed). This breached the contractor’s “fitness for purpose” obligation under the contract.

The Decision…

The judge in the case decided that both obligations could co-exist in a contract (they were not mutually exclusive). This left the contractor to foot the €26.25 million bill for the remedial works to the turbine foundations. Ouch.

What is interesting to note and prompted me to pen this article, in the case notes is the judges comments in respect of why the two standards or competing provisions can be mutually consistent and the effect of this on a contractors warranty to an employer.

The judge states “I can understand that any employer wishing to have an offshore wind turbine built would want the designer to comply with the latest applicable standard relating to the design or construction of such turbines. Such an employer would thereby hope and expect that the turbine so designed and constructed would not only operate satisfactorily but also would last for its design life. However, that employer could, if he wished, stipulate also for a term that the turbine should achieve a particular service life. But, as Mr. Streatfeild-James pointed out, such a term would usually come at a price: the contractor would have to consider what additional measures he should take in order to reduce the possibility of failure within the service life to an acceptable level and the cost of those measures would be factored into the price. But I consider that if the employer is prepared to pay for the additional comfort of having the service life guaranteed, then that is his choice. However, whether or not that was the subject of a conscious decision in this case we do not know.”

Peace of Mind….

I have emphasised the judges remarks to highlight what I consider is the concept of “peace of mind”. Peace of mind exists for an employer when they know that all appropriate risks have been taken on board by their designer or contractor. This peace of mind has a price tag though and in my experience there is a lack of appreciation of this most critical of costs, not just from employers but from contractors too. In simple terms the employer wants peace of mind, but in many cases is not prepared to pay a reasonable cost for it. Contractors want the work so will often sign up to contracts unaware of their exposure to liability as they are focused on winning the business and anything that could impact this negatively is subconsciously side stepped!!

This is when things go wrong.

To Summarise

From an Employers point of view, this decision will be very welcome, albeit double edged as it is entirely likely and fair that costs will rise to offset the resulting increase in risk to the supply chain. Having said that for Employers they now appear to have a remedy in situations where specifications may contain an error and they would be well advised to include these provisions in their contracts, assuming of course their budgets allow.

For the contractors, this decision shines a much needed spot light on the risks that go hand in hand with warranting a specific design life or “fitness for purpose”. Critically it also shows why they cannot assume that an obligation to exercise “reasonable skill and care” will somehow limit or qualify their other contract obligations. In situations where a contractor plans to have its obligations limited to carrying out work in line with specific standards or specifications, or with reasonable skill and care only, the inclusion by employers of provisions as to design or suitability should be removed during contract negotiations. If however the Employer insists, which is likely in many cases, the additional risk should be costed and included in their offer.

I thank you for taking the time to read this article and I hope you found it useful. Please feel free to connect with me, like, comment or share this article.

Wishing you every success in your endeavours.

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