Fitness for purpose: a reminder for contractors and construction professionals

In the case of Mt Højgaard v E.On, the Supreme Court has overturned the Court of Appeal, which had previously overturned the first instance TCC decision. It held that a fitness for purpose obligation was clear to its effect and imposed a duty on the contractor.

This matter concerns Scotland’s first offshore wind farm, where failure of the turbines’ foundation structures resulted in remedial works of €26.25m. Proceedings then began to determine which party would be liable for the costs of the remedial works. The contractor contended that it should have no liability for the costs because it had: (i) exercised reasonable skill and care, and (ii) complied with all its contractual obligations. By contrast, the employer contended that the contractor had been negligent and had been responsible for numerous breaches of contract (in particular, a fitness for purpose obligation that the foundations would last for 20 years).

The case first came before the Technology and Construction Court (TCC) in November 2013, where it rejected the argument that the contractor had been negligent, but found that the contract did require the foundations to be fit for purpose. The contractor appealed.

The Court of Appeal handed down its decision in April 2015, allowing the appeal. The Court of Appeal found that there was an “inconsistency” between the Employer’s Requirements and the other contractual provisions, describing the former as: “too slender a thread upon which to hang a finding that [the contractor] gave a warranty of 20 years life for the foundations”. The employer appealed.

The Supreme Court allowed the appeal, and restored the first instance TCC decision. Lord Neuberger, who gave the leading judgment, considered that there were two arguments open to the contractor:

  1. The first argument was that the fitness for purpose obligation would be inconsistent with the contractor’s obligation to construct the works in accordance with J101 (an international standard for the design of offshore wind turbines). Lord Neuberger found that, although each case must turn on its own facts, 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.”

    Lord Neuberger also commented that compliance with J101 was stated to be a minimum requirement in the contractual provisions, and held that where there are different or inconsistent standards the correct analysis is that: “the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement.”

  2. The second argument was that the paragraph in the contractual documents containing fitness for purposes obligation is: “simply too slender a thread on which to hang such an important and potentially onerous obligation.” Lord Neuberger commented that, notwithstanding the arguments put forward that there were ambiguities and inconsistencies in the unsatisfactorily drafted contractual documents, that did not alter the fact that: “the court has to do its best to interpret the contractual arrangements by reference to normal principles.” Lord Neuberger found that the paragraph in question was: “clear in its terms in that it appears to impose a duty on [the contractor] which involves the foundations having a lifetime of 20 years…”.

Comment

While each case will turn on its own facts and the specific wording of the contract, the Supreme Court’s decision serves as a useful reminder that a contractor/construction professional cannot always rely on the defence that they exercised reasonable skill and care. This case also is of concern to construction professionals as, typically, professional indemnity policies exclude cover for strict liability (eg for guaranteeing fitness for purpose). Agreeing absolute design obligations could, therefore, leave construction professionals in a situation where there is a gap in cover. So, it is somewhat ironic that, in certain circumstances, an insured may prefer to have a finding of negligence against it rather than only being found liable in respect of a fitness for purpose obligation!

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.