Supreme Court Decision Could Have Big Impact on Construction Contracts

A partner at Sharpe Pritchard has said that a recent Supreme Court decision has “potentially significant ramifications” for construction contracts.

Justin Mendelle, head of Construction Law at the firm, said that the decision means parties entering into such contracts will need to exercise additional vigilance to understand the implications of multiple and sometimes seemingly conflicting obligations.

In MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59, the Supreme Court, in a significant judgment for the construction industry, allowed EON’s appeal and restored the first instance decision of Edwards-Stuart J in the Technology and Construction Court (TCC).

E.ON appointed MT Højgaard A/S (MTH) to design, build and install two offshore wind farms. Unfortunately, some of the turbines developed significant faults shortly after construction was completed and costly repairs were necessary.

This litigation concerned who should be liable for the costs of those repairs and involved a detailed examination of the documents and obligations that formed the contract between E.On and MTH.

The Supreme Court held that MTH was under a fitness for purpose-type obligation, which was contained in a technical schedule in the contract. This had the effect of a warranty that the turbine component would not fail within a certain timeframe. This was despite obligations on MTH elsewhere in the contract to exercise reasonable skill and care and comply with an international standard (J101) – which as it turned out, was erroneous and even if met, insufficient to ensure the standard in the technical document was achieved.

“The decision has potentially significant ramifications for all who enter into complex construction contracts, particularly those requiring the Contractor to assume responsibility for design and the future performance of the build.”

Importantly, the decision provides useful guidance on the interpretation of contracts where the obligations imposed on the Contractor may not be straightforward, and which often contain a mixture of obligations including –

• to exercise reasonable skill and care
• to comply with specified national or international standards and
• to design and construct something that is fit for purpose.

He said that there are three key messages for employers and contractors:

Firstly, it is standard practice for technical documents to be incorporated into construction contracts in varying terms and multiple formats. Technical documents can contain onerous and, importantly, enforceable obligations. Contractors should take care to review such documents alongside the contract conditions to ensure that they appreciate the full extent of the obligations being placed upon them.

“Secondly, although each case turns on its facts, the Supreme Court confirmed that where part of the works is to be produced in accordance with a prescribed design and which must also comply with prescribed criteria, the Contractor takes the risk that complying literally with the design provided may mean the result falls short of the prescribed requirements.

This is “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 of he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”.

Thirdly, although two requirements can appear to be inconsistent with each other they will not necessarily be interpreted as such where they are expressed as “minimum” requirements. The Supreme Court found that where two provisions impose different or inconsistent standards or requirements, 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.”

The Supreme Court agreed with the Court of Appeal’s description of the contract in this case as of “multiple authorship and containing much loose wording”. Despite this the Supreme Court determined, in line with many previous cases, that the literal meaning of the provisions should prevail. This judgment does not alter the approach taken to contractual interpretation but emphasises that interpreting a specific provision owing to its particular commercial implications may receive short shrift from a court.

Justin Mendelle added that there were a number of practical points for contractors and employers to consider, in particular: “Contractors and employers should ensure that any contract into which they will be entering clearly distinguishes between those obligations which are absolute/subject to a fitness for purpose obligation and those which are subject to reasonable skill and care.

Where contract documents are multi-layered and complicated, there is really no substitute for reviewing the documents and making sure they exist alongside each other without conflicts/inconsistency. Importantly, consideration also needs to be given as to whether the interface between the conditions of the contract and the technical documents works.”

(Source: Sharpe Pritchard)