Hong Kong – Contractors May Be Liable For Change In Industry Standards.

25 January, 2018

 

In MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited [2017] UKSC 59 the U.K. Supreme Court reversed the Court of Appeal’s decision and held that the Contractor was in breach of a warranty that the foundation structure of the Works would have a service life of 20 years. (We have previously reported on the Court of Appeal’s decision here.) This decision will have implications on construction contracts which adopt certain industry standards as a project quality benchmark.

 

Background

 

The Employer (E.ON) engaged the Contractor (MTH) to design and install foundations for 60 turbines at the Robin Rigg offshore wind farm.

 

There were three major requirements in the contract regarding the quality of the foundations. Firstly, MTH should exercise reasonable skill and care. Secondly, MTH should comply with an international standard issued by Det Norske Veritas (DNS), known as DNV-OS-J101 (J101 Standard). Thirdly, pursuant to paragraphs 3.2.2.2(ii) and 3b.5.1 of the Technical Requirements (Relevant Requirements), the design of the foundations should “ensure a lifetime of 20 years in every aspect without planned replacement”.

 

It was thought that compliance with the J101 Standard would ensure a lifetime of 20 years for the foundations. However, after the design and installation of the foundations was substantially completed, DNS announced that there was a significant error with the J101 Standard. This meant the foundations would likely have a lifetime of less than 20 years.

 

The key legal issue was whether the Relevant Requirements constituted a warranty that the foundations would have a service life of 20 years. If yes, then MTH would be in breach of contract, despite the fact that it used due care and professional skill, adhered to good industry practice, and complied with the J101 Standard.

 

Court of Appeal Decision

 

The Court of Appeal preferred an interpretation which was consistent with business common sense.

 

The Court of Appeal found that all of the Technical Requirement provisions were directed towards a design life of 20 years, and that the parties should understand that compliance with the J101 Standard was expected, but not absolutely guaranteed, to produce a lifetime of 20 years. The Relevant Requirements were inconsistent with the other contractual provisions and it did not make commercial sense to regard them as overriding; they were “too slender a thread” to infer a warranty of a lifetime of 20 years.

 

Supreme Court Decision

 

The Supreme Court adopted a more literal approach and held that the Relevant Requirements should be given their natural meaning.

 

This was a case where the contract included two terms, one requiring the Contractor to adopt a specified design, the other requiring the product to satisfy specified performance criteria; and where those criteria could not be achieved by complying with the design.

 

The Court reviewed a long line of cases, and concluded that while each case would depend on its own facts, “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”.

 

The Court held that the Relevant Requirements were not inconsistent with the rest of the contract. There was no problem with one clause specifying a minimum requirement, and another clause specifying some criteria which may or may not turn out to be more onerous than the minimum requirement.

 

It was argued that the Relevant Requirements were “too slender a thread”, because they appeared in the Technical Requirements document rather than the main text of the contract. The Court rejected this argument because the terms of the contract clearly intended to give contractual effect to the Technical Requirements.

 

In sum, since there was no ambiguity in the wording of the Relevant Requirements, they amounted to a warranty by MTH that the foundations would last 20 years.

 

Comment

 

It should be emphasized that the Supreme Court did not purport to lay down any general principle that contractors must be liable for change in industry standards. The Court made its decision by interpreting the particular terms of the contract in this particular case.

 

Contractors should be wary of the different sources of duties in a building contract. At first glance, two or more clauses may appear to be mere repetition (here, compliance with the J101 Standard was thought to be equivalent to a design life of 20 years). However, as this case demonstrates, one of the clauses may morph into a separate and more onerous duty, through no fault of the Contractor. Parties to a building contract can, of course, allocate the risks of external factors such as a change in industry standards through careful drafting of the contract.