Finding for breach of contract now hangs on a very slender thread

By Olivia Diaz November 22, 2017

An important decision for design and build contracts was recently made by the Supreme Court in a judgement for the case MT Hogaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd and others. The decision brings significant ramification for the interpretation of construction contracts which may leave a contractor liable for a contract preformed without negligence and where the contractor is not covered by insurance for the claim in question.

The subject of the litigation was a design and build contract for the design, fabrication and installation of the first two off shore wind farms in the UK at Robin Rigg in the Solway Fifth. The appellant, MT Hogaard, was contracted by the defendant, E.ON, to design and install the foundations of the wind farms. The design life of the foundations was to be a minimum of 20 years without major retrofits or refurbishments. Shortly after completion the project failed due to the weakness of foundations as a result of omissions in the international standard issued by the independent body DNV, known as J101. The error in the international standard issued by DNV was not known at the time MT Hogaard used them.

LEGAL ISSUES

 

The courts had to consider and resolve the relationship between the two standards of duty generally applied to design & build contractors: the obligation to use reasonable skill and care in relation to design and the obligation to design a product that is fit for its intended purpose. The Supreme Court has held that a contractor will be liable under the stricter fitness for purpose obligation, despite not being negligent and therefore not liable for the breach of the reasonable skill and care obligation elsewhere in the contract. The legal implication of this means that contractors, or those who find themselves in a consultancy position, may be liable under similar warranties or contractual promises. Contractors need to be especially concerned with this decision as they may find themselves liable for a breach of contract notwithstanding having exercised reasonable care and skill, it is not fit for purpose. Consequently, as the contractor has not been negligent, they would be unlikely to be indemnified by their professional indemnity policies.

 

THE CASE

At first instance, the Technology & Construction Court (TCC) held that whilst finding MTH had exercised reasonable skill and care and not been negligent, the contract required the foundations to be fit for purpose. To determine fitness for purpose technical requirements in tender documents would need to be referenced, in this specific circumstance the foundations were warranted to last for 20 years. Therefore, the TCC found MT Hogaard in breach of the contract and liable for the remediation costs. This was reversed by the Court of Appeal. However when appealed again by E.ON it was unanimously held by the Supreme Court that MT Hogaard were in breach of the contract. The most important finding being that when a contract specifically requires a product, building or the construction to be made according to a prescribed specification, the contractor takes the risk of the defective design, even if the contractor exercises reasonable skill and care. In his leading judgement Lord Neuberger held that where there are two inconsistent standards, rather than concluding they are inconsistent the correct analysis is that the stricter or more rigorous of the two standards must prevail and the less demanding will be a minimum requirement.

CONTRACTORS DEFENCE AND INSURED CONTRACTORS

What does this decision mean for contractors? The test for standard of care has long been the ‘Bolam test’. This being that where a professional acted in accordance with a practice accepted as proper by a reasonable body of people skilled in that particular area, he or she would not be guilty of negligence. The case of Bolthio develops this rule by asserting that the professional opinion relied upon must not be unreasonable or illogical. Therefore if a contractor exercised reasonable skill and care in his design and build he would not be reliable for failures.

This is in contrast with the stricter fitness for purpose obligation which requires the contractor to achieve a result or comply with a standard or regulation. Therefore it does not require a finding of negligence for the contractor to be liable; all that is needed is for the product not to be what was stipulated in the contract.

Design & build contracts often contain the two obligations. Until this case it was assumed that so long as professionals exercised reasonable skill and care that obligation would prevail over the fitness for purpose obligation. However, professionals can no longer rely on this obligation.

Professional indemnities cover contractors for breach of professional activities and duties and therefore the failure to act with reasonable skill and care. There is no cover for contractual promises, meaning contractors will not be insured for fitness for purpose warranties.

Each case is specific and therefore the advice given should be tailored for the individual case.  For more information about the case and how it could possible effect your contract please contact Paul Wilson on pwilson@tyndallwoods.co.uk or 0121 693 2222

Paul Wilson

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