The dangers of a client’s design choice

MT Hojgaard v E.ON [2017] BLM, BLR, Supreme Court

Facts

E.ON wished to develop a 60 turbine offshore wind farm in the Solway Firth.  The foundations of each of the turbines were to consist of a monopile and a transition piece held in place by grouted connections.  The design-build contract prepared by E.ON was complex and required Hojgaard (1) to carry out design in accordance with an international standard for offshore wind turbine construction; (2) with due care and professional skill; and (3) to warrant a 20-year design life.

No-one realised that the stipulated International Standard (“Det Norske Veritas, No. J101”) was seriously flawed.  The axial capacity of the grouted connections had been substantially over-estimated.  Because Hojgaard faithfully complied with the stipulated standard, all the grouted connections in all 60 wind turbines had to be replaced subsequent to construction, total cost €26m plus.

The question was whether the risk of an error in an independent international design standard fell on the employer who chose it or the contractor who undertook to work to it? Also whether the skill and care requirement was eclipsed by the strict or absolute promise on design life.

Held

1. Hojgaard was held to have acted with due care and in a professional manner; and to have complied with the DNV standard. Indeed Hojgaard’s compliance with E.ON’s specified standard had made the subsequent failure inevitable.  Nevertheless Hojgaard lost.
2. The reason for the Supreme Court’s hard line lies at paragraph 3.2.2.2 of the Technical Requirements document which, in the Conditions of Contract, Hojgaard had undertaken to comply with. This paragraph warranted the foundations to have a lifetime for 20 years or to be designed to have such a lifetime.
3. Compliance with the DNV standard was a minimum requirement; since the 20 year requirement was more rigorous, it therefore prevailed. The greater subsumes the lesser.
4. Clause 8 of the Conditions required the works to be fit for purpose, and defined “fit for purpose” as compliance with the Technical Requirements. The works were also therefore not fit for purpose.
5. A clause in the contract required all work to be done “in a professional manner” and with reasonable skill and care. This was disregarded as conflicting with the strict obligations also imposed.

Commentary

1. Three Court of Appeal judges agreed with Hojgaard. The original High Court Judge and five Supreme Court Judges agreed with E.ON.  The contract was lengthy, appears to have been assembled by “copy and paste”, and proved very difficult to interpret.  Too often, contractors and designers faced with badly drafted contracts like this, tend to sign and hope for the best.
2. The Court of Appeal had decided in favour of Hojgaard stating that in general a defect caused by an owner’s choice of specification would not be the responsibility of the Contractor unless the Contractor had given an express undertaking to ensure that the outcome would be fit for purpose. The Court of Appeal held that no such promise was given.  Further the CA considered that the requirement of 3.2.2.2 for a 20-year design life was about the intention of the design rather than the outcome of the design.
3. The Supreme Court set aside these arguments ruling that the reconciliation of the terms of the contract and their combined effect had to be decided “by reference to ordinary principles of contractual interpretation…the Courts were generally inclined to give full effect to a requirement that an item as produced must comply with prescribed criteria, even if the customer has prescribed those criteria.”
4. Further the Supreme Court ruled that its interpretation was not unreasonable, because on the one hand Hojgaard had agreed a 20-year warranty but on the other hand it had also negotiated a 2-year limitation period after which claims could not be brought on the warranty. Liability fell upon Hojgaard because the foundations failure was discovered well within the 24-month period.
5. There have been a number of cases where the contracts included 2 terms, one requiring the contractor to provide an article in accordance with the client’s design, the other requiring the Contractor to satisfy specified criteria which conflict with that specified design.  The unfairness is obvious, but such contracts have repeatedly been enforced against the contractor or designer who accepts the client’s performance requirements.

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