Practical Law

The Supreme Court’s decision in MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd has spawned a predictable welter of case notes and commentaries. Legal luminaries have analysed Lord Neuberger’s judgment from a variety of angles, noting that the contractor (Højgaard) was held to be under a “double obligation” to comply with both the (as it turned out, defective) J101 standard for offshore wind turbine structures and the “fitness for purpose” design life warranty in the technical requirements.

But, when reading the judgment, I found my thoughts wandering down a different track. What was it that motivated the Supreme Court to disagree so fundamentally with the Court of Appeal? And what are the likely implications for parties negotiating future contracts? 

The Court of Appeal’s view

In my post on the Court of Appeal decision in May 2015, I suggested that the Court’s sympathies lay heavily with Højgaard and that this seemed to influence their thinking. The language they used – that “a reasonable person… would know that the normal standard required… was compliance with J101” and that the inconsistencies in the technical requirements were “too slender a thread” on which to hang a finding of liability – clearly indicated their direction of travel. There was even a sense that they felt it unjust for E.ON to take advantage of the “diffuse” provisions and “loose wording” in the technical documents – which had been prepared on its behalf – in its attempt to pin liability on Højgaard.

But, of course, that is not how contract documents should generally be interpreted; at least, no longer. The Court of Appeal in Persimmon v Ove Arup made clear that the contra proferentem rule now has very limited application, at least in the context of a complex contract made between grown-up commercial parties. The documentation in Robin Rigg will no doubt have been pored over by both sides at great length and negotiated in considerable detail. So to treat the various ambiguities and inconsistencies in them as very much “E.ON’s mess” is to miss the (contractual) point.

The Supreme Court’s view

In my earlier post, I also suggested that E.ON must have been surprised at the result. Hence their (as it turns out, inspired) decision to pursue the matter in the Supreme Court, who unanimously upheld their appeal.

Putting sympathy firmly to one side, Lord Neuberger brings us squarely back to the modern orthodoxy of Arnold v Britton and reminds us that, first and foremost, contractual interpretation is about the actual words used. Inelegant and clumsy drafting does not change that, unless it leads to an “improbable and unbusinesslike” conclusion.

In Robin Rigg, Højgaard had signed up to an express obligation to “ensure a lifetime of 20 years in every aspect without planned replacement”. If the Court of Appeal was correct, these words (which featured twice in the technical requirements) would effectively be redundant. The fact that other parts of the contract appeared to require a lower standard did not compel or entitle the court to ignore these provisions. That may lead to a harsh result, but (with the benefit of hindsight) the outcome in Arnold v Britton may also be seen as harsh. In any event, Højgaard were big boys and sympathy did not come into it.

Design life v service life

As my earlier post noted, the Court of Appeal ducked the question of whether the phrases “design life” and “service life” meant different things and had different contractual consequences. Unfortunately, in this respect the Supreme Court has followed the Court of Appeal’s lead. It held that the foundations as designed satisfied neither the “design life” nor the “service life” test. That being the case, it did not need to decide whether the latter effectively amounted to a 20 year guarantee, since the result was the same whichever meaning was chosen.

Given that both terms are commonly used in technical specifications, this distinction could prove crucial in a future case. It is therefore regrettable (although perhaps understandable) that the Supreme Court chose not to take the opportunity to clarify matters.

What next? – implications of the decision

For Højgaard, the decision comes with a hefty price tag: EUR26.25 million, plus costs. For contractors generally, it serves as a stark reminder that a general “reasonable skill and care” qualification will not override an express fitness for purpose provision.

As for E.ON, their ultimate success will by no means fully compensate them for over 7 years of wrangling since the foundation connections first started to fail. They – and clients everywhere – will no doubt take to heart the lesson that it is worth investing time and effort to ensure, as far as possible, that contract documents are coherent and internally consistent.

Going forward, we are already seeing design and build (D&B) contractors looking to protect themselves from the consequences of the Robin Rigg decision, by writing express exclusions of “fitness for purpose” liabilities into their contracts. At one level this is an understandable reaction, but is it really justified? Those contractors who offer a D&B service will be aware that clients are typically looking to them to deliver contractual outcomes (for example to meet a performance specification) and are willing to pay a premium in return. I would suggest that contractors do themselves no favours by unthinkingly disclaiming the very purpose for which clients employ them. By all means seek limitations where the circumstances truly justify them, but intelligently rather than in a blanket manner.