A Supreme Court ruling on contractual interpretation serves as a warning to contractors that they need to be careful about the work they agree to do for their clients. Emily Albou, barrister at 2 Temple Gardens, takes a look
MT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59, better known as the Robin Rigg case, concerned a liability dispute after the turbine foundation structures of two offshore wind farms failed.
The turbine foundation structures, located in Solway Firth, were designed in December 2006 and subsequently fabricated and installed by MT Højgaard A/S (MTH) on behalf of E.ON. The project was completed in February 2009, but in April 2010 started to fail.
Repair work began in April 2014, agreed by the parties at a cost of €26.25m. The question arose as to who should bear the cost.
E.ON brought a High Court action to determine whether MTH was liable to pay. MTH argued that it had no such liability, having exercised reasonable skill and care and complied with its contractual obligations. E.ON contended that MTH had been negligent and was responsible for several breaches of contract, making it liable for the failure.
Mr Justice Edwards-Stuart found for E.ON – chiefly because MTH had breached the contract terms: the foundations were to be fit for purpose as determined by reference to the Technical Requirements (which were part of MTH’s tender documents); and those requirements necessitated the foundations to be designed with a lifetime of 20 years. The judge held that this conclusion was further supported by other contractual clauses.
MTH successfully applied to the Court of Appeal, which held that an inconsistency existed between the paragraphs relied upon by Mr Justice Edwards-Stuart and several other contractual provisions. In his lead judgment, Lord Justice Jackson (supported by Lord Justice Patten and Lord Justice Underhill) stated that these contractual provisions should prevail. The paragraphs relating to the Technical Requirements that Mr Justice Edwards-Stuart had relied upon were described by Lord Justice Jackson as “too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations”.
The Supreme Court then reviewed the arguments in the case. Lord Neuberger gave valuable guidance in his judgment on the interpretation of contractual clauses, confirming the decision in Wood v Capita Insurance Services Ltd [2017].
Giving the lead judgement, he stated that: “The reconciliation of the terms and the determination of their combined effect must, of course, be decided by reference to ordinary principles of contractual interpretation (as recently discussed in Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095, paras 8 to 15 and the cases cited there), and therefore by reference to the provisions of the particular contract and its commercial context.”
Lord Neuberger gave further clarification on three main points. First, where a contract contains terms requiring an item, (i) which is to be produced in accordance with a prescribed design and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will result in the product failing one or more of the prescribed criteria, it does not follow that the two terms are mutually inconsistent.
Second, Lord Neuberger held that in many contracts, a proper analysis may be that the contractor must improve any aspects of the prescribed design that would otherwise lead to the product falling short of the prescribed criteria and, in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design that are not prescribed.
Lord Neuberger further stated that although each case turns on its own facts, decisions in the United Kingdom and Canada suggest the courts are inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria on the basis that although the customer or employer has specified or approved the design, the contractor is expected to take the risk if they agreed to work to a design that would render the item incapable of meeting the agreed criteria.
In applying these principles to the contract, the Supreme Court overturned the Court of Appeal and restored the initial decision made at first instance – which meant that MTH was liable for the failure, and should therefore bear the cost of the repair work. The Robin Rigg case progressed to the Supreme Court due to the conflicting contractual terms, which were left open to different interpretations. Ultimately, this cost MTH €26.25m.
The final judgment provides greater clarity on contractual interpretation and acts as a strong warning for contractors that contracts should be subject to extreme scrutiny at the outset. It is of the utmost importance that contractors obtain expert legal advice when drafting contracts, to ensure that they are not left open to ambiguous interpretation.
At a practical level, contractors should also ensure that the agreed design meets the prescribed criteria since the contractor bears the risk in circumstances where they have agreed to work to a design that later inevitably fails the prescribed criteria.
Emily Albou
Barrister
2 Temple Garden
Tel: +44 (0)20 7822 1200
Twitter: @2templegardens
