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Complying with an international standard could land you in stormy waters

Sat 05 Aug 2017

Complying with an international standard could land you in stormy waters
Mark de la Haye: “Supreme Court’s decision could affect risk assessment, insurance and finance arrangements”

The Supreme Court’s decision in the Robin Rigg court case could significantly affect risk assessment of existing contracts, as well as insurance and finance arrangements, in the offshore wind energy sector and beyond

As Mark de la Haye, a senior associate at Clyde & Co LLP explains, in a decision that may come as a shock to many – and that will have potentially wide-ranging ramifications for English law contracts – the UK Supreme Court has overturned the Court of Appeal’s decision in the long-running Robin Rigg offshore windfarm dispute, by finding in favour of Eon Climate & Renewables (Eon).

In its judgment, the Supreme Court has held that:

  • In giving effect to the natural meaning of the words used by the parties, the contractor, MT Højgaard, was under an obligation to ensure that the foundations at Robin Rigg would have a minimum lifetime of 20 years.
  • That was the case notwithstanding the fact that the 20-year lifetime provision that Eon relied upon was ‘tucked away’ in a part of the contract that was, according to MT Højgaard, essentially a technical – rather than a legal – document.
  • This effectively placed on MT Højgaard the consequences of an error in the applicable international design standard – DNV’s J101 – even though MT Højgaard complied with that standard and carried out its work in accordance with good industry practice.

In 2006, Eon employed MT Højgaard to design, fabricate and install 60 wind turbine foundations at the Robin Rigg offshore windfarm in the Solway Firth. In designing the foundations, MT Højgaard’s designer, Rambøll, relied on J101, the international standard that was commonly used in the industry at the time and was incorporated into the contract. 

Unbeknown to the industry then was the fact that J101 contained a fundamental error (the value given in one of the equations for delta (δ) was wrong by a factor of about 10) that resulted in a significant overestimation of the axial load capacity for wind turbines with grouted connections.

In 2009, movement was discovered in the grouted connections, following which the error in J101 came to light. All of the foundations required remedial work, at an agreed cost of €26.25M. The contract between Eon and MT Højgaard contained various warranties regarding fitness for purpose and provisions regarding the intended lifetime of the foundations.

The issue before the court was which of the parties should bear responsibility for the error in J101 and, therefore, the cost of the remedial work.

At first instance, MT Højgaard submitted that it had exercised reasonable skill and care and had complied with its contractual obligations to produce a design that was compliant with J101. Eon, on the other hand, submitted that MT Højgaard had warranted that the foundations would have a service life of 20 years, which had not been achieved, and that MT Højgaard was therefore liable as a result.

The judge, Mr Justice Edwards-Stuart, held that the contract required MT Højgaard to provide foundations with a service life of 20 years and, as the foundations did not in fact have a 20-year service life, MT Højgaard was in breach of contract. As such, MT Højgaard was held responsible for the cost of the remedial work.

On appeal to the Court of Appeal it was held that, although there was “much loose wording” contained in “somewhat diffuse contract documents,” on balance MT Højgaard had not given a warranty of 20 years guaranteed service life for the foundations. 

Rather, MT Højgaard had agreed to comply with J101, which was intended to lead to offshore structures with a design life of 20 years. MT Højgaard had in fact complied with J101. As such, the Court of Appeal allowed MT Højgaard appeal.

Eon subsequently sought permission from the Supreme Court to appeal the Court of Appeal’s decision. The matter was heard by the Supreme Court on 20 June 2017 and judgment was handed down on 3 August 2017.

In reversing the decision of the Court of Appeal and restoring the High Court’s decision, the Supreme Court unanimously allowed Eon’s appeal, and held that MT Højgaard was responsible for the cost of the remedial work to the Robin Rigg foundations.

In reaching its decision, the Supreme Court held that:

  • The natural meaning of the relevant 20-year clause of the Technical Requirements involved MT Højgaard warranting either (i) that the foundations would have an actual lifetime of 20 years, or (ii) that they would be designed to have a lifetime of 20 years. 
  • If this clause was an effective term of the contract, then it was breached by MT Højgaard, regardless of whether MT Højgaard warranted an actual 20-year lifetime or a 20 year design life.
  • In those circumstances, there were only two arguments open to MT Højgaard as to why this clause should not be given its natural meaning.
  • The first argument that was open to MT Højgaard was that such an interpretation would be inconsistent with MT Højgaard obligation to construct the works in accordance with J101. 
  • In relation to that argument, the court considered a number of earlier cases regarding the reconciliation of competing contractual terms. Applying the principles established in those cases to the present contract, the court found that MT Højgaard’s case faced “an insurmountable difficulty” as J101 and the 20-year lifetime warranty were stated to be the “minimum” requirements to be taken into account by MT Højgaard in the design of the foundations. 
  • As such, the court held that the “more rigorous or demanding” provision (the 20-year lifetime provision) “must prevail”, as the “less rigorous” provision (that is, J101) “can properly be treated as a minimum requirement.” 
  • The court went on to comment that MT Højgaard was obliged to determine whether to employ shear keys within the grouted connection. MT Højgaard chose not to do so, but had shear keys been employed, the court noted that “the problems which arose would, it appears, have been averted.”
  • The second argument that was open to MT Højgaard was that the relevant 20-year clause in the contract was simply too slender a thread on which to hang such an important and potentially onerous obligation (that the foundations “would survive for 20 years or would be designed so as to achieve 20 years of lifetime”).
  • MT Højgaard relied on a number of factors in support of this argument. In dealing with and rejecting those factors, the court emphasised the importance of giving effect to the natural meaning of the words used in the contract, irrespective of where those words appear in the contract and/or the nature of document within which they are contained.
  • The court was clear that, in this case, the natural meaning of the words used in the contract “appears to impose a duty on MT Højgaard which involves the foundations having a lifetime of 20 years.”

In reaching its decision, the Supreme Court has, it seems, reinforced the more literal approach towards contract interpretation that has been increasingly adopted by the English courts in recent years. As such, this decision will be of relevance to all parties who contract under English law.

Going forward, contractors in particular should be aware of this decision and the increased risk that it potentially entails. Now, more than ever, the importance of clearly drafted contracts cannot be overstated.

 

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