Getting your contract in shape: the potential inconsistency between design life obligations and principal-prescribed standards or designs

Consider a contract for design and construct which requires a contractor to both adhere to prescribed standards or design and ensure that the product has a minimum design life.

What happens when adherence to the prescribed standard or design produces an item which does not meet the minimum design life – is the contractor liable for breach of the design life obligation, despite having followed the contractually mandated standard or design?

The United Kingdom Supreme Court (UKSC) considered this issue in a recent decision which brought to an end a long running dispute between MT Højgaard A/S (MTH) and the E.ON group (E.ON) regarding whether MTH was liable for the failure of wind turbine foundations which had been designed and installed by MTH.

The implications of this case are important, and give rise to a number of practical considerations which should be taken into account when entering into design and construct contracts. These considerations are outlined below at the end of this article.

Facts

MTH was engaged to design and construct wind turbines for E.ON. The contract included a document titled ‘Technical Requirements’ (TR), which, in part, informed the fitness for purpose obligation contained elsewhere in the contract.

The TR required MTH to prepare a design which, among other things:

  • was in accordance with “J101”, an international standard for the design of offshore wind turbines (the J101 Obligation); and
  • ensured a lifetime of 20 years (the Design Life obligation).

Other parts of the TR referred to a “design life” of 20 years.

In preparing the design, the MTH met the J101 Obligation and the turbines were constructed in accordance with MTH’s design. However, due to an error within J101, the wind turbine foundations began to fail less than 18 months after completion.

The parties commenced proceedings, and E.ON succeeded at trial. However, MTH appealed and the result was overturned by the Court of Appeal.

On appeal to the UKSC, E.ON argued that although MTH had met the J101 Obligation, MTH had nevertheless breached the Design Life Obligation and was liable to pay the costs of the rectification.

Decision

After analysing the contractual terms, the UKSC concluded that MTH had either:

  • warranted that the foundations would in fact last for 20 years; or
  • agreed that it would design the foundations for a lifetime of 20 years.

The difference between these obligations is that the latter would not necessarily render MTH liable if the foundations failed prior to the end of the 20-year period, if it could show that it had nevertheless designed the foundations to have a lifetime of 20 years.

In this case, on either alternative, the UKSC found that MTH was in breach of the Design Life Obligation and was therefore liable to E.ON.

In reaching this finding, the UKSC:

  • stated (without finally determining) that there was a “powerful case” that the Design Life Obligation amounted to an agreement that the foundations would be designed to have a lifetime of 20 years, rather than a warranty that the foundations would actually last for 20 years;
  • recognised that while contractual terms should be reconciled using ordinary principles of contract interpretation (which may in some cases lead to the conclusion that the terms are inconsistent), decisions from the United Kingdom and Canada indicated that:

“…courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employee has specified or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed.”

  • considered the potential inconsistency between the J101 Obligation and the Design Life Obligation but found that, given the reference in section 3 of the TR to the requirements being the minimum requirements to be taken into account in the design, there was no inconsistency, and the provision imposing the more rigorous requirement must prevail;
  • rejected any notion that the Design Life Obligation (as it was worded in the TR) was “too weak a basis on which to rest a contention that [MTH] had a liability to warrant that the foundations would survive for 20 years or would be designed so as to achieve 20 years of lifetime.”

Lessons

Parties regularly involved in design and construct contracts should consider:

  • making clear in the contract whether or not a prescribed standard or design is a minimum requirement and whether compliance with such a standard will displace a “fitness for purpose” or “design life” obligation;
  • reviewing the accuracy (or currency) of a prescribed standard or design, and its ability to meet fitness for purpose obligations, prior to execution of the contract;
  • where parties wish to include a design life obligation, specifying in the contract whether that obligation amounts to a warranty that the final product will, in fact, last for the period of the design life;
  • where parties wish to include a design life warranty as well as a shorter defects liability period, making clear in the contract how the expiration of the defects liability period impacts on the longer design life warranty; and
  • how the contractual documents are intended to co-exist, noting that, as in this case, important contractual obligations can be contained in documents other than the general conditions of contract.

If you have any queries or would like further information regarding this article, please contact:

Alastair Oxbrough
Partner
M: 0400 818 636
E: aoxbrough@pageseager.com.au

Freya Godfrey
Lawyer
P: (03) 6235 5125
E: fgodfrey@pageseager.com.au

Published: 16 October 2017

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