Construction contracts: The €26.25m wind farm question

Legal Notes has followed the contrasting and conflicting fortunes of all of the parties to MT Højgaard v E.ON Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59 closely over recent years. From first instance (“Qualifiedly absolute”, Legal Notes, EG, 5 July 2014, p91), through to the Court of Appeal (“A lawyer’s lot is not a happy one”, Legal Notes, EG, 16 May 2015, p131), and now to the Supreme Court, it is fair to say that the parties have been on somewhat of a roller-coaster of a litigation ride. The facts The dispute centred on the turbine foundations for the Robin Rigg Wind Farm in the Solway Firth. Højgaard was the design and build contractor. E.ON was the client. Højgaard employed a consultant, Ramboll, to design the foundations. Ramboll produced a design in accordance with the relevant international standard. As such, Højgaard complied with the clause in its contract with E.ON requiring it to carry out the design “with the due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors (as the case may be)”. Key point In a landmark decision, the Supreme Court has confirmed that where a party is subject to absolute and qualified obligations that are conflicting, the courts’ inclination will be to give effect to the absolute ones. However, compliance with the international standard did not stop the turbines from being defective. There was a mistake in the calculations contained in the standard itself which meant that the turbines at the  were sinking into the foundations installed by Højgaard. The remedial work necessary to fix the problem was valued at €26.25m. E.ON wanted Højgaard to meet the cost. Højgaard disagreed, and relied on its compliance with the duty of care clause in its defence. It had complied with the relevant international standard. It was not Højgaard’s fault that the standard was defective. E.ON countered this by relying on conflicting provisions in the contract. Højgaard faced a separate (and seemingly absolute) obligation – “The design of the foundations shall ensure a lifetime of 20 years in every aspect without replacement” – as well as a requirement that the works should be fit for their purpose. E.ON argued that this absolute obligation took legal precedence over the qualified one to act with the appropriate duty of skill and care. Højgaard disagreed. At first instance, Edwards-Stuart J sided with E.ON. The judge held that the absolute obligation could exist side-by-side with the qualified one, and often did so in design-and-build contracts where contractors have an obligation to design with due skill and care as well as a requirement (often implied by common law rather than expressly stated) that the completed work be fit for its intended purpose. That decision was reversed by the Court of Appeal, with Jackson LJ finding that, when read as a whole, the absolute words used in the contract were “too slender a thread” on which to decide that Højgaard had warranted a 20-year lifetime for the foundations. E.ON appealed to the Supreme Court. The Supreme Court In what was one of his last decisions before retiring as the court’s president, Lord Neuberger gave the unanimous judgment. This was not the first time that the courts had considered the question of whether a qualified or absolute obligation should take precedence and Lord Neuberger reviewed a range of authorities from the UK and Canada, some of which dated from the 19th century. He commented: “While each case must turn on its own facts, the message from the decisions and observations of judges… is that the 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 employer 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.” He then considered the various clauses in the Robin Rigg contract to see whether there was any reason why that general inclination should not apply in this instance. He saw no reason why it should not. The requirement that the design meet the relevant international standard was expressed to be a “MINIMUM requirement” and other provisions of the contract made it clear that Højgaard was expected to depart from the stipulations of the international standard “where appropriate”. Lord Neuberger also had no difficulty dismissing the Court of Appeal’s concern that the absolute words were “too slender a thread” on which to make Højgaard liable. He felt that the words were clear and should be given their natural meaning, especially as the alternatives were unsatisfactory with the words being given no meaning or an artificial one which rendered them redundant. The importance of the decision This is a decision which has both a practical effect for the parties – €26.25m is a lot of money – as well as a potentially significant legal one. The different outcomes of the case at first instance and before the Court of Appeal highlight the difficult state of the law prior to Lord Neuberger’s judgment. Added to which, it will take another decision of the Supreme Court to stop the decision from being binding authority. As was acknowledged by Edwards-Stuart J at first instance, design-and-build construction contracts often contain qualified and absolute obligations. Going forward, parties should assume that, in cases of conflict over which should take priority, the inclination of the courts will be to give full effect to the absolute requirements. Drafters of construction contracts should take note. Stuart Pemble is a partner at Mills & Reeve