EPC contractor not liable for premature failure despite fit for purpose obligation

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

An EPC contractor has been held by the English Court of Appeal not to be in breach of a "fit for purpose" obligation when works with an intended service life of 20 years failed after less than two years.

• The appeal decision rested on the fact that the contract did not unambiguously identify the purpose which the contractor undertook to achieve, having regard to numerous references contained in the Employer's Requirements (ER) to a design life of 20 years.
• Although the contract was not FIDIC-based, the Court of Appeal's decision potentially has significant implications for users of the FIDIC Yellow and Silver Books.
• The authority of the case may provide ammunition for contractors who have undertaken fit for purpose obligations and want to restrict their responsibility.
• Owners who require a guaranteed operational life are well advised to obtain an explicit warranty to that effect.

Fit for purpose obligations

When a design and build contractor gives an undertaking that the work will be fit for purpose, it is expected that the obligation is strict, as distinct from the "reasonable skill and care" obligation that is more usually undertaken by designers of constructed facilities.

However, the all-important question in every case is "fit for what purpose?", and it is far from unusual to see that the objective to be achieved is only vaguely identified in the ER: instead, the purpose that the contractor has to achieve is often left to be inferred and deduced from a collection of contractual documents, typically of multiple authorship and containing much loose wording.

The FIDIC conditions may be prone to lead owners' advisers into the trap of not specifying the purpose with sufficient clarity, inasmuch as the purpose is stated in GCC 4.1 of both the Yellow and the Silver Book to be "the purposes for which the Works are intended as defined in the Contract".

Relying on that formulation, the temptation may be to flood the ER with wide expressions of how the works are intended to be used, in the hope that doing so will fix the contractor with strict responsibility to achieve a wide range of objectives.

An example of loose wording that is frequently seen is the expression "design life". As was observed by Michael Curtis QC in a paper for the Society of Construction Law, this expression has no single definition that applies in all contexts. The starting point may be that the design life is the period of time for which the works are expected to fulfil their function. However, does it follow that the thing must actually function for the stipulated period?

Robin Rigg case

The issues that may arise, if the required purpose is not clearly expressed, are illustrated in the recent decision of the English Court of Appeal in M.T. Hojgaard a/s v. E.ON Climate and Renewables Robin Rigg East Ltd [30 April 2015].

This case arose out of a contract by which the contractor (MTH) agreed to undertake the design, fabrication and installation of foundations for 60 offshore wind turbines to comprise the Robin Rigg windfarm, off the west coast of Scotland.

Each turbine foundation consisted of a monopile and a transition piece. The monopile is a cylindrical steel pile driven into the seabed. The transition piece is also a steel cylinder. It has a slightly larger diameter and fits over the top of the monopile. The transition piece is held in place by a grouted connection which works by friction. The tower which supports the wind turbine generator fits onto the transition piece. The towers and the generators for the Robin Rigg windfarm did not form part of MTH's contract, but were to be supplied and installed atop the foundations by other contractors.

By clause 8.1 of the contract conditions, MTH undertook to design, manufacture, test, deliver and install and complete the works in accordance with the following requirements (among others):

(i) with due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors…;

(iv) in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices in accordance with internationally recognised standards and Good Industry Practice;

(viii) so that the works, when completed, comply with the requirements of this Agreement…

(x) so that each item of plant and the Works as a whole shall be… fit for its purpose as determined in accordance with the specification using Good Industry Practice;

(xv) so that the design of the Works and the Works when completed by the contractor shall be wholly in accordance with this Agreement…"

Good Industry Practice was defined in the contract as meaning:

"in relation to any particular undertaking or task … those standards, practices, methods and procedures … to be performed with the exercise of skill, diligence, prudence and foresight that can ordinarily be expected from a fully skilled contractor who is engaged in a similar type of undertaking or task in similar circumstances consistent with recognised international standards."

The ER within the contract specified (among other things) as follows:

"The Works elements shall be designed for a minimum site specific "design life" of twenty (20) years without major retrofits or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime." [ER para 1.6]

"The detailed design of the foundation structures shall be according to the method of design by direct simulation of the combined load effect of simultaneous load processes (ref: DNV-OS-J101)…" [ER para 3.2.2.2(1)]

"The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. ..." [ER para 3.2.2.2(2), repeated in ER para 3b.5.1]

"All parts of the works, except wear parts and consumables, shall be designed for a minimum service life of 20 years." [ER para 3b.5.6]

The ER also contained numerous other references to the required design life of 20 years.

The reference to DNV-OS-J101 (J101) is a reference to a widely-used international standard for the design of offshore wind turbines that was published by Det Norske Veritas in 2004.

MTH's design of the foundations, including the grouted connections, was prepared in accordance with J101, and the installation of the foundations was completed in February 2009. However, in April 2010, the grouted connections started to fail and the transition pieces began to slip down the monopiles. This was shortly after the failure of similar grouted connections at another offshore windfarm, the investigation of which revealed that there was an error in a value given in J101 for an equation to determine the strength due to friction at the grouted connection. The value was wrong by a factor of about 10, which meant that the load-bearing capacity of the grouted connections had been substantially overestimated.

Robin Rigg decision

When the case first came to the English High Court, to determine responsibility for the cost of necessary remedial works, the trial judge found that MTH's design of the grouted connections was not negligent. Nevertheless, he held that the design constituted breaches of clause 8.1(x) (not fit for purpose) and clauses 8.1(viii) and 8.1(xv) (not wholly in accordance with the requirements of the contract). The basis of these findings was that MTH was in breach of the requirement of ER para 3.2.2.2(2), that "The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement …"

However, the Court of Appeal disagreed and allowed MTH's appeal.

Delivering the leading judgment for the Court of Appeal, Jackson LJ noted that it is not unknown for construction contracts to require the contractor both (a) to comply with particular specifications and standards; and (b) to achieve a particular result. Such a contract, he said, may impose a double obligation upon the contractor: as a minimum, he must comply with the relevant specifications and standards, and also take such further steps as are necessary to ensure that he achieves the specified result. However, in order to give rise to that double obligation, the contract must be worded with sufficient clarity, and whether or not MTH's contract was one of that character was a matter of contractual interpretation.

Addressing that question, the Court of Appeal's reasoning was as follows:

• At first sight, the requirement of ER paras 3.2.2.2(2) and 3b.5.1, that "The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement", was a warranty that the foundations would function for 20 years.
• On the other hand, all of the other provisions of the ER were directed towards a design life. If a structure has a design life of 20 years, that does not mean that inevitably it will function for 20 years.
• The contract clearly required the contractor to comply with J101.
• Apart from clause 8.1(x) of the conditions, the obligations imposed by clause 8.1 required due care, professional skill, adherence to good working practice, compliance with the ER, and so forth.
• Clause 8.1(x) required the works to be "fit for purpose", but that phrase was qualified by reference to "Good Industry Practice", and further defined as "fitness for purpose in accordance with, and as can properly be inferred from, the Employer's Requirements". The court considered that this definition simply takes one back to the ER and J101.
• In conclusion, it did not make sense to regard ER paras 3.2.2.2(2) and 3b.5 .1 as overriding all other provisions of the contract and converting it to one with a guarantee of 20 years life. Those paragraphs were inconsistent with the remainder of the ER and J101, and were "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations."

The contract properly construed therefore did not contain a warranty for 20 years' service life, and MTH succeeded in its appeal.

Conclusions

There could be no doubt from the ER in this case that the intended service life of the foundations was to be 20 years. Superficially, it may therefore seem obvious that the fit for purpose obligation required MTH to provide foundations that would achieve that result. However, because of the way that the contract documents were expressed, the fit for purpose obligation was in effect treated as meaning "fit for purpose as a structure which has been competently designed to provide a service life of 20 years".

It should be noted that the Court of Appeal's decision was not simply based on the fact that MTH was required to comply with J101 that contained the fatal error. As was made clear in the judgment, and has been held in Commonwealth judgments, the contract may impose a double obligation, such that the contractor may be liable under a fit for purpose obligation despite faithful compliance with a contractually stipulated specification which is defective.

Rather, the essence of the decision was that, in the absence of an explicit warranty for a 20 years' service life, the multiple provisions in the ER which (in effect) required only a design life of 20 years were not sufficient to impose the absolute standard; and further, those multiple references to a design life of 20 years justified disregarding a provision in the ER, that was otherwise apt to constitute a warranty, for being inconsistent with the commercial purpose of the contract as discerned from the other provisions.

Under the Yellow and Silver Books, contractors' obligations with respect to fitness for purpose are expressed in a similar way as in the Robin Rigg contract ("fit for the purposes for which the Works are intended as defined in the contract"). It follows that a Yellow or Silver Book contract that expresses the intended service life in a similar way, by reference to design life, may well be interpreted as not warranting the service life in the same way as in the Robin Rigg case.

The case also illustrates the potential consequences of mixing up reasonable skill and care obligations with a fit for purpose obligation. The requirements of clauses 8.1(i) and 8.1(iv) of the Robin Rigg contract conditions, and the definition of Good Industry Practice, were no doubt intended to give the owner some control over the manner in which the work should be performed in order to provide further assurance that the fit for purpose obligation would be met. However, as in this case, the result of stipulating such added provisions may be to dilute the fit for purpose obligation, unless it is made clear that such is not the intention.