Friday, October 26, 2018
A key consideration for any contractor or sub-contractor under a construction contract is to ascertain the standard of care required of them in order to fulfil their contractual obligations. In many instances the standard is reasonable skill and care, however there are also occasions where a contract requires the higher and more onerous standard of fitness for purpose. The tension between those two standards has historically led to disputes. A significant case for both employers and contractors to be aware of is a recent decision of the English Supreme Court detailed below.
Fitness for Purpose Clauses – Advantages vs Disadvantages:
The Courts have often been called upon to examine the interaction between the standard of fitness for purpose and that of reasonable skill and care but the decision in this English Supreme Court case is quite dramatic – it held that carrying out one’s contractual obligations in compliance with a specified industry practice or standard will not be enough to exclude a contractor’s liability for a failure to comply with an agreed fitness for purpose obligation.
MT Højgaard A/S (Respondent) –v– E.ON Climate and Renewables UK Robin Rigg East Limited and Another (Appellants)1
Fit for Purpose vs Reasonable Skill and Care:
E.ON’s claimed that MT Højgaard was liable for the defects due to its failure to comply with the specific fitness for purpose obligation under the contract (i.e. the turbine foundations were to have a life span of 20 years). MT Højgaard argued that the strict fitness for purpose obligation should not apply, as its primary contractual obligations were to act in accordance with good industry practice, comply with the J101 and to exercise reasonable skill and care.
At first instance, the UK High Court held that as the turbine foundations did not have a lifespan of 20 years MT Højgaard had breached its fitness for purpose obligations under the contract. The 20 years lifespan requirement was additional to and not inconsistent with the contractor’s other obligations including compliance with the J101.
MT Højgaard appealed the judgment to the UK Court of Appeal. They overturned the High Court decision and held that the fitness for purpose obligation was not an absolute warranty and what the contract required was due care, professional skill, adherence to the good industry practice and compliance with the J101.
The matter was again appealed and in its judgment the UK Supreme Court reversed the decision of the Court of Appeal finding in favour of E.ON. The Supreme Court in its decision noted that a conflict between competing terms (in a contract) is to “be decided by reference to the ordinary principles of contractual interpretation”.2
While the Court went on to state that a requirement to produce an item in accordance with a prescribed design and a requirement that the item will comply with a prescribed criteria are “by no means…mutually inconsistent”3, it noted 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.”4
Upon examination of the requirements under the contract, the Supreme Court found that compliance with the J101 was a minimum requirement and that the more onerous fitness for purpose requirement should prevail. In coming to this conclusion, the Supreme Court rejected MT Højgaard’s argument that the fitness for purpose requirement (i.e. 20 year lifespan) was inconsistent with the requirement that the design would comply with the J101. It stated that where there are two terms that require different standards, “rather than concluding that they are inconsistent, the correct analysis…is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement”.5
The Court further held even where there was an inconsistency between a design requirement and the required criteria, MT Højgaard had a duty to identify the need to improve the design so that the required criteria was met.
It was notable that the Court rejected MT Højgaard’s argument that the fitness for purpose obligations should have been set out more prominently in the contract, as opposed to being contained within the technical requirements, if they were intended to have contractual effect. The Court noted that it was clear that the technical requirements were to form part of the contract and that a 20 year design lifespan was required.
1  UKSC 59
2 Ibid para. 37.
3 Ibid para. 44.
5 Ibid para. 45.