This article comes from law firm Andrews Kurth Kenyon LLP and is authored by Ryan S. Dean.
Energy, engineering, and construction disputes often give rise to the issue of what design standard a design and build contractor should be held to. The issue is particularly marked where a contract provides that the contractor must design and build in accordance with a prescribed standard but also that the product must be fit for its intended purpose. What happens when the contractor meets the standard but, through no fault of its own, the product remains unfit for its purpose?
The Supreme Court took the opportunity to address this question in the recent case of MT Høgaard A/S vs ON Climate and Renewables UK Robin Rigg East Ltd  UKSC 59. The decision provides some important practical lessons for parties negotiating and drafting design and build contracts.
In Højgaard, the appellants (“E.ON”, as the employer) had engaged the respondent (“MTH”, as the contractor) to design and install the foundation structures of two offshore wind farms in the Solway Firth. The parties’ bespoke contract contained a variety of provisions relating to the standard to which the foundations were to be designed and built by MTH. In the main contract, clause 8.2 provided:
“The Contractor shall, in accordance with this Agreement, design, manufacture, test, deliver and install and complete the Works:
(i) with due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors …
(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 and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement …”
The employer’s requirements included detailed technical requirements. Paragraph 1.6 of the technical requirements provided:
“The Works element shall be designed for a minimum site-specific ‘design life’ of twenty (20) years without major retrofits or refurbishments …”
Paragraph 3.1 of the technical requirements included the wording:
“(i) … the requirements contained in this section … are the MINIMUM requirements of [E.ON] to be taken into account in the design.
(ii) It shall be the responsibility of [MTH] to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters.”
Paragraph 3.2 of the technical requirements dealt with design and required the contractor to prepare its detailed design in accordance with international standard DNV-OS-J101 (“J101”) for the design of offshore wind turbines. Paragraph 18.104.22.168(ii) went on to state that:
“The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement …”
Unknown to either party, however, the international standard J101 contained a critical flaw. Section 9 of J101 dealt with the design and construction of grouted connections, which connect the bottom of the turbine tower to the top of the monopile. It contained a number of parametric equations, one of which calculated the fatigue strength of the grouted connection and their susceptibility to stress fractures. A constant in that equation was incorrect by a factor of 10. The effect was that using the equation as stated would significantly overestimate the grouted connection’s ability to withstand the constant stresses placed on it by the wind and sea.
MTH duly proceeded with the works and developed a detailed design for the grouted connections based on J101. Pursuant to the contract, they appointed Det Norske Veritas (“DNV”), the authors of J101, as the Certifying Authority. Rubber-stamping their own standard, DNV evaluated and approved MTH’s designs.
MTH commenced the installation of foundations in the Solway Firth in December 2007 and completed the work in February 2009. Later that year a serious problem came to light in a different wind farm, Egmond aan Zee, where J101 had also been used in the design. The grouted connections had started to fail. The transition pieces, steel cylinders connecting the foundations to the towers, began to slip down the monopiles.
DNV carried out an internal review in September 2009. They discovered the error in section 9 of J101. DNV immediately sent a letter to MTH and others in the industry alerting them to the situation. Of course, this alert was already too late for MTH. It was only a matter of time before the grouted connections at Robin Rigg began to fail.
This is exactly what happened from April 2010. The transition pieces began to slip down the monopiles. If this were not halted the towers would buckle and collapse into the sea. The parties agreed to a scheme of remedial works in the sum of €26.5 million and started proceedings in court to determine which of them should pick up the tab. ON argued that MTH was in breach of its overriding fitness for purpose obligations, while MTH argued that it had exercised reasonable skill and care and that any fitness for purpose obligation was qualified by its duty to comply with J101.
In the High Court, Edwards-Stuart J held in favor of E.ON and found that MTH was liable for the cost of the remedial works. He held that the relevant contractual obligations were not mutually inconsistent, but rather additional to one another, and that MTH had breached a warranty that the foundations would have a service life of 20 years.
MTH appealed to the Court of Appeal, which reversed the decision. In his lead judgment, Jackson LJ’s starting point was that all of the provisions in the technical requirements, with the exception of paragraph 22.214.171.124(ii), were compatible with the proposition that the entirety of the contractor’s obligation was to construct the works with reasonable skill and care while adhering to the relevant contractual standards and specifications.
By contrast, paragraph 126.96.36.199(ii) suggested that the contractor was required to produce wind turbines with a guaranteed operational life of 20 years. Jackson LJ held that this was inconsistent with J101 and the remainder of the technical requirements and was “too slender a thread” on which to impose what was in effect a 20-year warranty on MTH.
For the full article: https://goo.gl/EqxqYw