Beware “Fitness For Purpose” Obligations In Building Contracts
A recent case concerning a “fitness for purpose” obligation could have far reaching consequences for contractors particularly in the design and build sphere.
The case of MT Højgaard –v- E.ON Climate and Renewables  UKSC 59 concerned the construction of two offshore windfarms in the Solway Firth. They were designed and installed by MT Højgaard (MTH) for their client E.ON.
The contract had a provision in it which required MTH to ensure the wind turbines were fit for purpose and designed to last 20 years. The contract also had a provision in it which required MTH to design the turbines in accordance with a recognised and internationally accepted industry standard.
MTH designed in accordance with the recognised industry standard.
Installation work started in December 2007 and completed in February 2009. However during 2009 a serious problem came to light at a different wind farm which led to the discovery of an error in the recognised industry standard. MTH and others in the industry were notified of the error in September 2009.
In April 2010 the MTH turbines in the Solway Firth began to fail. MTH and E.ON agreed a programme of remedial work costing €26.25 million. The question was who should pay this cost?
The High Court decided MTH should pay because although MTH had not been negligent they had breached the fitness for purpose obligation and 20 year design life requirement.
The Court of Appeal reversed this decision.
E.ON appealed to the Supreme Court which said:-
“Where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent….
in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria,….
While each case must turn on its own facts…courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, …..”
The €26.25 million billed landed with MTH.
The harsh reality is that by agreeing to a fitness for purpose and 20 year design life obligation MTH had set itself a hurdle it had failed to jump. Compliance with the recognised industry standard was no defence.
Contractors: beware “fitness for purpose”! It could trump all else.
If you have any questions on this, or a similar case, please contact Michael McCord.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.