Supreme Court continues its return to orthodoxy in contract construction

In the first case concerning offshore wind farms to reach the Supreme Court, operators and engineers fought over who should bear responsibility for £26 million of remedial works to the Robin Rigg Offshore Wind Farm.

The controversy arose because an error in the Norwegian design standard (J101) for grouted joints led to defective foundations in all 60 structures in the wind farm. There was little or no damage beyond the joints themselves, but it was apparent that without taking remedial steps, all structures would fail within a few years. Without much actual damage, insurance offered little support, meaning one of these two parties would face huge uninsured losses.

The judgment addresses several points that will be of interest to all involved in construction projects:

1. Where a structure is defective, is it a defence for the contractor to say “our design is the outcome of using the method as instructed”?
2. Can an express term that appears to be against the general tenor of the agreement be ignored because it is “too slender a thread upon which to hang”?
3. What is the obligation where a structure has a specified ‘design life’? 

Technical background

The underlying technology was described in the Court of Appeal judgment:

“An offshore wind farm is a cluster of turbines standing on monopiles driven into the sea bed. …

… A steel cylinder, known as a transition piece, is fitted over the top of the monopile. The gap between the transition piece and the pile is filled with grout. The transition piece projects above the top of the pile. The tower which supports the electricity generator fits onto the transition piece. The grouted connection works by friction between the grout and the two steel surfaces between which it sits.”

The grouted joints began to fail, allowing the transition pieces to slide down the monopile.

Contract

The Employers’ “Key Functional Requirements” provided that:

“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.”

The Court of Appeal held that “If a structure has a design life of 20 years, that does not mean that inevitably it will function for 20 years, although it probably will”. So as long as the designer can show that he used reasonable skill and care in producing the design, the contract will not be breached simply because the resulting structure does not survive for 20 years. The Supreme Court did not disagree.

Similar obligations to use reasonable skill and care appeared in other clauses, but in paragraph 3.2.2.2 (ii) there was the stipulation that:

“The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement.”

This was accepted to be a warranty that the foundations would last 20 years. However, considering all the other obligations which imposed only a duty of reasonable skill and care, the Court of Appeal chose to ignore paragraph 3.2.2.2 (ii) on the basis that it was:

“… too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations”.

The message seemed to be that terms in construction contracts will not be seen as warranties unless it is very clear that they are intended as such.

The Supreme Court took an alternative, simpler line, saying that:

"… para 3.2.2.2(ii) is clear in its terms in that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years.”

Of the argument that the contractor was merely fulfilling his obligations by designing the grouted joint upon the basis of J101, Lord Neuberger said:

"… 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.”

Comment

The Court of Appeal’s decision seemed to introduce a requirement to perform a balancing act by weighing up whether a particular provision accords with the general tenor of the contract before deciding whether it was one which could be relied upon. This made predicting the outcome of contractual disputes very difficult.

As in other recent decisions, the Supreme Court favoured a more orthodox approach and provided confirmation that:

1. A contractor cannot use the defence that they were simply acting as instructed.
2. Where a contract is reasonably clear on its face, an express term cannot simply be ignored.
3. If the contract stipulates a ‘design life’, the contractor’s obligation is that of a professional designer to use reasonable skill and care, which in practice means, producing the design according to reasonable accepted norms of good practice of the time. The lifetime is not guaranteed.

Insurers can anticipate pressure to provide innovative products to cover the “uninsured risks” highlighted in this matter.

Read other items in the London Market Brief - September 2017