Double standards for design
Parties to construction contracts must pay careful attention to the wording of warranties, warns Chris Holwell
Many construction and engineering contracts require the contractor to design and build. In standard form contracts drafted by industry bodies, such as Joint Contracts Tribunal (JCT) or NEC3 contracts, these obligations are normally well defined and separated.
Building works are to be carried out in a good and workmanlike manner, using materials that are of merchantable quality and fit for their intended purpose, and design work is to be carried out with the reasonable skill and care to be expected of an appropriately qualified professional designer (such as an architect or engineer).
Design insurance policies (i.e. professional indemnity), which design and build contractors have to maintain, are geared to a professional, reasonable skill and care standard.However, these standard form contracts are often amended. Also, specification documents are prepared by architects, engineers, surveyors, and other non-lawyers for clients ('employers') who expect the buildings and structures they are buying to perform as they want them to. None of them appreciate the subtle distinctions in the standards, which the law normally implies and which insurance normally covers.
Designs may be required to be fit for purpose or to meet specific performance criteria. Warranties of performance are included in contracts and are applied to the whole of the work, with no distinction between design and construction.
Particularly in large-scale projects, it is not uncommon for employers to require fitness for purpose warranties or that the works comply with some specific performance criteria. These obligations normally incorporate a specification detailing what is required to be engineered or constructed, and, if worded carefully and consistently, they can still be insurable.
Unfortunately, all too often the authors of contracts struggle with the concept of what 'fitness for purpose' actually is. They try to solve this by appending employer's requirements documents and technical specifications, which they believe deal with the concept and with the actual requirements of the employer, but which in practice can confuse what is actually required by the employer.
In their enthusiasm to contract for these projects, contractors can end up accepting these confused mixtures of wording, whether by inadvertently agreeing to such terms in their tender packages or after coming under pressure from an employer to accept their standard terms. Contractors should be wary of accepting such provisions.
Fitness for purpose warranty
Last year's case of MT Hojgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd  EWCA Civ 407 highlights the problems that can arise when a contract contains a combination of standards of performance required of the contractor.
The contractor, MT Hojgaard, was appointed to design, fabricate, and install turbine foundations for the Robin Rigg offshore wind farm.
Within the contract, in addition to agreeing to carry out the design of the works with reasonable skill and care, the contractor agreed to give a 20-year fitness for purpose warranty, albeit that this obligation was to be determined in accordance with the specification. In the event, the contractor designed the foundations relying on DNV-OS-J101, an internationally recognised design standard.
Typically, offshore wind turbine structures are designed for an intended life of 25 to 30 years, so the 20-year requirement should not have caused much concern for the contractor. What wasn't anticipated by either party was that the design standard would subsequently be found to have flaws in its calculation formulae. These flaws resulted in an increased risk of movement at the base of the turbine tower, causing weakness and reducing its lifespan (and having an impact on the turbine achieving its projected output).
Upon inspection, the foundations at Robin
Rigg did indeed show signs of movement, which required significant and costly remedial works. As the flaws in the formulae within the international design standards were in reality outside the control of the contractor, the parties sought clarification as to who should ultimately bear the €27m remediation costs.
The Technology and Construction Court decided at first instance that, had the employer specified the design standard and the contractor agreed to design in accordance with such a standard using reasonable skill and care, giving no warranties as to design life, then the employer should bear the cost. However, because the contract contained a fitness for purpose warranty and a warranty of a 20-year life, the judge decided that the contractor had in effect agreed an absolute obligation to accept all design risks. Not surprisingly, the contractor appealed.At appeal it was found that the contractor had not given an absolute warranty for a 20-year service life, but had given a warranty for a 20-year design life. This was, therefore, not a fitness for purpose obligation and the contractor could rely on its skill and care obligations. The contractor had used the required skill and care and could not have anticipated that the international design standard, which had been used in the industry for some time, would prove to be wrong. Therefore the Court of Appeal found that the employer had to pay for the remedial works.
Clear contract wording
The key issues in both the Technology and Construction Court and the Court of Appeal concerned the contradictory requirements within the employer's technical requirements. They stated that the foundation design would 'ensure a lifetime of 20 years in every respect without planned replacement', which appeared to constitute a warranty that the foundations would function for 20 years. However, all of the other provisions in their technical requirements referred to a design life of 20 years.
The Court of Appeal did not dispute the fact that an absolute obligation to construct something capable of operating to a specific requirement (for example, a 20-year service life or fitness for purpose) can supersede the obligation to comply with the plans and specifications. But this is only if the contract wording is sufficiently clear about what is required and that the contractor will be liable for its failure to achieve that requirement.
The confusion here arose because of the way that the words 'service life' and 'design life' were used interchangeably, and because the employer's technical requirements documents did not take account of the requirements of the other contract terms.
If the employer had wanted an absolute warranty for a 20-year service life, then this should have been explicitly stated in the main contract provisions - where the contractor would probably have understood it and rejected it as beyond the scope of its professional indemnity insurance (PII).
As well as illustrating the potential risks of mixing reasonable skill and care obligations with a fitness for purpose obligation, this case underlines the importance of clear contract drafting using consistent terminology. Careful attention must be given to the wording of warranties in construction contracts, particularly where what is warranted is the satisfaction of technical requirements set out in documents prepared by non-lawyers, who may have no clear understanding of the different standards that are normally applied to workmanship, goods and materials, and design/professional advice-type obligations.Contractors will want to avoid wording that requires standards of performance beyond what their PII will cover. Employers may well want absolute obligations that the contractor will achieve fitness for purpose, absolute warranties that particular performance requirements will be achieved, and so on. However, employers should consider:
How valuable such things actually are if they are beyond what the contractor's insurance can cover;
The effect on price and the number of tenders they are likely to receive if they send out documents that well-advised contractors will not accept; and
The likelihood of costly disputes if they try to claim for failure to achieve standards that contractors never understood themselves to be taking responsibility for.
Where it is not possible for a contractor to exclude a fitness for purpose obligation, a contractor should ensure that the purpose is clearly and narrowly defined, by reference to specific industry standards where possible.
Where a contractor has to give a warranty that
a particular performance requirement will be achieved, it should be made clear exactly what the performance requirement is and how it is to be measured. Ideally this should be done as a one-off during the construction phase on a pass/fail basis, not left to be applied randomly for the next 12 years or more.
However, even this won't protect a contractor fully - skill and care should always be the basis
of any design standards if they are to be covered by PII.