Where Standards and Contracts Collide

October 24, 2017

A case on the defective design and
build of wind farm machinery bases (MT Højgaard A/S v E.ON Climate & Renewables
UK Robin Rigg East Limited and another
[2017] UKSC
on appeal from [2015] EWCA Civ
) is of potential relevance in contracts for other sectors which
are reliant on design standards according to international or national

This case has obvious similarities
with the way in which many outsourcing and IT services or information security
contracts are constructed by reference to a technical specification overlaid
with more general obligations of fitness for purpose or performance according
to good or best industry practice. The case deserves careful reading by
suppliers of complex IT and information security services to establish and
eliminate possible risk of a similar adverse contractual result.

In the case, wider general design
warranties overrode the specific minimum design standards prescribed in the
technical standards used for the construction, increasing the liability of the

Facts of the case

The case arose from defective
foundation structures for two offshore wind farms in the Solway Firth, designed
and installed by MT Højgaard A/S (“MTH”). The defects were discovered
shortly after completion of the project. The judge at first instance found in
favour of E.ON ruling that MTH were liable for the defects and although the
Court of Appeal unanimously disagreed, the Supreme Court again ruled in favour
of E.ON. The court had to look at a complex document set for the design and
build of the foundation structures. Jackson LJ’s comment in the Court of Appeal
that the issue was ‘how the court should construe the somewhat diffuse
documents which constituted, or were incorporated into, the “design and build”
contract’ should be viewed.

In the case, the contract provided
that MTH would design the turbines to have a minimum site specific design life
of 20 years without major retrofits or refurbishments. The contract
specifically provided that the basis of design was a minimum requirement for
the design and it was the responsibility of MTH to identify areas where works
needed to be designed to additional or more rigorous requirements or
parameters. The design principles, in particular paragraph, stated ‘The
design of the foundation shall ensure a lifetime of 20 years in every aspect
without planned replacement. The choice of structure, materials, corrosion
protection system operation and inspection programme shall be made accordingly’.
The minimum standard specified was international standard J101.

The agreement required MTH to design
in accordance with ‘international and national rules, circulars, EU directives,
executive orders and standards applying to the Site’. In particular, the works
had to be completed in a professional manner in accordance with modern
commercial and engineering, design project management and supervisory
principles and practices and in accordance with internationally recognised
standards and Good Industry Practice and in addition in accordance with all
legal requirements, with the effect that the works had to be free from
defective workmanship and materials and fit for purpose as determined in
accordance with the technical specification using Good Industry Practice.

It became quickly obvious that the
works would not have a design life of 20 years. The question for the court was
whether MTH was in breach of contract despite the fact it had used due care and
skill and acted in accordance with Good Industry Practice and with the specific
requirements of standard J101 (which contained an error). The court determined
that MTH was liable. On an interpretation of the contract, E.ON had 24 months
to discover that the foundations were not, in fact, designed to last for 20
years and therefore the cost of remedial works amounting to some £26 million
had to be borne by MTH.

The court referred to a number of cases
where contracts included two terms, one requiring production of an article in
accordance with a specified design and the other requiring the article to meet
particular performance criteria and how any inconsistencies were resolved. The
court stated (at [45]):

those circumstances, in my judgment, where the two provisions of Section 3
impose different or inconsistent standards or requirements, rather than
concluding that they are inconsistent, the correct analysis by virtue of
paragraph 3.1(i) is that the more rigorous or demanding of the two standards or
requirements must prevail as the less vigorous can probably be treated as a
minimum requirement.’

The court noted that the contract was
‘long, diffuse and multi-authored with much in the way of detailed description
in the [technical requirements] and “belt and braces” provisions both in the [technical
requirements] and the contract’. The court still had to interpret these
according to normal principles.

Lessons for technology agreements

In many contracts reference to
standards are becoming increasingly common, particularly information security
standards such as ISO27001 and ISO 27018 (cloud services) and many other more
specific environmental and technical standards. Lessons from the case are clear:

  1. Include a clear hierarchy of priority. Does
    the technical standard constitute a minimum standard, eg of information
    security, or the standard that a supplier must work to?
  2. If the contract includes technical specifications
    or references to standards, consider how these interact with general
    obligations of reasonable skill and care, good industry practice or
    fitness for purpose. This is where the interpretation of the case became
    particularly difficult and the adverse result occurred. In many IT
    services contracts there are general obligations of skill and care as well
    as obligations to achieve service levels so careful construction is needed
    to ensure there are no adverse consequences from this.
  3. The case clearly highlights the risk of
    multi-authored technical standards and legal contracts. This is common in
    larger technical contracts, therefore significant effort should be made to
    ensure that these documents are consistent as far as possible and that
    overlapping standards and inconsistent ‘belt and braces’ terms are not
    included. It is better for the parties to spend time understanding what
    the actual technical requirements are to ensure that the resulting design
    is what both parties expect and therefore issues can be ironed out before
    contract signature rather than expensive litigation ensuing.
  4. Under the GDPR, service providers (processors)
    are obliged to assist controllers in determining compliance with technical
    and organisational standards. There are additional risks in relation to
    joint and several liability under the Regulation, as well as complexities
    in the record keeping that must be observed.

The case therefore deserves careful
study and interpretation and/or consideration alongside GDPR compliance
programmes to ensure that all the good work done in preparing policies,
procedures and standards is not lost by unintended or loose contractual
drafting where customers seek to transfer risk according to generalised
obligations of skill, care or performance.

Mark Bailey is a Partner at Charles Russel Speechlys: https://www.charlesrussellspeechlys.com