When obligations collide in construction contracts

When obligations collide in construction contracts

To what extent can obligations in a contract co-exist? Alison Fagan of Addleshaw Goddard examines a recent ruling where an absolute obligation was held not to be incompatible with an obligation to use skill and care.

Original news

MT Højgaard A/s v E.ON Climate And Renewables & Ors [2014] EWHC 1088 (TCC)

What issues were raised by this case?

The principal issue in this case was whether an absolute obligation in a contract can coexist with an obligation to use a required level of care and skill. Edwards-Stuart J decided that such duties can coexist.

The claimant (MTH) as contractor, entered into an agreement with the defendants (E.ON), as the employer, for the design, fabrication and installation of the foundations for 60 wind turbine generators for an offshore wind farm at a cost of just over €101m.

An international standard for the design of offshore wind turbines contained a value attributed to a variable used in one of the equations which was underestimated by a factor of about ten. MTH’s designer, like everyone else at the time, was unaware of the error when it carried out the design. Several years later, and after the wind turbine foundations were constructed, the error was discovered. The resulting remedial works cost €26.25m.

The contract contained two material clauses:

  1. a warranty that the wind turbine foundations would have a service life of 20 years, and
  2. an obligation on MTH to use due care and diligence

The question was whether these were mutually incompatible.

The court decided that two sets of obligations—one to achieve a particular result (an absolute obligation) and another to exercise reasonable care or to do the work in a workmanlike manner—are not necessarily mutually incompatible. It is not uncommon for construction and engineering contracts to contain two sets of such obligations. On the facts of this case the two sets of obligations were not mutually inconsistent. Edwards-Stuart J gave the example of a building that is constructed to last a lifetime but out of mis-matched bricks. The absolute obligation to last a set number of years may be satisfied, but the obligation to carry out the work in a workmanlike manner would not allow for the blemish of mis-matched bricks.

Is the judgment helpful in clarifying this area of law?

The judgment does not create new law as it applies the general principles of contractual interpretation set out inRainy Sky SA v Kookmin Bank [2011] UKSC 50[2012] 1 All ER 1137. Nevertheless, there was a dearth of cases on this specific point, with the two other authorities referred to on this point being from the Supreme Court of Canada, the Court of Appeal for British Columbia, together with a passage from Hudson.

Although in this case the two obligations were held not to be mutually incompatible, the case is highly fact specific, and the wording of a contract in a different case may mean that an absolute obligation is incompatible with a skill and care obligation.

What lessons can be learned from the case?

The case means legal professionals should exercise casre when agreeing terms to ensure that absolute and skill and care obligations are clearly identified.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This article was first published in LexisPSL Property on 8 May 2014. Click here for a free one week trial of Lexis®PSL Property. 

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