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Supreme Court finally puts E.ON contract saga to bed

Tom Duncan

The decision on MT Højgaard v E.ON has provided a clear reminder that contracts, including their technical content, need to be carefully drafted, read and understood.

The construction industry is not great at getting its contracts agreed and signed.

And even if a contract is put in place, there is another rather important question: are the contents of the contract quite clear? If the project goes pear-shaped, after all, the last thing anybody wants is to have to go to court to find out what it really means.

This is what happened to MT Højgaard A/S’s contract with an E.ON company, E.ON Climate & Renewables UK, to design, fabricate and install wind turbine foundations in the Solway Firth.

The case

The contract said MTH’s design must comply with an international standard, J101, and must ensure a 20-year lifetime for the foundations, without planned replacement.

The design complied with J101 but turned out to contain a critical mistake. The foundations started to fail and the remedial costs came to €26.25m. Were these for the account of MTH or E.ON?

“The design complied with J101 but turned out to contain a critical mistake. The foundations started to fail and the remedial costs came to €26.25m”

The issue for the courts was just how the two obligations worked, or did not work, together. Mr Justice Edwards-Stuart said they were consistent and both obligations applied, so that MTH ended up with the bill.

The Court of Appeal disagreed, deciding that the 20-year obligation was inconsistent and could be ignored. This left the Supreme Court to rule on the deciding round of the dispute. Reaching a judgement earlier this month, it unanimously allowed E.ON’s appeal.

The decision

Supreme Court judge Lord Neuberger said that, although each case must turn on its own facts, the message from UK and Canadian cases was that the courts are generally inclined to give full effect to the requirement that the item produced complies with the agreed contract criteria.

“The correct analysis of the two obligations in the MTH contract was that the more demanding of the two requirements must prevail, as the less rigorous could properly be treated as a minimum requirement”

This is on the basis that, 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 it agreed to work to a design which would make the item incapable of meeting those criteria.

The correct analysis of the two obligations in the MTH contract was that the more demanding of the two requirements must prevail, as the less rigorous could properly be treated as a minimum requirement.

And if there was an inconsistency between a design requirement and the required criteria, the effect of the relevant contract clause would be to make it clear that, although it might have complied with the design requirement, MTH would be liable for failure to comply with the required criteria, as it was its duty to identify the need to improve on the design.

Implications for contractors

So where does this leave us? With a big reminder that contracts, including the technical content, need to be carefully drafted, read and understood. Once agreed and signed, both parties are committed to whatever the contract says. Which could be, ultimately, for a court to interpret.

“While the principles may be clear, just how the courts might apply them is another matter, as can be strikingly seen in the different results in the three courts in this case”

While the principles may be clear, just how the courts might apply them is another matter, as can be strikingly seen in the different results in the three courts in this case.

Contract interpretation and litigation are not exact sciences.

Tom Duncan is a partner and George Fisher is an associate in the construction and engineering group at Mayer Brown International

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