MT Højgaard v E.ON was a long-running case that was finally put to bed by the Supreme Court this summer – but it could have significant implications for the interpretation of JCT contracts.
A recent case relating to offshore wind farms might not have caught the imagination of parties involved in other sectors, but contractors and developers should take note as the implications resonate more widely.
Much has been said already about the recent Supreme Court case of MT Højgaard v E.ON. A critical issue, relevant for present purposes and on which responsibility for a multi-million-point repair bill turned, was whether a general contractual design obligation in terms equivalent to ‘reasonable skill and care’ was overridden by a more onerous obligation, buried deep in the technical documentation, requiring the design to be ‘fit for purpose’.
Consider the reasoning in the context of JCT contracts and parties should be careful not to rely on any perceived order of priority to stop them falling foul of the same situation.
When agreeing a design-and-build contract (or other design appointment), clarity as to the contractor’s design responsibility is essential, with the two common alternatives being variants of either using ‘reasonable skill and care’ or ensuring ‘fitness for purpose’.
An obligation to use ‘reasonable skill and care’ is generally satisfied if a design is prepared to the standard that a reasonably competent member of the profession could be expected to have achieved. In contrast, ‘fitness for purpose’ is an absolute commitment to achieve a result, so if the design fails it is no defence that other competent professionals would have done exactly the same.
Reasonable skill and care is the generally accepted standard in most sectors. Great care is usually taken to avoid inadvertently accepting a fitness for purpose obligation, not least as professional liability insurance typically only covers duties of ‘reasonable skill and care’ and most commercial parties are unwilling to carry uninsured design risk.
In that context, the JCT contracts contain two important sets of provisions.
The first concerns design responsibility. Under the JCT form, the contractor accepts the same liability for design to the standard of a competent architect experienced in the relevant type of work (ie for all practical purposes an obligation to use ‘reasonable skill and care’).
What happens then if, as in Højgaard, despite what the JCT terms say, the employer’s requirements include a more onerous fitness for purpose obligation?
The JCT’s answer (our second set of important provisions) is the interpretation clause, which states that, while the contract is to be read as a whole, nothing in the employer’s requirements can override or modify the contract conditions. If there is a conflict, the contract conditions take priority.
Does this mean that the JCT interpretation provisions stop any attempt to impose a fitness requirement in the employer’s requirements in the way which caught Højgaard, because of a conflict with the contract conditions? Not necessarily.
When applying the JCT’s interpretation provisions, the courts have approached it exactly as the clause describes. Wherever possible the contract conditions and the employer’s requirements will be given an interpretation which makes it possible to read them together. Only in cases of clear conflict will the contract terms take precedence.
In that context, a significant conclusion in Højgaard was that a standalone obligation to ensure part of a design is fit for purpose is not incompatible with a general obligation to use reasonable skill and care. The fact that it was buried in a technical document made no difference, and the court was content that the obligations could be read alongside each other.
While the court did stress that each case must turn on its own facts, the door is open for parties to argue that fitness for purpose obligations in employer’s requirements are not automatically in conflict or unenforceable.
One response to this will be parties revising their amendments to the JCT contract.
The NEC3 (and NEC4) approach to liability for design under option X15, for example, provides an interesting contrast in that, instead of defining the duty of care, it confirms that a contractor will not be liable for defects if they have used reasonable skill and care. Attempts to impose fitness for purpose obligations in technical documents in that context look closer to a conflict.
Obviously the best approach is to ensure all documents are checked thoroughly and conflicting obligations avoided.
But for as long as the commercial reality is that, when assembling technical documents as part of contracts, large volumes of paperwork are often compiled by multiple parties in short time periods, parties must also think about ensuring they are properly protected from unintended consequences.
Alan Woolston is a partner at Fladgate