Who takes the risk in an offshore construction project if the design imposed by the contract terms is wrong? The company which has required the use of that design, or standard, or the contractor which agreed to design and build using it?
The Supreme Court has handed down its much-anticipated decision in MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited, and decided that, on the wording of that particular contract, the risk lay with the contractor, MT Højgaard, to the tune of 26.25million Euros.
While this decision was concerned with the construction of offshore windfarms, the principles, and the potential exposures, apply equally to offshore oil and gas contracts and act as another reminder that the energy industry is a high cost, high risk environment.
MT Højgaard had been engaged by E.On to design, fabricate and instal the foundation structures for offshore wind turbines at Robin Rigg in the Solway Firth. Shortly after completion, grouted connections incorporated within the foundation structures failed. It was found that the failure was due to a decision not to incorporate shears, this decision having been made by MT Højgaard in reliance on J101. J101 is an international Det Norske Veritas approved standard which was intended to bring about a service life of 20 years and was commonly used at the time. However it contained an incorrect formula (which was discovered later) which meant that the foundations were failing shortly after installation.
The remedial works cost 26.25million Euros. Who should bear that cost?
In the oil and gas industry, we are used to lengthy supply chain contracts with “legal” terms and conditions set out at the front followed by schedules: scope, remuneration and so on. The Robin
Rigg contract, which was for the design, fabrication and installation of the foundation structures, was just such a document, with the technical requirements, which had formed part of the tender documents, tucked away as Part D of the final contract. The technical requirements stated that “The Works elements shall be designed for a minimum site specific “design life” of twenty (20) years without major refits or refurbishments” with the main conditions and other sections of the contract containing less onerous obligations such as the requirement to exercise reasonable skill and care and an express obligation to comply with J101.
The first instance court had held that MT Højgaard was liable to E.On for breach of contract because the design of the foundations was not fit for purpose as required in the technical requirements. The Court of Appeal overturned that decision emphasising that J101 was the normal design standard required of offshore windfarms. More was required, therefore, than two paragraphs “tucked away” in the technical requirements if a much more onerous obligation was to be imposed warranting a 20-year lifetime.
The Supreme Court disagreed with the Court of Appeal that the technical requirements were “too slender a thread” to support the more onerous fitness for purpose obligation. The court was unimpressed by an argument that paragraphs contained in a technical schedule should not be readily interpreted as imposing additional onerous obligations above those spelled out in the primary contract conditions. In fact the contract stated that J101 and the 20-year design life were the “minimum” requirements in the design of the foundations. Given that the technical requirements formed part of the contract they were to be taken at face value and applied even though they arguably contradicted other provisions in the contract.
The Supreme Court also disagreed that the technical requirements amounted to a warranty that the foundations would last for 20 years. Instead they formed an agreement that the foundations
would be designed to last for 20 years without replacement. This agreement could be relied on by E.On even though MT Højgaard complied with J101 and carried out its work in accordance with good industry practice. Because of the error in J101, it was incapable of producing foundations with a design life of 20 years. MT Højgaard was in breach of contract, therefore, as the foundations did not have the required design life, and was liable to pay the cost of the remedial work.
Who takes the design and build risk under a contract will depend on its terms. Oil and gas supply chain contracts (including LOGIC) usually contain provisions requiring the contractor to review information supplied by the company and notify the company of any discrepancies, errors, or omissions.
Where the contractor agrees to produce a scope of work, then, unless the contract says otherwise, the contractor accepts the risk for the creation of that scope of work, even if the company has specified or approved the design, or the standards, to be used in the contract.
In the Robin Rigg case although J101 was imposed on MT Højgaard, they had agreed to work to it and so, absent anything in the contract to the contrary, MT Højgaard was liable when J101 did not produce the required 20-year design life.
If the parties to a contract want the risk to be dealt with differently, they are free to set that in the contract. All the provisions of a contract should be reviewed and considered so that careful negotiations on the legal terms and conditions section aren’t contradicted by obligations in the schedules. Parties should take note that, absent provisions to the contrary, and particularly in contracts containing fitness for purpose obligations, the courts will be inclined to enforce obligations that the work complies with the prescribed criteria set out in the contract and even if the company specified or approved a design, as the contractor agreed to work to that design the contractor takes the risk of the work not meeting the prescribed criteria.
This case reminds us, yet again, that clarity in contracts is essential.
Penelope Warne is senior partner and head of energy at CMS.