The Interpretation Game

A look at the ruling in the Højgaard case and what this means for industry, by Jack Banks, senior associate, DLA Piper

The Supreme Court's ruling in MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another provides legal certainty on a contractor's obligation to deliver in line with the technical specification and required design life – an issue directly relevant to those involved in the PPP/PFI sector.

The judgment provides comfort to employers/SPVs seeking to rely on specific provisions within such requirements when pursuing defective design claims against contractors responsible for the design and construction of projects.

Højgaard arises from the defective design of the foundation structures of two offshore windfarms at Robin Rigg on the Solway Firth. Shortly after construction was completed, the grouted connections used on the turbine monopiles began to fail, resulting in the need for extensive remedial works at a cost of €26m.

The failure was attributed to the incorrect calculation of the axial capacity of the connections, a problem arising, in part, as a result of formulaic errors in "J101" – a design standard which the contractor was obliged to adhere to in the design of the foundations.

The central issue to be determined by the Supreme Court concerned the true effect of a specific provision within the technical requirements of the contract: "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 case considered two key issues:

1. Inconsistency between obligations which required the contractor to carry out the works in accordance with a prescribed design and those requiring the works to meet prescribed criteria – in this case the apparent conflict between the contract provision and the requirement to carry out the design in accordance with J101; and

2. Inconsistency between multiple requirements scattered throughout the contractual documents and technical requirements and the relevant precedent of each.

These are familiar issues on complex PFI arrangements where the use of design-based technical requirements, criteria-based output specifications and the incorporation of extensive technical guidance, design standards and supplementary documents may render the precise nature of the design and build contractor's obligations unclear.

Addressing the first issue, the judgment in Højgaard confirms that the standard legal requirement is for the contractor to design and construct the works so as to meet the prescribed criteria, even where to do so would render the works not compliant with the employer's prescribed design.

This provides a powerful tool for SPVs pursing defect claims against design and build contractors (particularly where payment deductions arise as a result of non-compliance with the output specification).

On the second issue, the Supreme Court rejected a number of arguments advanced by the contractor emphasising the "ambiguities and inconsistencies" contained in the contract. The fact that the requirement for a 20-year lifetime was "tucked away" in the technical requirements of the contract did not prevent it having full contractual effect, nor dilute the nature of the obligation it imposed, on the contractor.

This finding is also helpful to SPVs, strengthening their ability to rely on the full terms of the extensive technical documents which feature in PFI agreements. The diffuse and multi-authored nature of such documents frequently results in the full technical requirements relevant to a particular element of the works being scattered widely. An SPV's prospects of successfully pursing a claim against its contractor may be heavily dependent on its ability to rely on such requirements to their full extent.

The Supreme Court's reasoning can be seen to provide an employer/SPV-friendly re-statement of the law's tendency to accept a wide scope of responsibility for design and build contractors.

However, the emphasis placed on the general rules of contractual interpretation by the court reinforces the importance of the specific drafting used in the contract. Employers and SPVs should review each case on the precise terms of the relevant contract and the full factual matrix of the dispute.

A further issue considered by the Supreme Court concerned the enforceability of the contract provision. The contractor successfully argued that the terms of the contract prevented any claim being commenced by the employer later than 24 months after completion of the works.

The Supreme Court's findings here highlight the difficulty which may be encountered where claims relating to a failure to achieve an extensive ‘design life’ or ‘service life’ are not commenced within contractual or statutory limitation periods. It provides a timely reminder of the need for vigilance on such issues in light of the age of many of the UK's PFI assets.

The Supreme Court's judgment in Højgaard provides an employer friendly confirmation of the wide ranging responsibilities that are likely to have been placed on design and build contractors in projects which rely on complex, multi-faceted technical requirements.

It provides support to SPVs seeking to pursue claims against design and build contractors for defective works carried out on PPP/PFI projects and the extensive payment deductions which can result.

Nevertheless, the prospects of success for such claims remain dependent on the precise terms of the contract in question – detailed review of the prescribed design, prescribed output criteria and the supporting technical documents is essential in order to determine the strengths and weaknesses they present.