Is your insurance fit for purpose on design and build contracts?

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In June 2017, Nik Oldham and his team provided a seminar on the insurance arrangements relevant to design liability and fitness for purpose (FFP) obligations in design and build contracts.

In June 2017, Nik Oldham and his team provided a seminar on the insurance arrangements relevant to design liability and fitness for purpose (FFP) obligations in design and build contracts.  We looked in some detail at the case law on the type of FFP obligations assumed by Design & Construct contractors and, in particular, at the 2015 Court of Appeal decision in MT Højgaard A/S v E.ON Climate.  On 3 August 2017, the Supreme Court handed down its decision in the Højgaard case.

Background

The claim concerned the Robin Rigg wind farm off the coast of Scotland.  E.ON appointed Højgaard to design, fabricate and install the foundations for 60 wind turbines.  The works were completed in February 2009 and in April 2010 the foundations began to fail.  It was subsequently discovered that the failures were associated with a fundamental error within a document known as ”J101” (an international standard for the design of offshore wind turbines).  Remedial works cost €26.25 million and the litigation was commenced to establish which of the two parties should bear this cost.

The Litigation

The Court of Appeal (CoA) described the contract between the parties as consisting of ”diffuse” documents of ”multiple authorship” which contained ”much loose wording”.  The relevant terms were:

  1. The contract T&Cs imposed a due skill and care obligation on Højgaard, but they also required the foundations to be fit for purpose.  This express FFP obligation was determined by compliance with standard J101 (that contained fundamental errors).
  2. A set of Technical Requirements, which were incorporated into the contract, required the foundations to be designed so they would have a lifetime of 20 years.

The TCC held, in November 2014, that the foundations failed because works were designed to the flawed J101.  Højgaard was not negligent in that they reasonably complied with J101 but it was held responsible for the cost of the remedial works due to its failure to comply with the obligation to produce foundations with a 20 year service life.  The CoA overturned the TCC decision on the basis that Højgaard complied with its due skill and care obligation and with J101, and these obligations were stated in the contract to take precedence over the Technical Requirements.

The Supreme Court reviewed the conflicting obligations imposed on Højgaard, namely ”conformity with the prescribed design” (i.e. J101 containing fundamental errors) on the one hand and  compliance with ”prescribed criteria” (i.e. foundations designed to have a lifetime of 20 years).  The Supreme Court concluded from earlier decisions that the courts ”are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria” i.e. the 20 year service life.  It therefore held that Højgaard were required to have  identified that it was necessary to improve on the prescribed design set out in J101 to achieve the criteria, and was thus responsible for the remedial works.

Implications for D&C Cover

The cover under a D&C policy is restricted to negligence.  The Højgaard case is unusual in that there was no finding of negligence and accordingly its liability to a third party for damages would not fall within the Insuring Clause of a a standard D&C wording.

The FFP extensions we reviewed in our June seminar only provided cover for implied obligations not express ones.  The above express FFP obligation in the Højgaard contract to design to J101 would not attract cover under such an extension.  However, the Supreme Court concentrated largely on the performance standard (i.e. the 20 year lifetime) which we consider is synonymous with an express FFP obligation and again would not fall for cover under an implied FFP extension.   Any implied obligation of FFP (which may fall within the cover of the FFP extension) was arguably displaced by the express terms (although the court did not consider this point).  Therefore, it seems unlikely that any of the obligations in the Højgaard case would fall within the normal scope of D&C cover, even with the benefit of a FFP extension. 

This all underlines the importance of understanding FFP obligations, including how they are likely to be construed by the courts and how D&C cover is likely to respond.

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