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19 October 2017

Standards and contracts collide – lessons for IT services to learn from wind farm design defects

A recent case on the defective design and build of wind farm machinery bases (MT Højgaard A/S the E.ON Climate & Renewables UK Robin Rigg East Limited and another, judgment given on 3 August 2017 Supreme Court [2017] UKSC 59 on appeal from [2015] EWCA Civ 407) is of potential relevance in contracts for other sectors which are reliant on design standards according to international or national standards.

This case has obvious similarities with the way that many outsourcing and IT services or information security contracts are constructed by reference to a technical specification overlaid with more general obligations of fitness for purpose or performance according to good or best industry practice. The case deserves careful reading by suppliers of complex IT and information security services to establish and eliminate possible risk of a similar adverse contractual result.

In the case, wider general design warranties overrode the specific minimum design standards prescribed in the technical standards used for the construction increasing the liability of the supplier.

Facts of the case

The case arose from defective foundation structures for two offshore wind farms in the Solway Firth, designed and installed by MT Højgaard A/S ("MTH"). The defects were discovered shortly after completion of the project. The Judge at first instance found in favour of E.ON ruling that MTH were liable for the defects and although the Court of Appeal unanimously disagreed, the Supreme Court again ruled in favour of E.ON. The court had to look at a complex document set for the design and build of the foundation structures. Jackson LJ's comment in the Court of Appeal that the issue was "how the court should construe the somewhat diffuse documents which constituted, or were incorporated into, the 'design and build' contract" should be viewed.

Facts

In the case, the contract provided that MTH would design the turbines to have a minimum site specific design life of 20 years without major retrofits or refurbishments. The contract specifically provided that the basis of design was a minimum requirement for the design and it was the responsibility of MTH to identify areas where works needed to be designed to additional or more rigorous requirements or parameters. The design principles, in particular paragraph 3.2.2.2(ii) stated "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 minimum standard specified was an international standard J101.

The agreement required MTH to design in accordance with "international and national rules, circulars, EU directives, executive orders and standards applying to the Site". In particular, the works had to be completed in a professional manner in accordance with modern commercial and engineering, design project management and supervisory principles and practices and in accordance with internationally recognised standards and Good Industry Practice and in addition with all legal requirements, with the effect that the works had to be free from defective workmanship and materials and fit for purpose as determined in accordance with the technical specification using Good Industry Practice.

It became quickly obvious that the works would not have a design life of 20 years. The question for the court was whether MTH was in breach of contract despite the fact it had used good due care, skill and accorded with Good Industry Practice and with the specific requirements of standard J101 (which contained an error). The court determined that MTH was liable. On an interpretation of the contract E.ON had 24 months to discover that the foundations were not, in fact, designed to last for 20 years and therefore the cost of remedial works amounting to some £26 million had to be borne by MTH.

The court referred to a number of cases where contracts including two terms, one requiring production of an article in accordance with a specified design and the other requiring the article to meet particular performance criteria and how any inconsistencies were resolved. The court stated (paragraph 45) "In those circumstances in my judgment where the two provisions of section 3 impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis by virtue of paragraph 3.1(i) is that the more rigorous or demanding of the two standards or requirements must prevail as the less vigorous can probably be treated as a minimum requirement." The court noted that the contract was "long, diffuse and multi-authored with much in the way of detailed description in the technical requirements 'and belt and braces' provisions both in technical requirements and the contract". The court still had to interpret these according to normal principles.

Lessons for technology agreements

In many contracts reference to standards are becoming increasingly common, particularly information security standards such as ISO27001 and ISO 27018 (cloud services)and many other more specific environmental and technical standards. Lessons from the case are clear:

  1. Include a clear hierarchy of priority. Does the technical standard constitute a minimum standard eg of information security or the standard that a supplier must work to.
  2. If the contract includes technical specifications or references to standards, how do these interact with general obligations of reasonable skill and care, good industry practice or fitness for purpose. This is where the interpretation of the case became particularly difficult and the adverse result occurred. In many IT services contracts there are general obligations of skill and care as well as obligations to achieve service levels so careful construction is needed to ensure there are no adverse consequences from this.
  3. The case clearly highlights the risk of multi-authored technical standards and legal contracts. This is common in larger technical contracts, therefore significant effort should be made to ensure that these documents are consistent as far as possible and that overlapping standards and inconsistent "belt and braces" terms are not included. It is better for the parties to spend time understanding what the actual technical requirements are to ensure that the resulting design is what both parties expect and therefore issues can be ironed out before contract signature rather than expensive litigation ensuing.
  4. With the impact of GDPR where service providers (processors) are obliged to assist controllers in determining compliance with technical and organisational standards. There are additional risks in relation to joint and several liability under the Regulation, as well as complexities in the record keeping that must be observed.

The case therefore deserves careful study and interpretation and/or consideration alongside GDPR compliance programmes to ensure that all the good work done in preparing policies, procedures and standards is not lost by unintended or loose contractual drafting where customers seek to transfer risk according to generalised obligations of skill, care or performance.


This article was written by Mark Bailey. For more information, please contact Mark on +44 (0)20 7427 6519 or at mark.bailey@crsblaw.com.

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