Inconsistent performance obligations in IP agreements

Summary

In a case involving the failure of foundation structures for two offshore wind farms designed and installed by MT Højgaard (MTH), the UK Supreme Court reversed the ruling of the Court of Appeal and held that MTH was liable for such failure. This was despite MTH having designed and installed the foundation structures in accordance with an international standard referred to in the relevant “design and build” contract which subsequently was found to be incorrect and the cause of the failure.

This case has broader application for agreements containing multiple performance obligations where some of those obligations are tied to agreed standards, specifications or designs, as is typical for IP related agreements across the Life Sciences, TMT and other sectors.

Background

MTH was the successful bidder for a tender from the two appellant companies in the E.ON group (E.ON) for the design and installation of the foundations for two offshore wind farms at Robin Rigg in the Solway Firth. The parties entered into a contract in December 2006 and MTH completed the works in February 2009.

Over the next year or so it became apparent that the foundations were failing, primarily due to a lack of “shear keys” (which reduce fatigue) for the grouted connections for the turbines. The decision not to include “shear keys” was due to reliance by MTH on an incorrect formula in an international standard referred to in the contract for the design of grouted connections in offshore wind turbines (J101 Standard).

The parties agreed to carry out remedial works totalling €26.25m, and asked the court to determine who should bear the cost, E.ON asserting various breach of contract claims against MTH. The Supreme Court agreed with the Technology and Construction Court (reversing the Court of Appeal’s judgment) and found in favour of E.ON, such that MTH was liable for the cost of the remedial works.

Case overview

The contract in question required that the works / foundations be “fit for purpose”, where “fitness for purpose” was defined by reference to various specifications including a document containing technical requirements which was expressly incorporated in (and attached to) the contract. These technical requirements included two performance related provisions such that:

(a) MTH prepare the design of the foundations in accordance with the J101 Standard, and

(b) the design of the foundations shall ensure a lifetime of 20 years.

Whilst the Court discussed whether the second provision (item (b) above) was a warranty as to the life of the foundations or a contractual term that the foundations would be designed to have a lifetime of 20 years, the Court considered that it was largely irrelevant because the term had been breached by MTH in either case.

Primarily, the Court sought to analyse arguments as to why the second provision (item (b) above) should not be given its natural effect, including that such an interpretation results in an obligation which is inconsistent with MTH’s obligation to construct the foundations in accordance with the J101 Standard (item (a) above), and that this provision was simply “too slender a thread” (as per the Court of Appeal) on which to hang such an important and potentially onerous obligation (given it was contained in an appended technical specification and not the main body of the contract). The Court’s analysis on these points is discussed below.

Inconsistent terms

Dealing with the potential inconsistency between the two provisions, the Court reiterated that reconciliation of inconsistent terms, and the determination of their combined effect, must be decided by reference to ordinary principles of contractual interpretation (referring to Wood v Capita Insurance [2017] 2 WLR 1095), and therefore by reference to the provisions of the particular contract and its commercial context.

Following a review of past cases ranging from shipbuilding to the replacement of Blackfriars Bridge, the Court referred to the law as summarised in Cammell Laird v The Manganese Bronze and Brass Co [1934] AC 402 such that “where a manufacturer or builder undertakes to produce a finished result according to a design or plan, he may be still bound by his bargain even though he can show an unanticipated difficulty or even impossibility in achieving the result desired with the plans or specification”, acknowledging that “[t]hough this is the general principle of law, its application in respect of any particular contract must vary with the terms and circumstances of that contract”.

In this case, where the two provisions potentially imposed different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the Court considered that the correct analysis was that: (1) the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement; and (2) if there is an inconsistency between a design requirement (ie design to the J101 Standard) and the required criteria (ie 20 year lifetime), MTH would be liable for the failure to comply with the required criteria as it was MTH’s duty to identify the need to improve on the design. Whilst this conclusion was supported by terms under the technical specifications within the contract which stated that the requirements (including compliance with the J101 Standard) were “minimum” requirements and that MTH had a responsibility to identify areas where the works required additional or more rigorous requirements or parameters, the Court stated that it would have reached the same conclusion despite these provisions.

Therefore, the Court’s decision here was broadly in line with existing jurisprudence whereby the courts are generally inclined to give effect to the requirement that the contracted works comply with prescribed criteria (loadbearing weight of a ship / lifetime of a turbine, for example) on the basis that, even if the other party / customer has specified or approved the design of the works, the contractor may be expected to take the risk if they agreed to work to a design which would render the works incapable of meeting the prescribed criteria.

Too slender a thread?

The Court rejected the argument that the provision relating to the 20 year lifetime (item (b) above) contained in the technical specification was too weak a basis or “too slender a thread” on which to provide that MTH had liability to warrant that the foundations would survive for 20 years or would be designed to achieve a 20 year lifetime. In doing so, the Court rejected arguments directed towards the fact that the contractual provisions in this case were long, diffuse and multi-authored, and contained ambiguities and inconsistencies, restating that “inelegant and clumsy” drafting of “a badly drafted contract” is not a reason to depart from the fundamental rules of contractual construction. In this case the Court considered that the relevant provision made it clear in its terms that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years.

In addition, it was not relevant that such an onerous obligation was contained in a technical document as opposed to the body of the contract given that the contract clearly stated that the terms of such technical document were intended to have contractual effect, or that the provision in question was “tucked away” within the technical document itself.

Commercial context

Whilst cases in this area have related to the design and build of ships and wind farms or repair / replacement works, the underlying legal principles have wider application to agreements that contain multiple performance obligations where some of those obligations are tied to designs, specifications or industry / international standards. Such performance obligations are typically included within a broad range of IP related agreements across sectors. Examples include:

• Manufacture and supply agreements, which normally include both obligations that the product supplied is fit for use for a certain lifespan, and also that the product has been developed, tested and manufactured in accordance with agreed designs or industry standards (Good Clinical Practice / Good Manufacturing Practice for medicinal products, UMTS for smartphones, etc.).
• R&D, collaboration and joint venture agreements where multiple technologies are being combined or developed, such as for the use of computer systems to increase efficiency of and innovate electronic systems and components, or to digitalise medicinal technology, devices or treatment.
• Longer-term project agreements involving the design, build and ongoing maintenance of complex technological systems, which are common for aerospace, energy and infrastructure projects.

Overall, this case indicates that currently the courts are inclined to find that liability rests with a contractor when performing contractual obligations in line with an incorrect specification, design or standard, even if the other party / customer has agreed these items. This appears to be the case even if the contractor uses due care and professional skill and adhered to good industry practice (as was the case here).

It is, therefore, important to consider carefully the interaction between performance obligations when agreements are being negotiated, especially when dealing with large complex agreements which refer to and incorporate other documents, some of which may appear more technical in nature but could still contain legally binding obligations. Contracting parties should also review all documentation which will form part of the agreement, as onerous obligations are not always found front and centre in the main body of the contract, and can be “tucked away” in other documents which on the face of it may appear less legal in nature.