Design defect disputes in renewables sector causing continued uncertainty

Developers and contractors continue to question the extent of their design obligations amid continuing uncertainty about liability for defects.

It was hoped a 2017 Supreme Court ruling in a dispute between MT Højgaard and E.ON concerning design defects, would resolve uncertainties around design liability, but clarity on these issues remains elusive.

In the MT Højgaard case, the Supreme Court found that a contract can contain both fitness for purpose and 'reasonable skill and care' obligations. The court said that a MT Højgaard's fitness for purpose obligations, in the form of a warranty that the offshore wind farm it was building would have a service life of 20 years, took precedence over less onerous obligations to use reasonable skill and care and adhere to industry standards.

Since the decision there has been some pushback against agreeing fitness for purpose obligations in the construction supply chain.  Although even if a “reasonable skill and care obligation” is agreed, cases dating back over four decades have shown that can still require a high standard of performance, if a professional person undertaking the design should have identified the issue which caused the design failure.

During the cut and thrust of negotiations often compromise wording is agreed. If an express fitness for purpose obligation isn’t accepted, Employers will often seek commitments from contractors to achieve specified performance requirements, such as a design or service life. It is this more sophisticated approach to design risk allocation which is likely to be creating continued uncertainty.

An absolute warranty obligation such as one which requires the works to be fit for purpose, tends to be obvious as it usually requires an output to be achieved, which is defined by the purpose or performance standard described. If you don’t achieve the specified output, be that an identified purpose or standard, you are liable, whatever the reason.

Similarly, a true reasonable skill and care obligation is generally easy to spot. It works on an input basis, requiring you to carry out a design based on the knowledge available at the time, but if the design fails then you will only be liable if your performance fell below the expected professional standard for that type of work.

The difficulties tend to lie in the region between these two positions. The recent cases have not had to grapple directly with this as the contracts have all been found to contain true absolute warranty-type obligations (even though the words ‘fit for purpose’ were not always used).

Obligations which less obviously fall within the description of a fitness for purpose or reasonable skill and care obligation are not as easy to identify.

In the 2018 case between SSE and Hochtief, obligations that on first review might have been viewed as design obligations were in fact regarded as ‘implementation’ of the design, meaning they were workmanship issues.

In a February 2020 decision relating to the construction of a tram depot in Blackpool, the High Court made some further interesting observations about the nature of a warranty to design in order to achieve a particular result – in that case a design life, in circumstances where it was impossible to achieve.

The judge in that case speculated that it might be possible to have a situation where a designer may not be in breach of a design life warranty, if the design life was impossible to achieve due to factors outside of the designers control and which the designer was not required to guard against. The judge contrasted that scenario with one where you were warranting a structure or building would in fact still be standing at the end of the design life, in which case there would be no excuse if the building or structure was not in place.

The point was not central to the decision and no judgment was made, but it illustrates how complex and difficult these issues can be. As parties seek to move away from the relatively straightforward binary positions on design liability, the drafting which so often is a compromise can introduce a level of complexity, resulting in a degree of uncertainty in the contractual design obligations and liabilities.

What often makes things harder is that because of limitation issues, many claims generally have to be brought a lot earlier than the expiry of the stated design life and, as in the Blackpool case, they involve some crystal-ball gazing as to whether the design life is likely not to be met in the future. That was not a problem in the Højgaard case as the wind farm’s foundations failed within the defects period.

As a result, what might have appeared to be a relatively clear and settled position following the Supreme Court’s judgment in 2017, seems to be a nuanced one.

Until the courts provide further guidance, trying to settle on an objective test that can be used in the renewable energy sector to differentiate and understand design risk positions remains an aspiration. These issues are likely to remain a challenge for the renewable energy sector in the months and years to come and continue to require advice from legal practitioners.