Jordan ... looking into contract models.
EPC model faces challenges
01 October 2017
STUART JORDAN* highlights the issue of conflicting technical specifications and the repercussions it has had on a particularly challenging project in the energy sector.
In the Gulf region, the EPC (engineering, procurement and construction) contract model is one of life’s certainties: All risk is placed in a strong box. We have faith in the contractor’s ‘full wrap’ responsibility for project delivery. The certainties in this model have been challenged by two factors which are prominent right now in our industry.
First is the increasing ambition of engineering projects, particularly in the energy sector where – for example – deepwater offshore work (in oil and gas or renewables) is the new frontier. This work presents greater challenges in the form of novel engineering solutions, new construction methods and harsh working conditions. Frontier projects like these operate closer to the limits of feasibility and are bound to be more prone to failure.
Second (and no doubt in recognition of these challenges), owner teams usually express EPC technical requirements in several different ways. These might include:
• Exercise professional skill and care in the design;
• Build with good workmanship;
• Use new and suitable materials;
• Apply ‘good engineering practice’;
• Ensure ‘fitness for purpose’ of the completed works;
• Ensure a minimum ‘design life’;
• Comply with an existing Feed (front end engineering and design);
• Comply with industry standards;
• Meet specified performance guarantees;
• Give minimum component warranty periods.
Some obvious questions arise when a failure occurs: Are these technical requirements consistent with one another? Some are about inputs (competence, effort, industry standards) and some are outputs (fitness for purpose, design life). Can they somehow undermine each other such that a contractor might avoid liability?
Some high-profile disputes have examined these questions recently. The most prominent of these is MT Hojgaard A/S v E ON Climate and Renewables in which the UK Supreme Court last month delivered its judgment. We don’t routinely report on court decisions, but this one deals with situations that we encounter often in the Gulf region.
The background: In 2006 E ON awarded a contract to MT Hojgaard (MTH) to design, manufacture and install foundations for wind turbines at the Robin Rigg windfarms, offshore Scotland. Allowing for different wording, the contract included all of the above-listed features. The most important of these, in the dispute, were in Clause 8.1:
• A requirement to carry out the works in a professional manner in accordance with modern commercial and engineering design… and with internationally recognised standards.
• A requirement that the completed works would be “fit for its purpose as determined in accordance with the specification using good industry practice”.
‘Fit for purpose’ was defined, slightly unusually, as “fitness for purpose in accordance with, and as can properly be inferred from, the employer’s requirements”.
The employer’s requirements included the technical requirements; part of which (para 3.2.2.2) required the following:
• That MTH prepare the detailed design of the foundations in accordance with J101, a published international standard for offshore turbine design; and
• That the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement.
The introduction to the design basis stated:
• “It is stressed that the requirements contained in this section and the environmental conditions given are the minimum requirements of [E ON] to be taken into account in the design. It shall be the responsibility of [MTH] to identify areas where the works need to be designed to any additional or more rigorous requirements or parameters.”
The failures
Following completion of the works, the publishers of J101 issued a warning in September 2009 that it contained an error which overstated the strength of grouted connections in foundations by a factor of ten. This had been discovered following a failure of grouted connections on another wind farm. In April 2010, failures at Robin Rigg started to become apparent. E ON and MTH worked out a remedial strategy and agreed the cost of it, leaving for later the question of liability.
The dispute
The core of the dispute was about whether there is a conflict between the two parts of technical requirements para 3.2.2.2 (J101 v/s a 20-year design life) and if there is, which should prevail.
Apart from para 3.2.2.2, J101 was referenced elsewhere in the technical standards, including in relation to design of grouted connections. It was also one of the ‘internationally-recognised standards’ mentioned in Clause 8.1 and, for good measure, ‘good industry practice’ was defined to require the contractor to act “...in a manner consistent with recognised international standards”, which would include J101. Even ‘fitness for purpose’ was defined, ultimately, with reference to J101.
Relying on this, MTH argued that the works specification had been complied with (by the use of professional skill and care, adherence to good industry practice and compliance with J101) and that any 20-year warranty (if it existed) was impossible to achieve because of the error in J101. In other words, the specification, read as a whole, was in conflict with itself.
E ON argued that MTH was in breach, regardless of all other matters, for its failure to design the foundations as per 3.2.2.2 “to ensure a lifetime of 20 years without planned replacement”.
By the way, I wonder whether MTH considered pointing out that this provision doesn’t exclude unplanned replacement!
The decision
The Supreme Court’s decision was unanimously in favour of E ON. The court concluded that there was no need to decide whether there was a ‘20-year warranty’ on the works, although its preferred interpretation was an obligation to design in order to ensure a 20-year service life.
The court noted (as above) that the design basis introduction stressed that the technical requirements were merely the minimum requirements. Where there are inconsistent provisions, they decided that “the more rigorous or demanding of the two standards or requirements must prevail”.
The court, therefore, decided that there was no conflict within para 3.2.2.2 and that its meaning could be found using established principles of contractual interpretation. The judgment cites a string of cases in which a contractor was obliged to bring about a prescribed result even where this could not be achieved by the prescribed means, including the prescribed design. In these situations, a contractor is required to examine and improve the given requirements.
Conclusions
The decision is a product of its particular facts, some of which are unusual. It does, at least, follow an underlying principle of EPC contracting which is the proper reliance by the owner on the contractor’s skills and expertise to bring about a particular result. In many jurisdictions, this reliance is the basis of an implied ‘duty to warn’ in relation to deficiencies in the works specification, and an implied fitness for purpose obligation in design-construct contracts.
There is nothing inherently wrong in contracts setting multiple technical requirements although it may look like (and be!) ‘belt and braces’ drafting. The question is whether the contract can be made sense of, and this one could. Contractors will naturally price both the technical requirements and the risk of inconsistencies or incorrect data within them, if they hold those risks.
That said, the contract in this case was criticised for loose drafting, for being of ‘multiple authorship’ and for inconsistencies. This happens where, in particular, the ‘technical’ parts of the contract are never reviewed for their legal impact or for their alignment with the conditions. We are reminded again that all parts of a contract determine legal rights, responsibilities and liability. There are no ‘technical’ and ‘legal’ parts; it’s all legal!
Finally, this case also covered some interesting points on the meaning of ‘design life’ and whether it amounts to a warranty on durability of the works and, if so, whether such a warranty could work alongside contract provisions for ‘final acceptance’ of works. We shall look at these another time.
*Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
