Is your professional indemnity cover fit for purpose?

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The recent Supreme Court decision in MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59, which ostensibly appears to be a case concerned with the construction of a contract containing competing provisions relating to the standard of care to be met by MT Højgaard A/S (MTH), found the contractor liable despite it having exercised reasonable skill and care.  The result potentially has far reaching implications for design and build contractors and, to a lesser extent, consultants, in relation to a potential gap in their Professional Indemnity (PI) cover.

Background facts

The foundation structures of 60 offshore wind turbines designed and installed by MTH failed shortly after completion of the project. The dispute concerned who was to bear the €26.25 million remedial costs.

MTH contracted with E.ON to carry out the works so that they were fit for purpose (FFP), which was ultimately defined in a way which included adherence to E.ON's technical requirements. These laid out minimum requirements, including that foundations were to have a service life of 20 years and be designed in accordance with an international standard, published by an independent agency, known as J101. 

J101, however, contained a significant error (of which MTH could not reasonably have known), meaning the strength of the foundations had been substantially overestimated to the extent that a service life of 20 years was impossible.

The Court of Appeal found there was an inconsistency between the technical requirements and, in particular, adherence to J101; the design could not be FFP if it adhered to J101. It ruled that the technical requirements annexed to the main contract were “too slender a thread" upon which to hang a finding that MTH warranted the service life of the foundations for 20 years.

Overturning the Court of Appeal, the Supreme Court unanimously restored the TCC's original finding of liability by the contractor, holding that:

  • the reconciliation of contractual terms is to be decided by reference to ordinary principles of contractual interpretation
  • each case must turn on its own facts
  • the courts are generally inclined to give full effect to the requirement that an item complies with the contractually prescribed criteria, even if the employer has specified and approved the design
  • where a contract requires a product to be made according to a prescribed specification, in general the contractor takes the risk of the defective design even if the prescribed specification is defective and the contractor exercised reasonable skill and care
  • in the circumstances, the two provisions or standards were not inconsistent. The more rigorous FFP standard prevailed and the less rigorous provision (to comply with J101) was treated as a minimum requirement.

 

What might this case mean?

MT Højgaard can be seen as further evidence (following cases such as Arnold v Britton) that courts are likely to interpret contractual terms, agreed by parties of equal bargaining position with access to legal advice, at face value – even though the commercial outcome might be surprising to professionals who may have assumed the duty to exercise reasonable skill and care will always be paramount. The reality of the way in which construction contracts are drafted, aptly summarised by the Court of Appeal in this case as being “of multiple authorship [and] contain[ing] much loose wording” and including many “ambiguities, infelicities and inconsistencies”, affords much opportunity for construction professionals to be held to a higher standard of care than they thought they had agreed to. In such circumstances, MT Højgaard shows that it may be difficult to successfully argue that a particular contractual provision should be read down because of the commercial implications arising from inconsistencies in the contract or because onerous terms are less prominent than might be expected. 

There is, therefore, a greater onus on parties to ensure contractual terms reflect their intentions and/or to seek to include a paramountcy provision which makes clear the scope of the design duty, irrespective of the contents of the other contractual documents. There will be competing interests between construction professionals and any employer as to whether any paramountcy provision should be included and, if so, whether it limits the design duty to one of reasonable skill and care, or clarifies that any obligation to comply with a specific design or standard is only a minimum requirement.

In light of MT Højgaard, construction professionals may wish to think very carefully before providing a FFP warranty. FFP obligations require a particular result or compliance with a particular standard/regulation. This is a higher threshold for construction professionals to meet than the negligence threshold, which broadly requires a professional to demonstrate the skill and care to be expected of the reasonable construction professional in the circumstances.

Prior to this case, it was extremely rare, if not unheard of, for a party that had breached a FFP warranty not to have also been found negligent. In view of the court's readiness to accept such an eventuality in MT Højgaard, FFP only claims, i.e. absent an additional negligence allegation, may start to become more prominent. These actions are more difficult to defend (strict obligations naturally are) and are cheaper to pursue. With or without a negligence allegation, this may leave insureds unable to recover losses under their PI policies.

Whilst there are a number of bespoke FFP extensions on the market (which in their own right can be subject to difficult issues of contractual construction), PI policies routinely offer cover for negligence, i.e. the failure to act with reasonable skill and care. Therefore, without an FFP extension, there is usually no cover under PI policies for contractual promises. To the extent the position is not sufficiently clear under the insuring clause, negligence-based wordings typically also exclude cover for warranties and guarantees, including FFP warranties. Such exclusions often contain a 'write back', where cover is provided if the insured has also been negligent. Such cover would arguably not have assisted MTH (whether the claim was also pursued in negligence or not) by virtue of it having seemingly acted with reasonable skill and care. It is easy to see how other construction professionals may find themselves in a similar situation, i.e. in breach of a strict obligation and without insurance cover.

Construction professionals may, therefore, wish to review their PI policies to ensure they are aware of how their cover responds to FFP claims. They may also wish to review their existing contractual liabilities to determine the extent to which they have provided FFP guarantees and, where they have sub-contracted their design obligations, that they have obtained back-to-back FFP guarantees from the sub-contractor/sub-consultant.

By way of a topical practical example, design and build contractors involved in cladding projects may want to review the terms of their appointments to consider whether they have provided any FFP warranties (such as in relation to compliance with Building Regulations) and, if so, how these sit with the cover afforded under their PI policies and any contracts they entered into sub-contracting their design responsibilities.

About the author

Bryn Hodges
Partner, Clyde & Co LLP
020 7876 6511 Email