The United States has just joined the offshore wind community with the commissioning of the Block Island Wind Farm in Rhode Island. As this community continues to grow, any decision of a common law court that provides guidance on the interpretation of contractual terms, or of the application of established common law to this new and fast-growing industry, is welcome. A recent decision by the UK’s Technology and Construction Court (TCC) contains important guidance on “fitness for purpose” obligations in a supplier contract and how these obligations apply to an offshore wind project.
Fluor entered into a contract with Greater Gabbard Offshore Winds Ltd. (GGOWL) to supply the foundations and infrastructure necessary to support 140 wind turbines for the Greater Gabbard Offshore Wind Farm in the North Sea, some 26 kilometers off the coast of Suffolk, England. To ensure the quality of the welds in these massive structures, the contract required that nondestructive testing (NDT) be carried out on the foundation monopiles, which were in turn supplied by Shanghai Zhenhua Heavy Industries Co. Ltd. (ZPMC).
Two different scanning patterns can be used to test for weld quality: Scanning Pattern E (spE) and Scanning Pattern D (spD). The NDT provisions in the contract provided that spD was to be used when welds were ground flush, while spE was to be used when the welds were not ground flush. However, the parties did not appreciate at the time that spD was much more effective in identifying transverse cracks than spE testing, meaning that many of the monopile welds passed inspection when they in fact contained imperfections.
When GGOWL received the first shipment of monopiles, it carried out its own tests on some of them, and transverse cracking was detected. Fluor had to retest all the monopiles in the first shipment and repair any cracks found. Two additional shipments were also tested, and transverse cracking was detected in these as well, forcing Fluor (assisted by ZPMC) to carry out an onerous (and expensive) program of testing and repair for all of the project’s monopoles.
Fitness for Whose Purpose?
Fluor subsequently brought a claim against ZPMC in the TCC for the substantial costs incurred in the extra testing and repair work, which it said was necessary as a result of the monopiles not being “fit for purpose”—a legal term broadly meaning “good enough to perform the job it was designed for.” The judge was asked to decide if the monopiles were fit for purpose, and if not, whether this constituted a contractual breach by ZPMC.
Fluor argued that the monopiles had to be “fit and sufficient for the purposes” for which they were specifically intended, meaning onward supply to GGOWL and installation at its wind farm off the Suffolk coast. Fluor contended that these fitness for purpose obligations had to be met upon delivery. ZPMC, by contrast, argued that the test for fitness for purpose was an objective one. The intended purpose of the monopiles was to act as part of a foundation for offshore wind turbines for 25 years. Whether or not the buyer thought that the goods were fit for purpose was irrelevant: Either they were fit, or they were not. (Fluor never argued that the monopiles could not achieve a 25-year service life.)
The court concluded that the transverse cracking discovered by the spD scanning was a result of various failures by ZPMC to maintain correct preheat temperature of the welds. However, it also noted that there was little case law on the objective nature of the fitness for purpose test, and instead referred to the concept of “merchantability.” When considering merchantability, the court felt the key question was, “What is the position if the buyer knows of [the goods’] true condition but is unable to discover, without lengthy investigation, whether or not that condition affects that use?” It found that the buyer “would impose a condition that the necessary investigation is carried out before agreeing to buy the goods.” This effectively amounted to the imposition of a special term in the contract, namely the satisfactory outcome of the investigation.
Not So Objective
The court held that because the cracks were discovered by GGOWL in the first shipment, the only reasonable course available to Fluor was to carry out an investigation into the true condition of the monopiles and establish the extent to which the cracking might affect their performance in service. As far as Fluor was concerned, the monopiles had to be in a condition such that any reasonable purchaser in its position could, without further inquiry or investigation, load them out onto the installation vessels and install them in the sea bed. In the judge’s view, “they were not delivered in such a condition and so in my judgment they were not fit for purpose.” As a result of the cracking, which was attributable to breaches by ZPMC of its obligations, the monopoles could not be installed without further examination, testing, and repair.
All of this was despite the fact that ZPMC had, in fact, carried out testing to the standard required in its contract with Fluor. What mattered was that the monopiles contained cracks that were discovered upon testing by GGOWL. Even though Fluor never argued that the monopiles would, as a result of the cracks, be unable to meet their required service life, the court still found that they were not “fit for purpose.”
For both contractors manufacturing goods and those supplying them to an end user, this case contains important lessons, particularly if, as was the case here, the contractor is uncertain as to whether a flaw detected by the end user affects the use of the goods supplied in terms of “merchantability” and fitness for purpose. ■
—Rebecca Williams and David Wright are senior associates with Watson Farley & Williams LLP in the firm’s London office.