Limiting the contractor's design liability under NEC wording: does it leave you exposed?

10 May 2018

In the Scottish decision of SSE Generation Limited v Hochtief Solutions AG [2018], a first instance decision has been overturned in part, holding the Contractor liable under NEC2 wording for over £108m of repair work arising out of a tunnel collapse at a hydroelectric plant. A key part of the decision turned on a question as to whether the collapse arose as a result of errors in the Contractor's design, or due to the implementation of that design.

We review that decision and its significance.



On appeal, the Inner House, Court of Session has reached a majority decision in relation to liability arising out of the catastrophic collapse of a tunnel in Fort Augustus in Scotland.

Whilst the decision is not binding on the courts of England and Wales, it is likely to be persuasive, particularly as there have been very few judgments on the NEC contract wording.

Background

  • In December 2005, SSE Generation Limited (as Employer) appointed Hochtief Solutions AG (as Contractor) to design and build a hydro-electric scheme at Fort Augustus in Scotland. The scheme included a tunnel of over 8km running from a reservoir at the head of Glen Tarff, to Loch Ness.
  • The contract was based on an amended form of NEC2 Option A (lump sum), including Secondary Option M (which operated to limit the contractor's liability in respect of its design).
  • In April 2009, within a few months of take over, the tunnel suffered a major collapse.
  • The Employer instructed the Contractor to carry out remedial works under the contract. After some correspondence, the Contractor refused on the basis that it was not liable under the contract for the cost of those works.
  • The Employer appointed other contractors to carry out the remedial works.
  • Having incurred around £137m on those works, the Employer pursued a claim.

The Dispute

The dispute is complex and multi-faceted, with a series of appeals and cross-appeals. On the primary issue of liability it was held - at first instance - that the collapse did not result from a defect that was in existence at take over and that, as a result, the Contractor did not need to foot the bill. The Employer appealed.

For the reasons explained further below, the appeal on this issue was allowed - by a majority of the Inner House, Court of Session - and the Contractor was ordered to pay in excess of £108m, plus interest.

The Contract

The key clauses included clauses 80.1, 81.1 and 83.1, plus Secondary Option M.

  • Clause 80.1 provided as follows: "80.1 The Employer's risks are … Loss of or damage to the parts of the works taken over by the Employer, except loss or damage occurring before the issue of the Defects Certificate which is due to ... a Defect which existed at take over…"
  • Clause 81.1: "The Contractor's Risks … From the starting date until the defects certificate has been issued the risks which are not carried by the employer are carried by the contractor."
  • Clause 83.1: "Each party indemnifies the other against claims … due to an event which is at his risk".
  • Option M:

    "Limitation of the contractor's liability for his design to reasonable skill and care

    The contractor's design M1

    M1.1 The contractor is not liable for defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure that it complied with the works information."

The Decision on the Defects issue

The Court addressed the arguments on this point in three stages:

  1. Did the collapse of the tunnel arise due to a Defect (as defined under the Contract)?
  2. If so, was that Defect present at the time of take over?
  3. If so, was the Contractor protected by Option M?

Did the collapse of the tunnel result from a Defect?

In the period following take over, the risk of loss or damage to the works rested with the Employer - unless that loss of damage arose before the issue of the Defects Certificate and was due to a Defect that existed at take over. It followed that, if the collapse did not result from a Defect (as defined), the event could not fall within the exception and would remain at the Employer's risk.

There are two limbs to the definition of Defect in NEC2 (clause 11.2(15)), either: (1) a part of the works which is not in accordance with the Works Information or (2) a part of the works designed by the Contractor which is not in accordance with (the applicable law or) the Contractor's design which has been accepted by the Project Manager.

The majority agreed that the collapse did result from a Defect, under both limbs of the NEC2 definition.

Defect: first limb

A key part of this consideration related to the specified design life of the civil works, as set out in the works information (which was to be 75 years). In interpreting this provision, Lord Glennie cited Lord Neuberger's approach in MT Højgaard v E. ON Climate & Renewables UK Robin Rigg East [2017] (in that case regarding a 20 year design life requirement), a decision reported on in our article. In that case, Lord Neuberger said that a similar requirement:

" … did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement" [our emphasis]

Lord Glennie's view was that: "Such an interpretation meant that the contractor complied with his obligations if he handed over the works in such a condition; and the employer had the whole of the two year defects period within which to determine whether the Works did in fact have a 20 year design life."

In the other majority judgment, Lord Menzies emphasised that: "The assessment of whether the component had the requisite design life fell to be made at the defects date, and did not require to be made before then". In this case, and by that date: "… it was abundantly clear that the HRT did not have a design life of 75 years, as it had already suffered a catastrophic collapse".

This was therefore regarded as a Defect under the first limb.

Defect: second limb

The majority found that, in order to constitute a Defect under this limb, there must be a disconformity between the part of the works being considered and the Contractor's design thereof which had been accepted by the Project Manager. The Contractor's (accepted) design provided for various counter-measures to be adopted in the event that particular hazards were encountered during construction of the tunnel (of relevance here: the application of shotcrete to identified areas of erodible rock, if not already protected by steel rib supports). The first instance Judge had found that there had been a failure to shotcrete (or provide other protection) in areas of erodible rock and that those parts of the works had thus not been carried out in accordance with the contractor's design (as accepted by the Project Manager). The Court thus regarded this as a Defect under the second limb, and found that it did not matter - at least for these purposes - whether the presence of erodible rock ought reasonably to have been detected and addressed during the construction phase.

Was that Defect present at the time of take over?

As there had been no intervening event between take over and the collapse (which happened well before the end of the defects correction period), the majority found that the Defect must have existed at take over. This therefore fell within the exception stated in clause 80.1 and, in principle, transferred the risk of the collapse to the contractor under that clause and clause 81.1.

Was the contractor protected by Option M?

The Court considered whether, if the collapse had been caused by a Defect present at take over, the Contractor could rely on Option M to avoid liability by proving that it had used reasonable skill and care to ensure compliance with the Works Information?

The Court's answer to that question was 'no'. The majority found that the protection afforded by Option M only related to "defects in the works due to [the Contractor's] design" and so did not apply in these circumstances as the Defect here - the failure to shotcrete or provide other protection to areas of erodible rock - was "… not one of design but rather implementation of that design" [our emphasis].

As a result, the Court found that Option M was not triggered and no consideration as to whether there was a lack of reasonable skill and care was required.

Outcome of the defect issue

The majority of the Court therefore found that the collapse had resulted from a Defect that existed at take over and so the exception within clause 80.1 applied - resulting in risk resting with the Contractor. This rendered the Contractor liable for the cost of the repair work.

Commentary

The finding of the Inner House rendered the Contractor liable for the collapse. The decision in respect of the first limb, regarding design life, was consistent with the decision of the Supreme Court in MT Hojgaard and yet further reinforces the care that must be given to the introduction of such terms (particularly when 'tucked away' in the technical documentation) and as to the significance that will be placed on specified design lives.

The view expressed in respect of the second limb (and the associated inability to rely on the protections contained in Option M) drew a distinction between the design itself (the document that was 'accepted' by the Project Manager) and its implementation. Given that the implementation of the design itself involved the exercise of skill and judgment (work that the Judge at first instance found had not been done carelessly), the distinction might well have come as an unwelcome surprise to the Contractor. One speculates that this issue, in particular, may warrant a further appeal to the Supreme Court.

In the meantime, the terms of Option M (and their equivalents in NEC3 (Option X15) and NEC4 (X15.1)), clearly leave room for argument about the ambit of the protection that it affords. More robust Z-clauses may well be contemplated, perhaps by seeking to make it clear that all design decisions are protected in this way and not simply those recorded in formal design submissions.

If you have any queries on this or any construction issue, please contact Daniel Wood.


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