A design and construction contract will usually oblige the contractor to design and build in accordance with the specification and perform that work to an agreed standard. These obligations may be limited by a provision which imposes a duty on the contractor to perform its obligations with “reasonable skill and care”. However, as the recent Scottish law case of SSE Generation Ltd v Hochtief Solutions AG and Another[i]illustrates, there are costly consequences for contractors,and potentially their insurers, of agreeing to meet such obligations, without ensuring that the limitations on their performance, including the duties imposed, extend to all relevant obligations.
SSE Generation Ltd (“SSE”) contracted Hochtief Solutions AG (“Hochtief”) to design and construct a new hydro-electric scheme in Scotland.
The Works Information, which formed part of the contract, provided that the civil works were to have a design life of 75 years.
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Within six month of takeover of the works by SSE, a tunnel, that formed part of the civil works, collapsed.
Under the contract, Hochtief was liable for loss or damage occurring within two years of takeover provided that it was caused by a defect which existed at takeover.
A defect was defined in the contract as “(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 Contractor’s design which has been accepted by the Project Manager.”
Hochtief claimed that their liability for defects was limited because they were under a duty to only use “reasonable care and skill” in complying with the design. As a result, they refused to carry out the rectification work without payment, and SSE instructed a third party, Royal BAM group, to construct a bypass tunnel.
SSE commenced proceedings to recover the costs of the remedial project, some £130 million (more than the original cost of the project), from Hochtief.
Scottish Outer House, Court of Session Opinion
The first instance judgment[ii]found that Hochtief had acted with reasonable skill and care in complying with the design, which in the Court’s view “placed an important brake on liability” such that Hochtief was found to have not guaranteed the works but instead to have accepted the lower obligation of reasonable skill and care. It also found that the tunnel collapse was not caused by a defect that existed at takeover but that Hochtief was in breach for failing to carry out the rectification works. SSE was awarded £1 million to reflect the period when the hydro-electric scheme was out of operation.
The judgment, together with an earlier decision[iii] regarding the effect of a joint insurance policy, was appealed.
Scottish Inner House, Court of Session Opinion
The majority judgments on appeal considered that as the collapse had occurred after takeover the risk would lie with SSE, unless it was due to “a defect which existed at takeover”. The Court found that there was a defect under both limbs of the defect clause because: (1) the tunnel had not met the design life of 75 years; and (2) the design had provided that any erodible rock had to be shot creted and this had not happened. As there was no evidence of an intervening event that would have caused or contributed to the collapse, the Court concluded that the defect must have existed at takeover.
It also considered that while Hochtief was under a duty to use reasonable skill and care to ensure that it complied with the Works Information, this did not absolve Hochtief of liability because the tunnel had collapsed as a result of the implementation of the design and not due to its design and the duty did not apply to the implementation of the design. Hochtief was therefore liable for the cost of the rectification works.
In considering the design life, the Court acknowledged that there is no universally recognised definition of design life so instead looked at the recent decision of the Supreme Court in MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd & Others[iv]. In that case the contract required, by reference to an industry standard, a design life of 20 years without replacement for the foundations of offshore wind turbines. The Supreme Court found that the design life requirement did not amount to guarantee that the foundations would last 20 years without replacement but that they had been designed to last for 20 years without replacement. In line with that decision, the Scottish Court considered that the assessment of whether the component had the requisite design life and offered reliable service fell to be assessed on the defects date (or at the end of the warranty period), and not before, and it was for the employer to show that this had not been achieved. The assessment could include showing that the component would require major refurbishment or significant capital expenditure during its design life, which formed part of the definition of reliable service. In both Hojgaard and SSE a detailed assessment was not required because the components had failed within the defects period and therefore it was abundantly clear that they did not have the requisite design life.
The Court also looked at whether the existence of a joint names construction all risks insurance policy would prevent a claim against the contractor. The Court considered the decision in Gard Marine and Energy Ltd v China National Chartering Company Ltd[v]that a requirement for joint insurance can give rise to an implied term that the parties are not permitted to make claims against each other. In this instance, however, the Court found that such a clause should not be implied because there was already an express indemnity clause in the contract dealing with liability between the parties. In any event, the Court considered that the implied term would not prevent SSE from succeeding in its claims because the insurance did not cover breach of contract by Hochtief in failing to carry out their specific obligations under the contract.
As a Scottish law judgment, this judgment will not bind cases before the English courts but would be considered persuasive. However, the Scottish Court has now granted permission for an appeal to the Supreme Court, although the precise issue(s) to be considered and when the hearing will take place are not yet known.
In both the Hochtief and Hojgaard judgments, the contractors had failed to meet the design life requirements set out in the contracts and as a result were found liable for substantial damages, which may have been picked up by their insurers. In order to understand the potential risks for contractors and their insurers, a detailed review of the whole contract, including the specification and technical requirements,should be undertaken prior to commencement of the works in order to identify the obligations of both parties and determine, where there are competing requirements, the higher standard that they should satisfy and the extent of any limitation clause. This should also be conducted against the insurance coverage that will be put in place.
As to the design life warranties, contractors and their insurers are no doubt relieved that they are not on the hook during the entire design life for components which fail, but should be aware that if the employer can demonstrate during the defects period that the component is likely to fail during the design life, this will be sufficient to show that the design life has not been met under the terms of the contract. The precise terms of the contract may reduce the comfort that contractors can otherwise obtain from agreeing to perform the works with reasonable skill and care.
Haynes and Boone CDG, LLP
[i] CSIH 26
[ii] CSOH 177
[iii] CSOH 92
[iv] UKSC 59
[v] UKSC 35