The Inner House in Scotland by majority, allowed an appeal from a first instance decision regarding a contractor's liability for the collapse of a hydro-electric tunnel in Scotland.
SSE Generation Ltd (the employer) jointly engaged Hochtief Solutions AG and Hochtief (UK) Constructions Ltd (the contractor) to design and build a new hydro-electric scheme in Scotland. The dispute arose due to the contractor's refusal to carry out repair works after a tunnel collapse in 2009. As a result, a separate contractor had to be engaged, and SSE sought to recover its losses.
The Inner House overturned the decision at first instance and determined that the contractor was liable for the costs of repairing the collapse which amounted to approximately £107 million.
The decision touches on the ever present debate between obligations of design and obligations of workmanship.
Workmanship versus design and the "Option M" clause
The dispute centred on who was responsible for the cost of the defect under the contract which was based on the NEC2 building contract, and in particular the relationship between clause 80 and secondary option, Option M. The wording of this provision is in similar terms to secondary option clause X15.1 of the new suite of standard NEC4 contracts and therefore the outcome of the case and interpretation of such wording is topical.
Clause 80.1 of the contract provided that at takeover SSE would assume risk for loss or damage to the parts of the works taken over with the exception of loss or damage occurring before the defects certificate was issued due to a defect that existed at takeover (which remained the contractor's risk).
The tunnel collapse occurred after take-over but before the end of the defects correction period due to insufficient protection of sections of the tunnel where there were poor rock conditions. The contractor argued that the contractor was not liable for the cost of repair because under Option M they were not liable for defects that existed at takeover provided that the contractor had used "reasonable skill and care".
The Judge in the first instance found favour with the contractor's reasoning. The contractor had used reasonable skill and care when designing the works and the collapse was an employer's risk event under the contract since no defect existed in the tunnel as that term was defined in the building contract.
Whilst the Lord President in the Inner House agreed with the first instance decision on the contractual limitation of the contractor's liability, the majority (Lords Glennie and Menzies) held that the collapse of the tunnel did result from a defect as defined in the building contract. A defect was defined in the contract by reference either to part of the works not being in accordance the works information; or to part of the works not being in accordance with the contractor's design which had been accepted by the project manager.
The majority were of the view that given the tunnel had collapsed within four months of take-over and there was no evidence of any intervening act after take over, the works were not in accordance with the works information and were defective. In addition, the design that had been accepted by the project manager was for adequate protection to sections of the tunnel where there was erodible rock. The implementation stage required judgment as to which erodible rock needed to be protected, and the precise methodology and engineering judgment used by the contractor to implement the design was not part of the design accepted by the project manager. The contractor was therefore unable to rely on a reasonable skill and care limitation for its design since the defect was not due to the contractor's design (as covered by the reasonable skill and care option M) but due to the implementation of that design. The failure in implementation of the design resulted in the handover of a tunnel that did not have a design life of 75 years. The defect was a contractor's risk under clause 80.
Parties should be aware that the optional NEC clauses limiting a contractor's liability to reasonable skill and care apply to the design of the works and not to the implementation of the design.
What amounts to implementation of design will depend on all the circumstances. Our understanding is that the case will go to the Supreme Court, and in that instance, it will be interesting to see if the Supreme Court provide any guidance on the boundaries between design and design implementation.