In SSE Generation Limited v Hochtief Solutions AG and another decided on 21st December 2016, the Court of Session in Scotland considered a contractor's potential design liability under the NEC Form of Contract. It concluded that the contractor was not obliged to guarantee the performance of the works where Option M (X15) was adopted so that the contractor would not be liable for defects in the works due to his design so far as he proved that he used reasonable skill and care to ensure that it complied with the Works Information.
The court held that to impose strict liability on the contractor would effectively rob Option M of its meaning and make redundant some of the other provisions regarding repair and maintenance.
The court also considered important issues relating to mitigation of loss and expert evidence.
The case concerned the collapse of a tunnel in the Glendoe hydroelectrics scheme in Scotland. Rock material had fallen from a breach in the tunnel over several months, leading to a blockage.
The employer and contractor had entered into an NEC Option A contract on the basis of a lump sum fixed price. The contractor provided the methodology for excavation and rock support. After the collapse occurred, the employer brought in another contractor to carry out remedial works on the basis of an NEC Option E (Cost Reimbursable) Contract. This was subsequently converted to a Fixed Price Contract to limit the escalation in costs after finalisation of remedial design.
The defects had come to light after the employer had taken over the works. Such defects were at the employer's risk unless they were due to a defect which existed at takeover. A defect is defined as part of the works which is not in accordance with the Works Information. The employer contended that the requirement in the Works Information to "provide reliable service without requirement for major refurbishment or significant capital expenditure" indicated that the contractor's design must ensure the requisite level of support to prevent the erosion of erodible rock during operation.
However, the contractor relied on Option M within the NEC contract (X15 in the standard form) which said that the contractor was not liable for defects in the works due to his design so far as he proved that he used reasonable skill and care to ensure that it complied with the Works Information.
The Decision on Liability
The court held that Option M could not be interpreted as a guarantee of the works by the contractor. The "familiar and lesser" obligation of reasonable skill and care was the test. If the employer was correct, this would impose an overarching obligation of fitness for purpose and therefore strict liability on the contractor and rob Option M of its meaning.
The court also held that the overwhelming weight of the contractual provisions called for the exercise of engineering judgement in considering the tunnel support methodology. Isolated provisions which might indicate mandatory levels of support by requiring erodible rock to be shotcreted (by using sprayed concrete rather than leaving the tunnel unlined) did not impose a strict duty on the contractor. It had to exercise judgement in considering the integrity of the tunnel and assess the presence of any erodible material.
The employer's approach to liability was criticised as relying on hindsight and overlooking the collaborative approach to the design process. This had led to the approach to rock classification and support being agreed, making sure that the employer only paid for necessary support.
Mitigation of Loss
The court also considered the position, had it been wrong on liability. The contractor maintained that the employer had failed to mitigate its loss. However, the court relied on the case of Banco de Portugal (1932) where it was held that the duty on a party adopting remedial measures for breach of contract was to act reasonably in the adoption of such measures. If it did, there could be no criticism, merely because the party in breach could suggest that other measures less burdensome to him could be taken.
The court analysed the progress of the remedial works. Initially, these had been carried out on an NEC option E contract, providing for a cost reimbursable approach. The court did not criticise this approach, noting that the employer had to act quickly to recover its assets. It had also acted on the advice of its professional consultants and the remedial works contractor was only prepared to contract on the basis of Option E.
The remedial costs were monitored on an "exacting" basis and it was not appropriate to compare the price of the original works with those of the recovery project. The court concluded that Option E was the only appropriate model for the recovery project. Indeed, the original contractor had itself proposed to carry out the remedial works on that basis.
The court also noted the usefulness of adopting a concurrent evidence or "hot-tubbing" approach to the hearing of expert evidence. This had been adopted for the tunnelling evidence and the court described it as "an extremely valuable exercise and one which [the judge] would repeat in suitable future cases". Instead of hearing complex testimony weeks apart, the court said that it was able to hear the different opinions at one and the same time and the experts were also able to challenge one another's position which bought the topics into sharp focus. The experts rose to the challenge by providing crisp answers.
The issue of whether a contract provides for the exercise of reasonable skill and care in design or ensuring fitness for purpose has been regularly considered by the courts and, at present, the Højgaard case on this point is pending before the Supreme Court.
The issue here was not dissimilar to Højgaard. There were certain contractual provisions which might (in the court's view somewhat tenuously) indicate that a fitness for purpose obligation was applicable but, looking at the contract as a whole, and the "overwhelming weight" of the contractual provisions, the court concluded that they called for the exercise of engineering judgement. Taken as a whole, the effect of the contract precluded the mandatory requirement that the employer contended for.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2017