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Between a fault and a hard place — again

Just over a year ago, we explored what should happen if a defect is discovered in a construction project soon after completion.

You can read that blog post here.

As part of that discussion, we looked at the Glendoe hydro electric scheme in the Highlands where a tunnel collapse shortly after completion raised the question of who was liable for the remedial costs.

At the time — in this dispute between SSE Generation Ltd and Hochtief Solutions AG arising out of the NEC2 ECC contract — the court found that the contractor had exercised reasonable skill and care in the design of the works, and wasn’t liable for the costs of rectification.

That decision left SSE with the £100m plus bill to pay for the remedial works. Unsurprisingly, they took the case to appeal.

That’s where we pick up the story again.

In the Inner House of the Scottish Court of Appeal, Lord Glennie commented that the question of whether or not the cause of the collapse a few months after handover was a “defect” was not one that should be answered in the real world but, instead, in “the world of contractual interpretation.”

In the first round of litigation, SSE was largely unsuccessful because the judge there found that the design of the head race tunnel (the HRT), where the collapse occurred, had been carried out with reasonable skill and care, and therefore Hochtief could rely on “Option M."

Option M — largely equivalent to the NEC3 ECC Option X15 clause — states “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 Inner House over-turned the effect of the original judge’s decision on appeal.

The real twist in the story (so far!) was that the Inner House managed to over-turn the decision whilst agreeing with the original judge that the design had been carried out with reasonable skill and care.

Fault in implementation

The Inner House took the view that the design process — presumably conducted at a drawing desk in an office — had been carried out with reasonable skill and care and was therefore without fault.

It was when that design was taken to site that the problems arose.

That design was not, in the Inner House’s view, implemented correctly. That fault in implementation meant that the Option M clause wasn’t relevant and therefore Hochtief had no contractual basis for excluding liability.

In principle, that rationale sounds sensible and logical.

In “the real world” however, the rationale may raise a few eyebrows amongst design and build contractors because it draws a distinction between what you might call desktop design decisions and on-site implementation decisions.

Both dictate what should be constructed on site.

The Inner House has, however, decided that one is a design decision, and the other is not.

On the Glendoe project, the contractor’s design solution for the HRT (as accepted by the project manager) essentially boiled down to classifying whether or not the tunnel, at any given point, was going through an area of erodible rock.

If the rock was erodible, the tunnel was lined. If the rock was not erodible, it wasn’t.

The contractor had not lined the tunnel where the HRT later collapsed. Crucially, it was at that point where the tunnel passed through erodible rock.

The Inner House took the view that the decision not to line at that point was an implementation and not a design decision.

In the context of a generic design and build contract, however, drawing a distinction between pure design and implementation of design decisions may not be at all clear cut.

This may be particularly true for small contracts, such as the construction of one-off houses for private clients, where many decisions may be taken on site as works progress.

What will the Inner House’s decision mean for the ability of design and build contractors to rely upon their professional indemnity insurance policies in connection with decisions made on site that may later prove to be wrong?

It is perhaps wise to leave that question hanging for now.

Given the sums involved — and the fact that the Inner House decision was not unanimous (the Lord President disagreed with his two colleagues on the bench) — my suspicion is that this decision will be appealed to the Supreme Court.

Watch this space.

Jennifer Young

Jennifer was elected chairman in January, 2012, and became managing partner in June, 2020.

Posted, 02 May 2018 by Jennifer Young
Categories: Commercial property | Construction | Litigation