I'm interested in…

  • Strategy & Procedure
  • Motor
  • Fraud
  • Disease
  • Catastrophic Injury
  • Commercial Insurance
  • Costs
  • Liability
  • Local Authority
  • Professional Indemnity
  • Scotland

Fitness for Purpose: Light at the end of the tunnel?

In October 2017 we reported on the well-publicised Supreme Court’s decision in MT Højgaard v E.ON ("Højgaard")  which held that a fitness for purpose obligation required the contractor to achieve a particular result –  for the foundation structures to have a “design life” of 20 years.  More recently, this point was again considered by  the Scottish Inner House, Court of Session  in SSE Generation Ltd v Hochtief Solutions AG & Another [2018] CSIH 26, where it brought about an interesting discourse on the application of Højgaard to determine whether the employer or contractor was liable for the remedial works totalling over £100m.     

Background

The case relates to a hydro-electric scheme tunnel at Fort Augustus in Scotland. Hochtief (the Contractor) was instructed by SSE (the Employer) to design and build a tunnel as part of a hydroelectric scheme. The project was completed in 2008, however, shortly after completion and handover to SSE, the tunnel collapsed. 

The parties had entered into an NEC2 Engineering and Construction (ECC) form of building contract.  Clause 80.1 of which identified the Employer’s Risks. These included:

“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 provided that from the start of the works until the Defects Certificate had been issued, risks which are not carried by the Employer are carried by the Contractor.  Option M of the contract also limited the Contractor’s liability for the design to reasonable skill and care. 

The Defects Certificate had not yet been issued at the time of the tunnel collapse.  A dispute arose as to who was liable for the cost of the remedial works of over £100m and one of the key issues formative of this was whether a defect, as defined in the contract, existed at takeover.

The decision of the Outer House

The Outer House held that the tunnel collapse was SSE’s risk as the Employer, as it did not arise from a defect that existed at takeover. Furthermore, Hochtief had been obliged to exercise reasonable skill and care in the design of the scheme and had satisfied that standard.  Option M limited Hochtief’s liability and SSE was left with the costs of the remedial scheme.  SSE appealed the decision. 

The Inner House

The Inner House allowed SSE’s appeal by a two to one majority.

Whether a “Defect” existed at takeover was examined under the two limbs of the contract where it was defined (as): 

 “A Defect is

  • a part of the works which is not in accordance with the Works Information or
  • 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.”

The Works Information provided that the tunnel would comply with the following:

“DESIGN LIFE

The design life of the principal components associated with the scheme are detailed below.  The components provide reliable service without requirement for major refurbishment or significant capital expenditure for the period of time as follows:

  • Civil Works 75 years”

The tunnel was classed as Civil Works. 

Lord Carloway (minority judgment), in examining the first limb of the definition of a “Defect”, considered what the Works Information set out.  He commented on the general requirement to create the tunnel with a 75 year design life - it was not a guarantee of the tunnel’s longevity.  It merely meant that the design was one which, if properly implemented, ought to have produced a tunnel that lasted that long, following the decision in Højgaard.  

In Højgaard there was a two year defects period in which to give notice of any defects, which was not dissimilar to Hochtief’s contract with SSE. However, in Højgaard the defect was a miscalculation in the original design which meant that the design as built could not have lasted for the stipulated life span.  Lord Carloway held that this was different from the situation here - Hochtief’s design for the tunnel ought to have lasted 75 years, at least in the ground conditions then understood to exist.  It is only if an inconsistency between the design and the potential 75 year life can be found that a defect can be said to exist.  The evidence beyond the occurrence of the collapse of the tunnel did not support SSE’s arguments that  the structure as designed was not capable of lasting the 75 years.

As to the second limb, SSE submitted that there was erodible rock that was not shotcreted as it should have been in accordance with the contractual documents (and the design accepted by the Project Manager) – that being the part of the design relied on to prove that a defect existed at take over.  Lord Carloway disagreed with SSE’s contractual interpretation and held that there was no defect at the time of takeover.

Lord Menzies disagreed with Lord Carloway’s judgment and held that limb one of the definition of a “Defect” had been satisfied.  The short answer for why the tunnel collapsed was that there was insufficient support.The simple argument for SSE was that this amounted to a defect as it was not in accordance with the Works Information.  There was no suggestion or submission of an intervening event after takeover which might have caused or contributed to the collapse.  SSE had the benefit of a two year defects period to determine whether the tunnel had a design life of 75 years, which is consistent with the approach taken in Højgaard.  It was important that the assessment of the design life is made at the defects date and not before.  Lord Carloway had relied on the experts’ views at the time of the design to determine the design life.  No foresight is required because as at the defects date there is the benefit of hindsight, the tunnel having already collapsed.  

A “Defect” had been established under the second limb of the definition as what was provided was not in accordance with the design as accepted by the Project Manager.

Lord Glennie agreed with the approach taken in Højgaard, holding that Hochtief had complied with its obligations if they handed over the works in such a condition that they were designed to last 75 years, and SSE would have the two year defects period within which to determine whether the works complied with the 75 year design life.  Lord Glennie considered that SSE’s argument was simple and attractive – the tunnel, as built, did not have a design life of 75 years, having collapsed within six months.  Quite simply, this proved that it was not in accordance with Works Information, and this amounted to a defect. 

Option M did not assist Hochtief as it limited its liability for the design of the tunnel.  In this case  it was the implementation of that design (regarding the shotcrete and erodible rock) and not the design itself, so Option M was not applicable.

Lord Glennie held that this failure to implement the design satisfied the second limb of the definition of a “Defect”.  Hochtief advanced a similar argument as was used in Højgaard that the provision which applied to the shotcrete and erodible rock was one isolated provision in a technical document.  This argument was rejected on the basis that it was in fact the provision that identified the steps taken in relation to the erodible rock.  Even if it were but one isolated provision it should not be disregarded and was still part of the accepted design.  As in Højgaard, the argument was rejected. 

Hochtief was held liable for the cost of the remedial works.

Comment

Rather than adding clarity post Højgaard, the decision in SSE v Hochtief creates further confusion and debate on an already uncertain topic.  It seems likely that an appeal to the Supreme Court will follow, given (1) the sums at stake; (2) the decision raises further issues on the delineation between design and workmanship; and (3) the concentration and varying views on the definition of 'Defect’.

For construction professionals, the careful drafting and consideration of all contractual documents, including references to subordinate documents, remains paramount.  The implications of this should be noted in the context of professional indemnity insurance where policies usually contain an exclusion for cover for liability beyond that of negligence. 

Contact

For more information please contact Steve Oates, Partner (0121 516 7510)  Steve.Oates@dwf.law or Eliza Kwok, Solicitor (0121 516 7444) Eliza.Kwok@dwf.law

Share your views

Please complete your details below to share your views. All comments are moderated and only your name and comment will be visible.

Your Comment

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Top