Legal

SSE v Hochtief: lessons on NEC contract interpretation

10 June 2018 | By Sarah Alexander

The collapse of the headrace tunnel in 2009 led to the dispute between SSE and Hochtief

A £100m payout order, following a compensation claim by SSE against Hochtief relating to a 2009 tunnel collapse, has significant implications for drafters of NEC contracts. Sarah Alexander explains.

Sarah Alexander

A recent decision by the Inner House of the Court of Session has provided the construction industry with some rare guidance on the interpretation of NEC contracts.

The ruling on SSE Generation Ltd v Hochtief Solutions AG and Another, which involved a dispute arising from the 2009 collapse of the headrace tunnel at SSE’s Glendoe hydroelectric scheme in the north of Scotland, ordered the contractor to pay out over £100m to the utility client.

SSE was seeking to recover its losses following the tunnel’s collapse, when it was forced to engage a third party after its original contractor, Hochtief, refused to carry out repair works.

A pivotal issue in the decision was the impact of the inclusion of option M in the contract. Under clause 80.1 of NEC2, at takeover SSE assumed certain risks which included loss or damage to the parts of the works taken over.

The exception to this was loss or damage occurring before the defects certificate was issued due to a defect that existed at takeover. Under clause 81 of the contract, this was a contractor’s risk.

However, option M provides that: “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.”

SSE’s position, when the case was heard at first instance in 2015 and 2016 by Lord Woolman, was that a defect did exist before takeover – as a result of Hochtief’s failure to install the requisite level of support in the tunnel.

In response, Hochtief argued that, under option M, it was not liable for defects which existed at takeover – provided that it had used reasonable skill and care. Lord Woolman agreed, stating that in his view option M “placed an important brake on liability. Hochtief did not guarantee the works. Instead it accepted the familiar and lesser obligation of ‘reasonable skill and care’.”

Turning to the appeal on this point (among others), which was heard in late 2017, Lord Glennie expressed the view that Lord Woolman had confused two separate points. Option M only operates as a brake on liability for defects in the works due to the contractor’s design.

The first step is to consider if there is a defect. If a defect is established, the next step is to consider whether it is one for which the contractor is liable – whether there has been a failure to use reasonable skill and care to ensure the design complied with the works information.

Lord Glennie concluded that although there was a defect, it was not due to the contractor’s design of the works, but instead resulted from how the design had been implemented. In those circumstances, option M did not engage, and the defence of having used reasonable skill and care to ensure that the design complied with the works information was not therefore available to Hochtief.

As a result, the court found Hochtief liable for the cost of the repair works.

Given its value – more than £100m – and that the majority in the inner house disagreed with Lord Woolman’s first instance decision, there may yet be more to come from this dispute. However, until such a time that the dispute is looked at by the Supreme Court, what can parties take away from this recent decision?

Although this dispute may concern the provisions of NEC2, clause X15.1 of NEC4 is similar to option M, so this judgement remains widely relevant.

When identifying the design element of any works, contract drafters ought to consider carefully the distinction between where the design ends and where actions to be taken in implementation of the design may begin.

Sarah Alexander is a senior associate at law firm Dentons

Comments

Thanks Sarah,

Very interesting argument put from both parties, and felt compelled give my comments.

Irrespective of Hochtief having accepted design and having knowledge of the defect and risks, how the design was implementation is still predicated on the design, hence they bear certain liability under the contact. However Hochtief were hard done by SSE under such terms set out in the contract, and SSE should bear some liability under clause 81 of the NEC 2 contract. Stipulating such liability at the contractor’s risk may be subject to interpretation as existing defects can be attributed to a certain risks, and as such should not have to be borne by the contractor only but as well as the client, SSE in this case.

Princewill , 11 June 2018

Sarah well done. Very much a landmark pointer you have shown us all

Adetokunbo Odunlami, 11 June 2018

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