Kirsti Olson and Sarah Alexander describe a case in which the court ruled that use of reasonable skill and care does not amount to a ‘get out of jail free’ card
Only a handful of decisions from the UK courts consider the interpretation of NEC contracts. Given how widely the NEC suite is used, any guidance on the interpretation of the core and optional clauses is to be welcomed.
A recent decision of the Inner House of the Court of Session, namely SSE Generation Limited vs Hochtief Solutions AG and another, considers a number of key NEC2 provisions.
The dispute arose out of the collapse, in 2009, of the headrace tunnel built by Hochtief at SSE’s Glendoe hydroelectric scheme in the North of Scotland. Hochtief refused to carry out repair works, so a separate contractor had to be engaged, and SSE was seeking to recover its losses. We were fortunate to be able to sit in on the majority of the court hearings in this case.
Although the decision covers a number of interesting points, a pivotal issue is the impact of the inclusion of Option M in the contract.
The majority considered the collapse of the tunnel to be at the contractor’s risk
To explain, under clause 80.1 of the contract, at takeover SSE assumed certain risks. This 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.
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.”
When the case was heard by Lord Woolman in 2015 and 2016, SSE’s position was that a defect before takeover did exist. This was due to Hochtief’s failure to install the requisite level of support in the tunnel. In response, Hochtief argued that under Option M of the contract it was not liable for defects that existed at takeover provided that it had used reasonable skill and care. Lord Woolman agreed with Hochtief. He made no specific finding on whether there was a defect because 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’.”
During the appeal in 2017, SSE’s primary position was that Lord Woolman had erred by regarding Option M as “overarching”. Hochtief argued that inclusion of Option M turned the contract into one in which it would have no liability for defects in its design if it could prove that it used reasonable skill and care (in line with the reasoning of Lord Woolman).
On a 2:1 majority (with the Lord President dissenting), the Inner House found in favour of SSE. 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. First one has to consider if there is a defect. Only then can it be considered whether it is a defect for which the contractor is liable – that is, whether there has been a failure on the contractor’s part to use reasonable skill and care to ensure the design complied with the works information.
Lord Glennie concluded that there was a defect but that it was not due to the design of the works. The design required erodible rock in the tunnel to be identified and shotcreted or otherwise supported. The problem was not with the design, but rather with how the design had been implemented. In those circumstances Option M did not engage. 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. Lord Menzies took a similar view. The majority considered the collapse of the tunnel to be at the contractor’s risk. Option M is not therefore a “get out of jail free” card for a contractor.
Many judicial opinions arise from disputes which are so fact specific that they are unlikely to have far-reaching ramifications. This dispute concerned NEC2. We are, of course, now on to NEC4. However, clause X15.1 of NEC4 is in similar terms to Option M. Therefore this judgment remains widely relevant.
Future contract drafters should bear in mind, when identifying the design element of any works, that they should consider carefully where the design ends and where actions to be taken in implementation of the design may begin.
We now have four of Scotland’s judges in disagreement on what the outcome of this case should be. Although the bill for the remedial works currently sits with Hochtief, it seems likely that we have not heard the last of this dispute.
Kirsti Olson is a partner and Sarah Alexander a senior associate at Dentons