Neutral citation: SSE Generation Ltd v Hochtief Solutions AG [2018] CSIH 26

NEC contract topics: application of limitation of liability clauses, allocation of risk and liability for defects, enforceability of obligations to correct and remedy defects

Form of contract: NEC2 Engineering and Construction Contract

Main areas of law: scope and impact of joint names insurance clauses

 

Background and the Dispute
SSE Generation engaged Hochtief Solutions under an NEC2 Engineering and Construction Contract to design and construct a hydroelectric scheme at Glendoe, Scotland. The works included a 6.2km headrace tunnel (HRT) running from a reservoir, through the Conagleann Fault Zone (CFZ), to a turbine.

The HRT collapsed in or around April 2009, only four months after take over in December 2008 and before the defects date, which was set 104 weeks post-completion. The collapse was extensive, requiring the construction of a bypass tunnel at a cost of approximately £137 million.

Clause 11.2(15) of the contract defined a "Defect" to include any work not in accordance with the Works Information. The Works Information required a 75-year design life for the civil works and stipulated that erodible rock was to be protected through appropriate support measures such as shotcrete. Hochtief declined to undertake remedial works unless paid, which SSE claimed breached clause 82.1, requiring the contractor to replace loss or damage prior to the issue of the defects certificate.

 

Legal Issues
The central legal issues were:

• Whether the tunnel collapse constituted a "Defect" under clause 11.2(15)
• Whether Hochtief’s liability was limited by Option M, which required only the exercise of reasonable skill and care in design
• Whether the collapse was caused by a defect existing at take over, which would classify it as a contractor’s risk under clause 80.1
• Whether joint names insurance precluded SSE’s claim
• Whether Hochtief was obligated to correct the damage under clauses 43.1, 46.4, and 82.1

SSE argued the collapse was caused by failure to implement required support, thus breaching both the Works Information and the accepted design. Hochtief countered that they had used reasonable skill and care in design and that the risk post-takeover fell to SSE under the contract.

 

Judgement
The Inner House found that the collapse was due to inadequate support measures in the CFZ, particularly the failure to apply shotcrete to erodible rock, which was necessary to meet the 75-year design life requirement. The failure was classed as both a breach of the Works Information and the accepted design, thus constituting a "Defect" under the contract. The court held that the issue was not with the design itself but with the implementation of the design. Since Option M only applied to design defects and not implementation failures, it did not shield Hochtief from liability.

The argument that joint names insurance precluded SSE’s claims was rejected. The court held that the insurance did not cover breaches of explicit contractual obligations to repair and remedy defects.

Hochtief was ordered to pay SSE £107,617,830.94 for the recovery project, £1,000,000 for low availability damages under clause Z6, and additional adjudication-related sums. Interest was awarded at judicial rates. All other expenses were reserved.

 

NEC contract learning points and implications for the construction industry
This case carries substantial implications for those engaged under NEC contracts. The judgment clarifies that:

• Contractors remain fully liable for implementation failures, even where a limitation clause such as Option M exists. Such clauses are limited to design faults only.
• The obligation to meet a specified design life is not merely aspirational; it is an enforceable element of the Works Information. If the works do not meet this requirement, they are defective.
• Contractual obligations to correct defects or repair damage persist and cannot be avoided by reference to insurance arrangements unless clearly stated in the contract.
• The court recognised a distinction between the contractor's obligation to design with reasonable skill and care and the broader duty to construct the works in accordance with the contract. The latter remains subject to a higher standard of fitness for purpose.

For NEC contract users, the case reaffirms the need for precise and thorough compliance with the Works Information. The enforcement of contractual obligations to correct defects and repair works is not curtailed by joint insurance clauses unless expressly stated.