Neutral citation: SSE Generation Ltd v Hochtief Solutions AG [2015] CSOH 92 

NEC contract topics: Risks and Insurance – core clause 8

Form of contract: NEC2 standard form (2nd edition, November 1995)

Main areas of law: Interpretation of contractual insurance provisions, joint names insurance policies, subrogation, indemnity clauses

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SSE Generation engaged Hochtief Solutions to design and construct a hydroelectric scheme at Glendoe, near Fort Augustus. The parties entered into a contract based on the NEC2 standard form (2nd edition, November 1995), supplemented by selected options and Z clauses. The contract sum amounted to £125.9 million. Among other requirements, the contract included a provision for a joint names Contractor's All Risks (CAR) insurance policy, which Hochtief procured. Clause 83.1 required each party to indemnify the other for events at their risk. Clause Z11 capped liability between the parties at the total tender price.

The hydroelectric scheme became operational in January 2009. In August of that year, a major collapse occurred in one of the tunnels, leading to a complete shutdown of the plant. SSE subsequently appointed a different contractor to carry out remedial works, with operations resuming only in August 2012. SSE sought to recover over £130 million in damages from Hochtief, citing the losses suffered due to the collapse.

In response, Hochtief challenged the very basis of SSE’s claim. It contended that regardless of its liability for the collapse, SSE was precluded from seeking recovery through legal proceedings. Hochtief maintained that the joint names CAR insurance policy provided under the contract was intended to be the exclusive recourse for such losses.

 

The principal legal issue was whether the existence of a joint names CAR policy impliedly barred the parties from suing each other for losses covered by that insurance. Hochtief argued that the policy replaced any right to claim damages under the contract for insured events. This position rested on two key arguments.

First, Hochtief contended that insurers are barred from exercising subrogation rights against a joint insured. The CAR policy included a waiver of subrogation, and Hochtief submitted that this supported the view that neither party could make claims against the other for covered risks.

Second, Hochtief relied on the reasoning in the case of Co-operative Retail Services v Taylor Young Partnership (2002), where the House of Lords had considered the implications of joint insurance. In that case, it was suggested that where parties had agreed to a joint insurance arrangement, there was an implied term preventing one party from suing the other in respect of losses covered by that insurance.

 

The court rejected Hochtief’s arguments. It held that there was no automatic or irrebuttable implication that a joint names insurance policy extinguished liability between the contracting parties. The presumption of a bar to litigation between parties to a joint insurance arrangement was not applicable unless explicitly supported by the contractual terms.

Lord Doherty examined the terms of the NEC2 contract closely. He noted the absence of an express term indicating that the insurance was intended to substitute for legal liability between the parties. On the contrary, clause 83.1’s mutual indemnity obligations and Clause Z11’s liability cap both indicated that the parties contemplated potential liability to one another. These provisions suggested the CAR policy and contractual liability were intended to operate concurrently rather than one displacing the other.

A critical finding by the court was that any exclusion of liability would need to be stated clearly within the contractual documentation. Without such an express provision, there was no legal basis for Hochtief’s contention that SSE was precluded from initiating legal proceedings. Consequently, SSE’s claim was allowed to proceed. The judgment did not record a final award of damages but made it clear that the claim could be heard on its merits.

 

This decision serves as a cautionary benchmark for parties entering NEC contracts and relying on joint names insurance arrangements. The ruling affirms that the existence of a joint insurance policy does not, by itself, eliminate contractual liability between parties. If the intent is for insurance to replace such liability, this must be expressly stated in the contract.

 

The judgment also reinforces the need for parties to be precise when allocating risk. Reliance on implied terms or industry assumptions concerning joint insurance can lead to significant and avoidable disputes. Clause 83.1 in the NEC2 form affirms mutual indemnities for risks allocated under the contract, while clause Z11 reflected the parties' recognition that liability may arise and thus needed capping. Both provisions proved decisive in demonstrating that the parties did not intend to exclude claims against each other.

 

Another implication is the importance of understanding the scope and limits of CAR insurance. Despite its name, such a policy may not cover every loss associated with construction defects or damage. Retaining contractual liability allows the injured party an alternative route to recovery in the event that insurance is insufficient or unavailable. The outcome in the case turned on the specific language of the NEC2 contract and should not be taken as a universal principle across all construction agreements. Those advising clients on NEC-based contracts should pay particular attention to the interaction between clauses requiring insurance and those governing risk and indemnity.

 

As a footnote, the dispute between SSE and Hochtief on the Glendoe Hydroelectric Scheme did not end in the above case. If you wish to know about the dispute that developed, please click here.