Rebecca Barrass

In January 2009, energy giant SSE started operating the Glendoe Hydro-Electric Scheme. Opened officially by the Queen later that year, the scheme was cited as one of Scotland’s biggest civil engineering projects, capable of generating power for 250,000 homes every 24 hours. However, by August 2009, the scheme was no longer producing electricity. SSE discovered that the headrace tunnel, used to transport water from the reservoir to the turbine generators had collapsed and was completely blocked rendering the scheme inoperable.

SSE, losing substantial revenue, requested that the main contractor on the project, Hochtief Solutions AG, return to site and carry out remedial works. However, the parties were unable to agree on who should pay or how the works should be done. SSE then instructed BAM to undertake the works. The scheme didn’t operate for the best part of three years, and the remedial works cost a whopping £130m.

The works were governed by an NEC2 form of contract with option M, which stated “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 raised an action in the Court of Session to recover £137m from Hochtief, claiming that Hochtief were in breach of the Works Information and accordingly the collapse was a defect for which Hochtief was responsible. The case was heard by Lord Woolman, who decided that option M put an “important brake on liability”, finding that Hochtief had not guaranteed works and had instead only accepted the lesser obligation of “reasonable skill and care”. In other words, there was no “fitness for purpose” obligation and Hochtief only had to show that it had exercised reasonable skill and care when formulating the design. Ultimately the court found that Hochtief had exercised reasonable skill and care and as such the tunnel collapse was an Employer’s risk event for which SSE had to bear the cost.

Naturally, SSE, not content with the decision, appealed to the Inner House of the Court of Session where the case was re-heard by a panel of three judges, with the decision being handed down last month. Lord Glennie and Lord Menzies disagreed with the decision at first instance. Lord Glennie stated in his opinion: “I consider that the collapse of the tunnel was indeed due to a defect existing at takeover. Further, I consider that that defect was not due to the contractor’s design of the works but rather to the implementation of design. In those circumstances Option M is not engaged, and the defence of having used reasonable skill and care to ensure that that design complied with the Works Information is not available to the contractor.”

The court therefore found that the collapse was the result of a failure of Hochtief in their implementation of the design. Hochtief’s ability to show that they had exercised reasonable skill and care at the design stage did not protect them. The collapse amounted to a defect under the relevant terms of the contract for which Hochtief were liable.

The debate in relation to where, in design and build contracts, design obligations end and workmanship obligations begin has always been a complex one. Arguably the Court’s decision here has simply added to the ambiguity, causing more difficulties for employers, contractors and insurers alike. However, given the sums at stake – not small change, even for our energy and construction giants – it is anticipated that we will see the decision appealed in the Supreme Court. Until then? Parties need to think very carefully about the extent of the obligations they are undertaking pursuant to their contracts. It is not as simple as it might seem at first glance!

Rebecca Barrass is a solicitor at MacRoberts