Blog: Lessons to learn from Glendoe Hydro Electric Scheme litigation

Colin Clelland discusses two important points regarding NEC 3 contracts following a recent Court of Session case.

In recent years, the NEC 3 form of engineering and construction contract has increasingly been used to procure major engineering and infrastructure projects. It is, however, a contract that is in many respects very different from other forms of engineering and construction contracts that have traditionally been used to procure such projects.

The Scottish litigation in respect of the collapse of a tunnel at the Glendoe Hydro Electric Scheme has proved to be a valuable source of guidance on the operation of the NEC 3 contract and that continues to be the case. In a recent decision, Lord Woolman has concluded that the costs to remedy the damage caused by the tunnel collapse in a sum of about £114m require to be borne by the employer and not the contractor.

The key lessons from this decision are:

1. For the Employer - This case serves to demonstrate the consequences that arise where the contractor’s design responsibility is limited to that of exercising reasonable skill and care. A designer is not necessarily liable for a “mistake” in the design if the “mistake” is one that could be made by other competent designers exercising reasonable skill and care.

It is also worth noting that, provided that the contractor has exercised reasonable skill and care, the effect of the NEC 3 optional clause X15 will be to exclude the contractor’s liability for design defects both in respect of their contractual obligations to (a) correct or make good a design defect and (b) make good any damage caused by such design defect after the works have been taken over or accepted by the Employer.

2. For the Contractor - Under NEC 3 contracts the contractor is required to make good any damage occurring before the Defects Certificate is issued ie prior to the expiry of the period after completion during which the contractor is obliged to correct defects. This applies even if the contractor has no contractual responsibility for whatever has caused the damage.

Accordingly, even where the contractor disputes that they are responsible for a defect that has caused damage, they are obliged to carry out and fund the cost of works to make good such damage whilst disputes concerning the underlying contractual responsibility for the damage are being considered by the courts.

This leaves the contractor with a difficult choice to make. Are their interests better served by refusing to make good the damage and, therefore, breaching the contract?

While that course relieves the contractor of the short term financial consequences of funding what might be a wholly unknown and uncertain level of cost required to make good the damage, there will, undoubtedly, be longer term consequences that arise from the contractor’s breach of their contractual obligation.

More lessons may follow if this recent decision in respect of the Glendoe tunnel collapse is appealed.