REUTERS | Adnan Abidi

Design liability under NEC: lessons from the Scottish courts

Choose life. Choose a job. Choose a career. Choose a £128 million hydroelectric scheme in the Scottish highlands, with a five mile tunnel running through the Conagleann Fault Zone, drilled by an enormous machine the locals affectionately nick-named “Eliza Jane”. Choose NEC ECC, Option A, design and build. Choose a tunnel collapse eight months after take over. Choose a dispute over whether the collapse was an employer’s risk event and whether the contractor exercised reasonable care and skill in preparing its design. Choose £130 million of remedial works. Choose the Court of Session, Outer House. Choose concurrent expert evidence, 73,000 documents, and the absence of a key factual witness. Choose life.

So begins Lord Woolman’s judgment in SSE v Hochtief, a case that contains important lessons for employers, contractors and their advisers alike, both north and south of the border:

  • What effect does NEC Option X15 (which limits the contractor’s design liability to reasonable skill and care) have in practice? What risk does the employer retain? Does it matter?
  • What will the court infer from the absence of a key factual witness?
  • How many tunnelling experts can you fit in a hot-tub?

NEC3: To X15 or not to X15?

Lawyers are an excitable bunch. And one of the things they have been getting particularly excited about recently is the distinction between a design and build (D&B) contractor:

  • Guaranteeing that the works will be fit for purpose.
  • Exercising reasonable skill and care in preparing the design.

From an employer’s perspective, the distinction can sometimes seem academic. Surely, 95 per cent of the time, if the design is not fit for purpose, then the contractor has not exercised reasonable skill and care?

This case is a powerful reminder that the distinction is not academic and that it can have profound consequences for both parties.

Under the NEC ECC, the contractor’s core obligation is to provide the works in accordance with the works information. If the works information prescribes a particular purpose, this clause can import a fitness for purpose obligation into the contract. The English courts have also indicated that even if there is no express term, a fitness for purpose obligation might well be implied into a D&B contract (IBA v EMI Electronics and BICC Construction Ltd 14 BLR 9).

For the majority of contractors, the words “fitness for purpose” set alarm bells ringing. They often argue that an absolute design obligation falls outside the scope of their professional indemnity cover and that accepting a fitness for purpose obligation may void the policy.

As a result, many contractors seek to bring their design liability in line with the standard required of professionals, adopting wording along the lines of NEC3 Option X15.1:

“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 his design complied with the Works Information.”

Lord Woolman described this as “an important brake on liability”. But where does this leave the employer? In SSE v Hochtief it left the employer (SSE) with a £130 million bill for repairs. In that case, the contractor (Hochtief) was able to demonstrate that it had exercised reasonable care and skill, specifically in classifying rock types and judging the appropriate level of structural support. Although the level of support proved to be inadequate (and therefore not fit for purpose), the contractor’s judgment was held to be sound, based on the imperfect information available to it at the time.

Ultimately, this clause leaves the employer bearing the risk for non-negligent shortcomings in the contractor’s design. This is hardly a satisfactory outcome for an employer, who might ask why it should take any risk at all for the contractor’s design under a D&B contract?

Fundamentally, the problem is that one party has to bear the non-negligent design risk and typically neither party wants to do so, especially on a complex high value civil engineering project.

From the contractor’s perspective, it may query why it should be held to a higher standard than would be expected of an architect or engineer, simply because the employer has opted to procure the works on a D&B basis rather than through the traditional model? But, then again, the employer might point out that when it comes to workmanship, a contractor will be absolutely liable for the standard of its work, so why not when it comes to design? The employer wants and expects (and may argue it has paid for) its D&B contractor to deliver a “product” that achieves the contracted result.

Either way, the fact remains that non-negligent design defects are a very real risk, with very real consequences, and whoever that risk is allocated to should consider ways in which it can be mitigated. At the very least, it should be factored into the contract price.

In absentia: what will the court infer?

Somewhat surprisingly, Hochtief’s lead geological engineer did not give evidence, despite the fact it was essentially his conduct that the court was scrutinising. It is well established that the courts can draw adverse inferences from the absence of a key witness, but SSE went so far as to submit that Hochtief could not actually demonstrate it had exercised reasonable skill in his absence.

The judge gave this argument short thrift. The evidence before him was “comprehensive” and, in his view, sufficient for him to reach his judgment.

I sympathise with SSE on the point and I wonder if all judges would be as understanding as Lord Woolman. While there may have been a perfectly good reason for the engineer’s absence, it was not made known to the court. If Hochtief could not explain their engineer’s absence, why shouldn’t the court infer that his evidence might have been damaging to their case? Documentary evidence and testimony from other witnesses about how good a job the engineer did only gets you so far; surely that cannot be an adequate substitute for hearing from the man himself?

The court in this case considered the matter only briefly. For a more detailed analysis of the factors a court will take into account when a key witness is not called, take a look at Kerr J’s comments in O’Hare v Coutts (paragraphs 35-58, judgment) .

How many tunnelling experts can you fit in a hot-tub?

At least six. All of whom gave evidence, concurrently, in what was presumably an Olympic-sized hot-tub. From the sounds of things, the session was a great success: the procedure “brought the topics into sharp focus”, encouraged each expert to “crystallise his position” and proved to be “an extremely valuable exercise” and one the judge would repeat in suitable future cases.

The exercise was less successful when it came to quantum, where the issues in dispute were too wide-ranging.

The point to take away is that, where the issues are sufficiently narrow and, crucially, there is a degree of common ground between the experts, judges will often benefit from hearing evidence at the same time, rather than from individuals days or sometimes weeks apart.

Anyone looking for an introduction to hot-tubbing would be well placed to start with this Civil Justice Council paper. The majority of judges surveyed by the CJC thought that the practice saved trial time, improved the quality of expert evidence, and was of assistance to the court.

Berwin Leighton Paisner LLP Oliver Pearson

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