Last year, I blogged on the first instance decision of the Scottish courts in SSE Generation Ltd v Hochtief Solutions AG and another. That decision has been overturned by the Inner House, Court of Session (the Scottish equivalent of the Court of Appeal) in an important judgment that sheds light on how the English courts might interpret the provisions of the NEC engineering and construction contract (ECC) that govern the extent of a design and build (D&B) contractor’s design liability.
My colleague, John Hughes-D’Aeth, recently blogged on the joint insurance aspects of the case, but in this blog I focus on contractual interpretation.
The case concerned a hydroelectric power station designed and built under an NEC2 ECC Option A, the main component of which was a 6km tunnel deep under the Scottish Highlands running from a high-altitude reservoir, through a lot of rock, into Loch Ness. The tunnel was intended to have a design life of 75 years but about four months after take over, it collapsed. It took nearly three years to get the plant up and running again, and the remedial works cost an eye-watering £130 million. The parties fell into dispute about who should pick up the bill.
Crucially (or not, depending on your point of view), the parties agreed to limit the contractor’s liability for defects in design by adopting NEC2 ECC Option M:
“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.”
The equivalent provision in NEC3 and NEC4 is Option X15, although interestingly the burden of proof has been reversed in NEC4 ECC requiring the Client to prove that the contractor failed to exercise the requisite standard of care.
Without this clause, the contractor would effectively be subject to an absolute obligation to design and build a plant that is fit for purpose.
The Outer House described this clause as “an important brake on liability” and held that the contractor had in fact exercised reasonable care and skill in designing the tunnel. It was therefore not liable for the cost of repair.
The Appeal: what constitutes “design”?
The Inner House saw things differently.
All three judges held that the tunnel collapsed due to a defect in the implementation of the design, rather than the design itself. The majority held (2:1) that this meant the limit on liability did not apply. In what could prove to be an influential dissenting judgment, while the Lord President agreed that the defect arose from the contractor’s implementation of its design, he held that this defect still fell within the scope of the limit on liability.
At first glance, the distinction between design and implementation is not a particularly troublesome one. We are all used to characterising activities (and defects) as either design-related or workmanship-related. Indeed, the description of a contract as “design and build” recognises the distinction. But there are cases in which the lines between the two can be murky. Indeed, there might well be activities that do not fall neatly into either category, as this case illustrates.
The contractor prepared four different designs that provided for varying levels of structural support, which were to be implemented depending on the geological conditions in a given section of the tunnel. As the contractor excavated the tunnel, its geologist classified the rock as Class I, II, III or IV. For sections of Class I rock (where conditions were good), the tunnel was left unlined; if Class IV (where the rock was erodible), the contractor lined the tunnel with concrete. It was a failure to correctly classify (and hence reinforce) a section of the tunnel that led to its collapse.
So, was the assessment of the rock, and the subsequent decision about the extent of concrete support, part of the contractor’s design? Or was it instead “implementation” of the design?
“Design” or “implementation”? Some (potentially) relevant factors
Surprisingly, none of the judges looked at the distinction in detail, which is a shame as a clear test would have been helpful.
Factors in favour of it being “design” are:
- The classification involved an element of engineering judgement.
- Had the project been procured on the traditional basis, the assessment would likely have been made by the employer’s geotechnical consultant, rather than the (build-only) contractor.
- Most obviously, when the contractor set out to commence work, it did not know what it was going to build! A contractor might argue this was a “design-as-you-go” or “design-on-site” arrangement.
But a good argument could also be made the other way. The authors of Hudson refer to choice as a core feature of design. Here, the contractor was not free to build the tunnel as it saw fit. For readers who are mathematically inclined, you could think of it as an equation: A + B = C. The design that the contractor had to implement (C) was determined by its initial (four) designs (A), which were approved early on, and the conditions of rock in the tunnel (B). The contractor had control over the first variable, but not the second. The rock conditions are what they are. At the start of the job, the contractor faced what economists would call “imperfect information” but, as that information became available, the design followed as a matter of necessity, without the contractor being able to implement otherwise. Indeed, if the employer had insisted on something other than the pre-determined outcome (C), that would presumably amount to a variation. All of which suggests that the collapse stemmed not from a defect in design, but from one in implementation.
Such linguistic and philosophical argument is all well and good. But, taking a step back, it is worth considering the commercial purpose of the Option X15 limit on liability. If the parties had intended to align the D&B contractor’s liability with the “overall” liability under the traditional model (that is, of the employer’s professional team and the build-only contractor), this decision seems not to acknowledge that. The contractor’s geologist was found to have exercised reasonable care and skill in his assessment of the rock properties, but the contractor was nonetheless held liable for non-negligent shortcomings in that process.
The distinction between pure design and so-called implementation of design is not unique to this case. It can arise on all sorts of projects, particularly where there is a “design-as-you-go” component that does not fit in neatly to the design/build dichotomy that we are used to. Examples might be a road, a railway, or an airport runway.
The decision could have potentially profound implications for professional indemnity insurance. It may have opened the door for insurers to argue that a policy does not provide coverage to a D&B contractor in circumstances where a contractor’s negligence is down to “implementation of design” rather than pure design.
We are used to characterising activities as either “design” or “build” but there might be activities that would ordinarily be carried out by a professional, involve a degree of judgement, but which don’t quite qualify as “design” in the strictest sense of the word. If that is the case, D&B contractors may need to think about amending Option X15 to make clear which non-design activities fall within its scope.
This is unlikely to be the end of the story. There is every chance I will be blogging again on a Supreme Court decision on the matter. Stay tuned.