Construction Legal Advice
A common issue of dispute between parties who have entered into a Design and Build Contract (whether it be a JCT or NEC form contract) is that quite often, the design portion and the build portion of the contract give rise to different obligations. Contractors in particular, are often unaware of this and/or incorrectly presume these obligations have the same consequence and are freely interchangeable. All too often, contractors find themselves stuck between a rock and a hard place when it comes to liability.
The two obligations in question are as follows:
• The contractor’s design portion is to be carried out with “reasonable care and skill” i.e. a duty to exercise the level of skill and care expected of another reasonably competent member of the profession – A process obligation.
• The contractor’s build portion is to be carried out so that the end product is “fit for its intended purpose” i.e. the contractor must achieve a particular performance result– A result obligation.
The distinction between the two was provided in the case of; MT Hojgaard A/S (Respondent) v E.ON Climate and Renewables UK and have recently been thrust into the court’s sights once more in the case of SSE Generation Ltd v Hochtief Solutions AG (note; although this is a Scottish case, it is expected to be heard in the Supreme Court in England shortly).
Background:
Hochtief Solutions AG (“HS”) was engaged by SSE Generation Ltd (“SSE”) to design and build a tunnel which was part of a hydroelectric scheme in Scotland. HS and SSE entered into an NEC2 form of contract (the “Contract”). As above, the Contract imposed two obligations; the fitness for purpose obligation to build the tunnel that would not collapse for 75 years. The design obligation was limited to reasonable care and skill by virtue of Option M of the Contract.
Naturally, the tunnel collapsed a mere 6 months after commission and a remedial scheme was devised and implemented by a third-party contractor at a cost of £130m.
Decision on Appeal:
The decision of the first Court is largely irrelevant for the purposes of this article, but for completeness, it was decided that HS was not liable, but in any event, SSE was awarded a “nominal” award of £1m to account for the time the hydroelectric scheme was out of action.
On appeal however, the Court held that the cause of the collapse was not design related. As such, HS had complied with its design obligation under the Contract. The Court went on to decide that the cause of the collapse was linked to the “implementation of the design” – therefore a hybrid workmanship issue. Any liability was therefore subject to the “fit for purpose” test.
While the distinction may seem arbitrary, it does have important consequences. HS were prevented from relying on Option M of the Contract which acts as a “handbrake to liability” for design defects, providing reasonable care and skill was undertaken and proved. HS were therefore required to ensure that the tunnel did not collapse for a period of 75 years irrespective of the level of skill and care undertaken. The tunnel collapsed after 6 months and as such, the tunnel was not fit for purpose. HS were held in breach of their build obligation.
SSE was awarded £107m plus £1m in costs.
Point of Distinction
Unhelpfully, the Scottish Courts did not provide any clarity on how we can distinguish between design, workmanship or implementation. What we can see from this is that implementation falls somewhere between design and workmanship. It is doubted further clarity will be provided until such time the Supreme Court in England consider the case as a whole. What we do know, is this case has caused further grey area in already murky waters.
Conclusion
As a contractor, when considering a contract, you should be clear on where liability for design and liability for workmanship begins and ends. A fit for purpose obligation effectively warrants a particular performance for the life of the “thing” being built. This is clearly much more onerous than a simple reasonable care and skill obligation and should therefore be avoided if possible.
It should be further noted that many insurers do not provide cover for a fit for purpose obligation. So, it is of paramount importance that you know and understand the contract, ensure your insurance covers the specified obligations and if you are unsure, get in touch.
If you have any contract related queries, please contact Tyler Fitzpatrick, Solicitor at Birketts LLP, on 01223 326683 or [email protected].
