An incomplete code?

Hydro Electricity
Hot on the heels of the English Technology and Construction Court’s judgment in Haberdashers’ Aske Federation Trust v Lakehouse Contracts (see previous article here) is a Scottish First Division judgment, SSE Generation Ltd v Hochtief Solutions AG, which also considers the effect of joint names insurance in a construction contract and the extent to which this is sufficient to displace contractual liability between the parties. The Inner House decision makes clear, as a matter of Scottish law, that whilst joint names insurance will normally displace contractual liability between the parties, the scope of the insuring obligation must be considered carefully.

The dispute arose following the collapse, in April 2009, of a tunnel designed and constructed by Hochtief Solutions (the “Contractor”) as part of a hydro-electric scheme for SSE Generation (the “Employer”) at Glendoe, Fort Augustus, Scotland. The work was carried out in the period 2006 to 2008; however, following takeover in December 2008, there was a significant tunnel collapse, in April 2009, resulting in the blockage of a 70 metre section of the tunnel. The collapse put the scheme out of commission, resulting in a significant loss of revenue for the Employer of around £130 million.

The parties were unable to reach an agreement for the repair works and the Contractor refused to carry out the repair works without being paid. The contract stated that there was a defects period of two years following takeover. The Employer ultimately instructed a third party and sought to recover the costs of the remedial works and other associated costs.

Several arguments were live in the case but the Inner House decided the liability issues on the basis of two points. First, that there was ‘defect’ within the meaning of the underlying contract as the contract provided that the design life of the scheme would be 75 years. The Inner House, applying the approach of Lord Neuberger in the 2017 Supreme Court case of MT Højgaard v E.ON Climate & Renewables UK Robin Rigg East, considered that the contract provided that the tunnel would have a design life of 75 years whereas the tunnel did not last more than 6 months following take over. There was, therefore, a defect which the Contractor was obliged to make good. Additionally, the Inner House found that there was a further defect as the design was not in accordance with the Contractor’s accepted design, due to failures by the Contractor in implementing the same. Specifically, the Contractor failed to sufficiently protect/support erodible rock that was detectable in the area of the subsequent collapse. The effect of the findings on the defect issues meant that there was a defect that existed at takeover which led to the collapse of the tunnel, and that this was a risk borne by the Contractor under the contract. The Contractor was therefore liable for the costs of repair/reinstatement.

A related issue for consideration by the Inner House, was the effect of the joint insurance policy on the Employer’s right to a claim against the Contractor. Clause 84 of the contract stated:

84.2  The insurances are in the joint names of the parties and provide cover for events which are at the contractor’s risk from the starting date until the defects certificate has been issued.

The Contractor was, therefore, contractually obliged to provide insurance in the joint names of the parties in respect of, amongst other things, loss of or damage to the works caused by events that were at the Contractor’s risk prior to the issue of the defects certificate. The clause included an insurance table expressly stating that the minimum amount of cover for the “loss of or damage to the works” was the “replacement cost“ of the same. As the damage to the tunnel that resulted from the collapse occurred within six months of completion and was at the Contractor’s risk, the damage was arguably an insured loss. The Contractor therefore argued that, in the event that the tunnel collapse was a Contractor risk, the effect of the joint insurance provision in the contract was to create an implied term that the parties, having agreed a joint insurance regime for loss of or damage to the works, should look only to the insurance policy for redress and could not bring claims against each other in respect of that damage.

In presenting its argument, the Contractor relied on the English case law summarised in the recent Ocean Victory judgment that affirmed the principle that the existence of a joint insurance clause in the contract normally gives rise to an implied term in that contract that the parties cannot sue one another in respect of an insured loss (see previous article here). The Inner House considered that joint names insurance is normally sufficient to displace contractual liability between the parties, but that regard must be given to the terms of the particular contract to understand whether this effect was indeed the intention of the parties.

The Inner House agreed that there was an implied term in the contract, to the effect that joint names insurance excluded contractual liability, but the scope of that exclusion was limited. The majority of the Inner House found that the Contractor was not entitled to use the implied term as a defence to the claim by the Employer because the claim brought against the Contractor concerned the failure to carry out repairs and reinstatement works in the form of the relief tunnel that was constructed, subsequently undertaken by the Employer and the costs for which the Employer was entitled under the contract to recover from the Contractor. These claims, it was determined, fell outside the insuring obligation which was concerned with insurance covering loss or damage to the works. The insurance obligation of the Contractor did not extend to a breach of contract by the Contractor in failing to effect these specific obligations under the contract. In other words, the majority finding on the joint insurance provision in the contract was that it was not ‘a complete code’ between the parties that the joint insurance would supplant all contractual liability between the parties.

Whilst this judgment adopts the general principles on the insurance issues affirmed in the Ocean Victory case, the majority decision highlights that the existence of a joint insurance provision will not automatically displace contractual liability and that regard must be had to the particular terms of the contract. In many instances the joint insurance provision will not be regarded as ‘a complete code’ displacing liability between the parties. For example, it is common in many offshore construction contracts for the contract to make clear that the contractor’s insuring obligations does not relieve it from liability and that the insuring obligation is effectively acting as fund to make good the contractor’s liability. Alternatively, as in this case, the scope of the joint insurance provision may be limited so as to preserve the ability to bring claims which fall outside of the insuring obligations.

Brian Boahene