Sse General Ltd Against (first) Hochtief Solutions Ag And (second) Hochtief (uk) Construciton Ltd
| Jurisdiction | Scotland |
| Judge | Lord Woolman |
| Neutral Citation | [2015] CSOH 92 |
| Docket Number | CA162/12 |
| Court | Court of Session |
| Published date | 14 July 2015 |
| Date | 14 July 2015 |
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 92
CA162/12
OPINION OF LORD WOOLMAN
In the cause
SSE GENERATION LTD
Pursuer;
against
(FIRST) HOCHTIEF SOLUTIONS AG
(SECOND) HOCHTIEF (UK) CONSTRUCTIONS LTD
Defenders:
Pursuer: Keen QC, Barne, CMS Cameron McKenna LLP
Defenders: Currie QC, Richardson; Simpson & Marwick
14 July 2015
Introduction
[1] In December 2005, SSE Generation Ltd (“SSE”) engaged the first defender to design and build a new hydro-electric scheme at Glendoe, Fort Augustus (“the scheme”). Glendoe is within a geological area known as the Conagleann Fault, or Great Glen Fault.
[2] Subsequently SSE agreed to treat the first and second defenders jointly as the contractor for the purposes of the contract (‘Hochtief’). Hochtief engaged Jacobs (UK) Ltd to provide it with engineering assistance during the construction of the scheme. Following completion, the scheme began operating in January 2009. In August 2009, however, a major tunnel collapsed and it ceased to generate electricity.
[3] The parties entered into discussions about rectifying the problem. They were unable to agree the scope and nature of the remedial works. More fundamentally, they disagreed about who bore the risk of the collapse. In the absence of agreement, SSE employed another contractor to carry out the remedial works. They took place between 2010 and 2012. During that period the scheme did not generate electricity.
[4] The present litigation arises out of those events. In the principal action, SSE seeks to recover a sum of over £130 million, being the loss it claims to have sustained as a result of the tunnel collapse. In the alternative, it claims £102 million based on a different ground of action. Hochtief counterclaims for a sum of almost £10 million. That represents the profit it would have made if it had carried out the remedial works itself, together with the costs of investigating the tunnel collapse.
[5] The case came before me on a preliminary point relating to insurance. The parties chose to base their contract upon the core clauses of the NEC Engineering and Construction Contract 2nd edition (November 1995), together with various options of option Y(UK)2 of April 1998. They signed the contract on 22 and 28 December 2005 (“the NEC contract”). In accordance with its terms, Hochtief took out a policy in joint names of itself and SSE in respect of contractor’s risk events.
[6] Hochtief submitted that SSE is barred from raising the present proceedings. It should instead have made a claim on the joint names policy. In its note of argument, Hochtief sought dismissal of the action. In the course of oral submissions, however, it modified its position. It contended that the joint insurance clause responds to some of the grounds of action advanced by SSE. Accordingly, some parts of the claim should be deleted before the case is remitted to proof.
[7] SSE maintained that it was appropriate that the case go to proof on the whole pleadings for both parties, leaving all the pleas-in-law standing. The case turns on the proper construction of the relevant documents.
The Terms of the NEC Contract
[8] The core clauses of the NEC contract are divided into nine parts. I shall summarise the ones that are relevant for the present action.
Part 1 – General
[9] This part defines a number of material terms:
a. “Works Information” is information that either specifies and describes the works, or states any constraint on how the contractor provides the works: clause 11.2(5).
b. “A Defect” is “a part of the works which is not in accordance with the Works Information or a part of the works designed by the Contractor which is not in accordance with … the Contractor’s design which has been accepted by the Project Manager”: clause 11.2(15).
c. The “Defects Certificate” is a list of uncorrected defects that the Supervisor has notified before the defects date: clause 11.2(16).
Part 2 – The Contractor’s main responsibilities
[10] The contractor must provide the works in accordance with the Works Information: clause 20.1.
Part 4 – Testing and Defects
[11] If a test or inspection shows a defect, then the contractor must correct it and the test or inspection will be repeated: clause 40.4. If the supervisor notifies a defect, the contractor must correct it before the expiry of the specified period: clause 43.1. If the contractor fails to do so, the project manager assesses the cost of having it corrected by another person and the contractor pays that amount: clause 45.1. With regard to latent defects in the civil works, the contractor must make good any defect that appears within a period of 12 years after completion: clause 46.4 (as inserted by option Z3.1). An exception is made for normal wear and tear.
Part 6 – Compensation Events
[12] If an employer’s risk event occurs, the contractor is entitled to compensation for any works then required: clause 60.1(14).
Part 8 – Risks and Insurance
[13] The employer’s risks include loss of or damage to the parts of the works it takes over. It is not, however, responsible for loss or damage occurring before the issue of the defects certificate that is due to a Defect that existed at take over: clause 80.1. The contractor carries all the other risks from the starting date until the issue of the Defects Certificate: clause 81.1.
[14] Until the Defects Certificate has been issued, the contractor must promptly repair damage to the works, plant and materials: clause 82.
[15] Clause 83.1 provides that "Each Party indemnifies the other against claims, proceedings, compensation and costs due to an event which is at his risk." That obligation is qualified in two respects. First, any sum payable is reduced in the event of contributory negligence: clause 83.2. Second, the total liability of each party to the other in respect of loss of or damage to the works, plant and materials is limited to the total tender price: option Z11.
[16] Clause 84 is the insurance provision. It requires the contractor to take out a policy in joint names to provide cover for contractor’s risk events. The policy is to endure from the starting date until the Defects Certificate has been issued, which is 104 weeks after the completion date.
[17] The provision stipulates that the policy should include a waiver by the insurers of their subrogation rights against directors and other employees of the insured except in the case of fraud: clause 85.2. There is no similar waiver in respect of the parties themselves. Clause 85.4 provides that:
"Any amount not recovered from an insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk."
[18] With regard to design liability, the parties incorporated option M, which states that:
“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 CAR Insurance Policy
[19] The joint names insurance that Hochtief took out is a construction all risks policy (the “CAR Policy”). It contains two conditions about the insurers’ rights of subrogation.
[20] The first provision is contained in the section headed “Insuring Conditions”:
“It is agreed that this Insurance is effected for the protection and benefit of those mentioned under the heading ‘Insured’ and covers the interest and liabilities of each of them and also their mutual liabilities subject, however, to the terms and conditions of this Insurance. Whilst Insurers waive recourse or subrogation directly or indirectly against any of the Insured, in whose interest this Insurance is effected, they do, however, retain all rights of recourse against any other person …”
[21] The second is contained in “Memoranda applicable to Section II”:
“Insofar as the ‘Insured’ … comprise more than one party each shall be considered as a separate and distinct entity and the words ‘Insured’ shall be considered as applying to each party in the same manner as if a separate policy had been issued to each of the said parties and the Insurers hereby agree to waive all rights of subrogation or action which they have or may acquire against any of the aforesaid parties arising out of any occurrence in respect of which any claim is made hereunder …”
The Facts
[22] The following outline must be read subject to the proviso that the facts will be determined at proof.
[23] In return for the contract price of £125.9 million, Hochtief undertook to design and build the scheme, which comprises an underground powerhouse, a dam, an upper reservoir, two tunnels and various ancillary works. The completion date was 28 February 2009. The civil works had a projected design life of 75 years, during which they were to provide a reliable service without the requirement for a major refurbishment or significant capital expenditure. No employees were to be based at Glendoe. Instead, the scheme was to be monitored by SSE staff at its General Operation Centre (“the GOC”) in Perth.
[24] The two tunnels are a significant part of the scheme. The headrace tunnel is 5m in diameter and conveys water from the reservoir to a turbine 6.3km below in the powerhouse. The tailrace tunnel conveys water for discharge into Loch Ness. Hochtief used a tunnel boring machine to excavate the rock. It chose a design to support the tunnel that relied on the inherent strength of the surrounding rock. It varied over the length of the tunnel and was categorised by reference to different rock excavation classes.
[25] Hochtief completed the headrace tunnel in early 2008, well ahead of schedule. There followed a period of inspection and testing. Inspections in February and again in October 2008 disclosed some evidence of deterioration in surrounding areas of rock. In late October, Hochtief “watered up” the headrace tunnel for wet commissioning, which appeared to be successful and the scheme began operating. In...
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