Jordan ... checking contract obligations.
Are EPC firms liable for all defects?
A contractor can be held responsible for defects. However, it needs to be ascertained if these are due to faulty design or a failure to implement that design, as a UK court ruled, writes STUART JORDAN*.
01 August 2018
Over the past 12 months, we have been looking at an important set of recent court decisions, which examined the real nature of EPC (engineering, procurement, and construction) contractor obligations.
These are of real value to our industry in the Gulf because of the detailed reasoning they have given on concepts we use every day in EPC and design-build contract models, such as design life, fitness for purpose, duty to warn and professional skill and care.
The last of these cases went to appeal earlier this year and the judgement from that hearing is both interesting and important for us to note. The case is SSE Generation Limited Vs Hochtief Solutions AG and it arises from a contract between them for the design and construction of a 6.2-km inlet (head race) tunnel for a hydropower project in Scotland.
As you have already guessed, disaster struck. The tunnel suffered a serious collapse, leaving a great deal of debris blocking the tunnel shortly after it was completed by the contractor Hochtief and handed over to SSE. The parties discussed what to do and traded opinions about who held the risk. In the end, Hochtief refused to carry out repair works unless it was on a paid basis. So SSE then engaged another contractor to build a 605-m bypass tunnel at a cost of £137 million ($183 million).
The first question was: “Did this collapse occur because of a defect in the works?”
The contract defined a defect as: “Part of the works which is not in accordance with the works information [specification] 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.”
The next question was: “If the cause of the collapse was a defect, is the contractor liable for that defect?”
That brought two clauses into play.
First, the contract provided that the contractor was “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”.
Second, the contract included among the employer’s risks: “Loss or damage to the parts of the works taken over by the employer, except loss or damage (occurring before the end of the defects period, two years from takeover) which is due to a defect which existed at take over.”
Hochtief, of course, contended that this was SSE’s problem because the works has been taken over and were in SSE’s custody and control – adding that SSE failed to note odd readings which should have alerted them to a problem. Hochtief also contended that they had used reasonable skill and care to ensure that their design complied with works information and so they were expressly absolved of liability. Of course, that argument only works if the defect is a design defect.
The court looked in detail at the recent cases on similar lines and decided that the collapse was caused by a defect. However, the failure to conform to works information was not a design defect but failure to implement that design – specifically, it was failure to install enough erosion protection onto erodible rock. This being the case, the defect, of course, was present at takeover.
Separately, the court decided that the contractor was required to repair the damage and make good any loss because it was caused by a defect during the defects correction period.
The court did not disagree with the idea that the contractor had used reasonable skill and care, but this was irrelevant because this was not a defect in design. The contractor’s liability exclusion for design defects was knocked out.
As a separate issue, the contract also required the completed works to have a “design life” of 75 years. In line with other recent decisions on this, the court decided that this was not a guarantee of continuing service (which could only be assessed after 75 years) but an obligation to design and construct the completed works in a condition which can be judged to have the attributes to last that long.
As we can see, this contract was not quite a standard-issue EPC, in which fitness for purpose is the overriding contractor obligation, and where any catastrophic collapse would have been recognised immediately as a contractor failure and contractor liability. There were some contractor-friendly provisions in there which we don’t often see in the Middle East – but the result was still to hold the contractor liable both for the original defective work and for refusing to remedy it.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
