'Reasonable skill and care' standard will limit contractors' liability for defects, says expert

Out-Law Analysis | 21 Apr 2017 | 10:51 am | 3 min. read

ANALYSIS: In a recent decision, Scotland's highest court considered the effect that limiting the contractor's obligations to a standard of reasonable skill and care will have on its liability for defects.

Although some of the court's findings are specific to the case, its general observations are helpful in identifying the scope of clause X15 in the NEC3 Engineering and Construction Contract (ECC) and how it affects the liability for defects and its interaction with the employer's risks under clause 80.1. The case is also a useful reminder that claims are determined on the basis of facts known at the time and not with the benefit of hindsight.

The case arose out of works at the Glendoe Hydroelectric scheme under an ECC second edition Option A contract. After the project was handed back to the employer, but before the defects date, the main tunnel collapsed, resulting in rock material falling from the crown over several months and leading to a blockage. The employer, SSE, sought to recover £130 million in relation to the remedial works.

The judge considered the expert evidence and concluded that the collapse was due to a lack of support caused by a combination of poor rock conditions and insufficient use of shotcrete and rock bolts.

The employer relied on risk allocation clause 80.1; and argued that there was a defect in the works as defined in clause 11.2(15) because the contractor, Hochtief, failed to install the requisite level of support to prevent erosion of the rock. The contractor relied on option M, which is the equivalent of option X15 in the third edition contract, arguing that it was not responsible for defects because it used reasonable skill and care to ensure compliance with the works information.

Reasonable skill and care

The court was firmly of the view that the contractor did not guarantee the works - it only accepted the familiar and lesser obligation of "reasonable skill and care". The court observed that the assumption of a more limited degree of risk would have been reflected in the contract price and the level of its insurance premiums. It was also of the view that if the employer was correct, that would impose strict liability for any defects and effectively rob Option M of its meaning. It would also make redundant some of the other provisions in the contract regarding repair and maintenance.

The court then looked more closely at whether the contractor failed to exercise reasonable skill and care. Its conclusion was that the parties agreed the method for joint rock classification, a collaborative approach which was beneficial for all parties. As part of this, the judge noted the employer approved the rock excavation classification sheets. The court therefore rejected the allegation of a failure to exercise reasonable skill and care, finding that the employer's case was based on the data obtained following the collapse - which meant its case was presented with the benefit of hindsight.

Repair obligations and parties' risks

The court then went on to consider the contractor's refusal to carry out remedial works unless it was paid, refusing to share the costs on a 50:50 basis. This was held to be a breach of its obligations under repair clause 82.1, but as the loss was due to an employer risk this only had a minimal impact. The court observed that clause 82.1 creates a standalone regime, under which repairs are undertaken immediately with the liability determined later.

However, this finding meant that the court also rejected the contractor's counterclaim. This relied on clause 83.1, under which a party indemnifies the other for events at its risk. The claim was rejected as the court held that the contractor was in breach of clause 82.1 by failing to return to the site to carry out remedial works.

The court then considered the use of the ECC Option E 'cost reimbursable' contract for the remedial works. It noted that many employers view this type of contract with a degree of suspicion as favouring contractors, which contractors shy away from them because their accounts are subject to scrutiny.

However, in this case, Option E was the only appropriate contract form for the remedial works. This was because it allowed the works to start quickly and for the design to evolve; avoiding delay due to the need to compile the works information or a very high price to reflect the risks of proceeding with an outline design and uncertainty about the ground conditions.

Shy Jackson is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.