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Contractors Beware: Defects Liability and Project Insurance Coverage

Energy firm SSE Generation has been awarded in excess of £100m damages on appeal over a tunnel collapse nearly ten years ago at the Glendoe hydroelectric power scheme in Scotland (SSE Generation v Hochtief Solutions [2018] CSIH 26). The Inner House, Court of Session, decided by a majority of 2:1 that the contractor was liable for costs of repair due to breach of the requirement that erodible rock encountered in the tunnel be shotcreted if not otherwise protected, despite having exercised reasonable skill and care, as defects were in existence at take-over by the employer. The contractor could not rely on a contractual limitation of liability for design defects as the damage was caused by implementation of the design (i.e. workmanship).

Further, there was no implied term preventing the employer from bringing proceedings against the contractor, notwithstanding a joint names construction all risks policy, in view of express contract terms apportioning liability for claims due to an event at each party’s risk. Consistent with Gard Marine v China National Chartering Co [2017] UKSC 35, it was acknowledged that a requirement for joint insurance could lead to an implied term that claims between contracting parties were not permitted, and the Supreme Court’s use of language in that case such as “inconceivable” and “absurd” when referring to the possibility of a subrogated claim were “powerful contra-indicators”. However, the joint insurance required under the Glendoe contract indemnified loss or damage to the works, not breach of contract by the contractor in failing to carry out repairs, so the policy would not cover the employer’s claim on the facts in any event.

The decision is also notable in considering the Works Information requirement for a “design life” of 75 years. Following the Supreme Court decision in MT Højgaard v Eon [2017] UKSC 59, it did not mean the contractor was warranting that the works would in fact last for the specified period without “major refurbishment or significant expenditure”. Rather, the obligation was met if the contractor handed over the works with such a design life and the employer had the whole of the defects period to determine whether the works did in fact have that design life. The question of compliance therefore fell to be determined at the defects date, which may be difficult to assess in some instances, but not here, as the tunnel collapse had already occurred.

This comes hot on the heels of Haberdashers Aske v Lakehouse [2018] EWHC 588 (TCC), providing welcome clarification on the issue of how sub-contractors in the construction industry obtain the benefit of project policies. The Judge identified three different ways of analysing the situation – based on agency principles, a standing offer, or acceptance by conduct – and decided that in any case the roofing sub-contractor did not benefit from cover under the project policy (which included a waiver of subrogation term), given that it had obtained separate liability insurance with a limit of £5m in accordance with express contract terms. It was accepted that cover would otherwise be available under the project insurance to sub-contractors as additional insureds for specified perils including fire damage. The project insurers had funded settlement of claims against the main contractor for £8.75m and the subrogated claim was limited to the extent of the sub-contractor’s insurance, leaving open the question of whether a project policy might (partially) respond to losses claimed against a sub-contractor in excess of separate policy limits.

Performance obligations and insurance requirements in construction contracts must be carefully considered to ensure appropriate allocation of risk, scope of cover and limits of indemnity. If the parties intend to create an insurance fund as the sole avenue for making good the relevant loss, this should be expressed in clear and unambiguous terms. Subject to interpretation in individual cases, a sub-contractor agreeing to obtain separate liability insurance may be exposed to subrogated claims from any project insurer, even if the loss in question was covered by the project policy.

Amy Lacey is a partner at Fenchurch Law