This case, which was heard by the Outer House of the Scottish Court of Session, but which involved detailed consideration of the English authorities, arose out of a dispute between a power generation company, SSE Generation Ltd (S) and its contractor Hochtief Solutions AG (H) over the impact, if any, on the position as regards liability as between them of their joint names construction all risks policy (the policy). The court held that the parties’ liability to each other was not displaced by a clause in the contract between them providing for such joint names insurance. Because the case turned on the interpretation of the commonly used NEC2 ECC form of contract, the case will be of particular interest to those involved in the engineering and construction industry, their insurers and their advisors.

The background to the dispute was the collapse of a major tunnel forming part of a new hydro-electric scheme which S had engaged H to construct. Disagreement arose between S and H as to which of them bore the risk of the collapse. Ultimately, S engaged a third party contractor to perform the necessary remedial works and pursued H for damages in breach of contract. H denied liability and counterclaimed for the profit which it would have made if it had been engaged to undertake the repairs – it being a term of the contract between S and H that S would be obliged to so instruct H in certain circumstances.

As part of its defence H argued that, in providing for joint names insurance, the parties had contractually excluded claims against one another for losses covered by the policy. In particular, the express waiver of subrogation rights in the policy demonstrated, so H argued, the parties’ intention that they should not be able to claim against each other for the losses it covered. Against this, S argued that the wording of the policy was irrelevant to rights as between the parties, which were set out in the contract. There was nothing in the contract excluding claims for the losses covered by the policy and if anything the terms of the contract appeared to contemplate the possibility of such claims.

Having considered the English law authorities, the court concluded that the “thrust” of those authorities favoured joint names insurance displacing contractual liability. However, the court went on to say that care must be taken not to merge the law of insurance with the law of contractual interpretation, and that the primary focus in each case should be on the words used by the parties in the contract, set in their context.

On the wording of the contract between S and H, the court concluded that the parties’ intention had not been for the provision for joint names insurance to displace the parties’ liability to each other under the contract. This was largely due to the fact that the contract included a clause expressly providing for the liability of the parties to one another, and nothing in the policy suggested that the intention was for this to be overridden by the clause providing for joint names insurance. The court also placed reliance upon the fact that certain express waivers, for example of subrogation rights against directors and employees, were provided for in the contract, concluding that one would expect a much more significant waiver of the kind argued for by H to be set out in similarly express terms.

Whilst the case ultimately turned on its facts and in particular upon the particular contractual wording agreed between S and H, it is likely to be of wider application because S and H had contracted on the commonly used NEC2 ECC form. The case also provides a useful analysis of the case law in this area and an important reminder that, in the words of the court, “this is a difficult area of the law”.